Pipeline Economics: The dollars & cents of the energy export debate

When Alberta's oil sands started being commercially developed almost 50 years ago, the biggest challenge for companies was finding cost-effective production technologies. Producers such as Sun Oil Company (now Suncor Energy) and Syncrude focused on securing capital rather than launching public relations campaigns.

Industry and the Alberta government might have some regrets in that regard. As opposition to the carbon-intense development of the massive resource mounts, even seemingly benign pipelines have become vehicles in the battle over bitumen.

Energy corporations, as well as provincial and federal politicians argue the ability to move bitumen — either raw or upgraded — to markets is vital for Canada's economic prosperity. First Nations, environmental groups and landowners believe blocking pipelines will halt further development of oil sands and reduce the risk of oil leaks polluting land and water.

Lack of access to markets has Canadian crude trade at a massive discount to U.S. oil benchmark West Texas Intermediate, reaching a record $42.50 per barrel discount in December.

"If we do not go ahead with infrastructure, with pipelines to move our resources to tidewater and on to markets that want the resources, we will see them stranded and our legacy lost," federal Energy Minister Joe Oliver said in a recent interview. "The people who will be hurt by this will be Canadians and we don't want that to happen and we are determined it will not happen."

The gap between Canadian and U.S. crude prices is expected to narrow substantially by 2014 when pipeline expansions in Canada and the U.S. start flowing, increasing the value of exports by an estimated $8-billion per year. The discount currently hovers around $22 per barrel.

"The so-called 'bitumen bubble' is having serious consequences for government finances in Alberta and the rest of Canada and is costing the Canadian economy at least $20-billion per year," says Alex Pourbaix, TransCanada president of energy and oil pipelines. "Narrowing this price gap will ensure that Canadians and Americans realize the best possible value for their precious natural resources."

The so-called 'bitumen bubble' is having serious consequences for government finances in Alberta and the rest of Canada and is costing the Canadian economy at least $20-billion per year

Mr. Pourbaix says Keystone XL will also support job growth through increased corporate and tax revenues, adding there will be an estimated 2,200 jobs building the line through Alberta and Saskatchewan. The pipeline also is projected to add $3.5-million per year in Alberta property taxes and $1.3-million in Saskatchewan.

While TransCanada and the Alberta government are focused on trying to convince the U.S. public of Keystone's economic benefits, the pipeline is more important to Alberta and Canada, adds Frank Atkins. economics professor at the University of Calgary.

"If we don't get this, it's a big blow," he says. Keystone will help producers continue the expansion of the oil sands, while its delay — and uncertainty over accessing the U.S. — has some producers slowing or temporarily capping investments in the region.

The benefits of oil sands development extend far beyond Western Canadian borders, Mr. Atkins notes. Within the next 25 years, just under a million people will hold oil sands related jobs, up from 75,000 two years ago, and 126,000 of the total will be held by people outside of Alberta, according to a 2012 Conference Board of Canada report.

But for union leader Gil McGowen, Keystone XL would allow more than the movement of bitumen to market. The president of the Alberta Federation of Labour sees the pipeline drain jobs from Alberta and Canada, high-paying, long-term work associated with upgrading and refining bitumen in the province. "We think that pipelines like Keystone XL will simply act as conduits to take high-paying jobs in upgrading and refining out of the country, down the pipeline, to places like the American Gulf Coast and perhaps to China," he says.

Workers in upgraders and refineries earn about two-thirds more a week than the average worker in Canada, notes the association, which represents 145,000 unionized workers in Alberta.

The province of Alberta's own efforts to promote its bitumen royalty in-kind program in 2009 outlined the benefits of an upgrading, refining petrochemical hub as increasing provincial and municipal revenues by $748-million, adding almost 2 million jobs and increasing the GDP by more than $5-trillion over two decades.

Taking all into account, the loss of refinery jobs and spin-off jobs triple the loss for each dollar gained on exporting bitumen, Mr. McGowan argues.

The Canadian Association of Petroleum Producers notes oil sands employ 112,000 people across Canada, from which goods, materials and services used to build oil sands operations are sourced. But with a tight labour market expected to become more acute as boomers retire, the issue of jobs flowing south is a non-issue, says spokesman Travis Davies.

"This isn't about jobs. The oil sands are going to be supplying more jobs that we can handle," he says. "The economic case for building brand new refineries is a tough one; we have existing product and existing customers that want our product on the Gulf Coast and to the degree that we should take advantage of that [Keystone] is clearly good for Alberta and good for Alberta workers."

Getting the stuff to the U.S. is important, but we would still be a seller with one customer, which is not good for any business

Why go south? The region between Texas and Louisiana has the most oil refining capacity in North America at 8.5 million barrels a day, including about three million barrels of daily capacity for heavy crude. Producers such as Suncor, a major backer of Keystone, much prefer to flow bitumen to existing facilities rather than invest billions of dollars in developing their own. The veteran oil sands producer is expected to red light its $11.6-billion Voyageur upgrader project any day now after warning the economically challenged project was not a "strategic investment."

Mr. Atkins points out Enbridge Inc.'s Northern Gateway pipeline project, from Alberta to Kitimat, B.C., is also an important option for producers and Canada.

"If you can get to the west coast, you can get it to Asia and Asia has huge demand we've got to capitalize on it because if we don't we miss out on a big market," he says. "Getting the stuff to the U.S. is important, but we would still be a seller with one customer, which is not good for any business."

Production of non-upgraded bitumen is expected to increase by 17% to 1.04 million barrels per day. Bitumen upgraded to refinery-ready feedstock is slated to rise to 1.03 million barrels per day.

And come what may, the product will ship to markets, either by pipeline, railcar, truck or barge — all alternatives being used and expanded on by Canadian producers.

The debate on bitumen pipelines out of Alberta could cool down once Keystone XL's future is determined, but don't expect the issues around transportation to go away, says analyst Phil Skolnick, managing director with Canaccord Genuity.

"Keystone is a big fix but it's not a permanent one," Mr. Skolnick says. "We'll run into that situation again when other oil sands projects come online in 2020-2021."

Edmonton Journal, Friday Apr 12 2013
Byline: Dina O'Meara, National Post

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