The Economics of Oil Pipelines and Supertankers

28 March 2013


The following presentation was delivered by Robyn Allan, March 27, 2013 at the Confederation Centre in Burnaby at an event hosted by the Institute for the Humanities – SFU, the Environment Committee of the Unitarian Church of Vancouver, ForestEthics Advocacy and BROKE.

Good evening.

Thank-you Councillor Thomas for the lovely greeting.

I would also like to thank the sponsors of tonight’s event including the Burnaby Residents Opposed to Kinder Morgan’s Expansion, the Environment Committee of the Unitarian Church of Vancouver, Simon Fraser University Institute for the Humanities and Forest Ethics Advocacy for inviting me to speak to you about the Economics of Oil Pipelines and Supertankers.

First, let me be clear.

The debate about oil pipelines and supertankers is not about economic benefit stacked against environmental cost to see if the risk is worth it.

That’s a false dichotomy. It’s developed by oil interests to pit ordinary Canadians against ordinary Canadians.

They hope our fear of economic loss if we don’t approve these pipelines, is greater than our fear of environmental harm if we do.

They fund made-to-order industry studies to pump up the economic benefits but knowingly turn a blind eye to economic costs and deliberately downplay environmental risk.

They voraciously lobby government to bring in legislation sensitive to their needs—at the expense of ours.

They wind-up our elected leaders and send them out to cheerlead on their behalf, and if that doesn’t work—to fear-monger for them.

The energy strategy in Canada is about multinational oil companies and national oil companies of foreign governments reaping vast financial gain and market power versus economic and environmental cost for the rest of us.

I am going to discuss the oil industry and how two pipeline projects—Enbridge’s Northern Gateway and Kinder Morgan’s Trans Mountain twining—fit into the oil sector’s strategy for Canada.

The costs of these pipeline proposals come in many forms.

What are they? Here’s the top 10:

  1. Decades of higher oil prices for Canadian consumers and businesses across the country;

  2. Lost opportunity to add value, create meaningful jobs and control environmental standards here at home;

  3. Hollowing out of the oil sector as raw bitumen exports take precedence over upgrading and refining;

  4. Twice the number of pipelines and almost double the tanker traffic to move diluted bitumen as compared to upgraded bitumen;

  5. As soon as Northern Gateway and Trans Mountain are approved, more pipeline capacity will be requested;

  6. Rapidly rising exchange rates along with rising diluted bitumen oil prices, impacting other sectors of our economy and our ability to export;

  7. Continued reliance on foreign, higher priced oil imports through eastern Canada;

  8. A growing dependence on foreign condensate imports through western Canada;

  9. Crowding out of BC’s legitimate and vibrant economic activity; and

  10. Supernatural British Columbia becomes a Supertanker terminal for Alberta.

As I expand on a few of the costs I’d like you to keep in mind that oil interests deliberately mislead, misrepresent, and obfuscate in order to exaggerate benefits, deny the costs and underplay the environmental risk.

That’s what they do.

We are told half-truths, we are made false promises, and—since our needs and concerns are inconvenient—we are viewed with contempt. If necessary, we get demonized.

We are asked to put at risk our economic, social, cultural and environmental capital, but are not shown the respect or courtesy we deserve when we seek appropriate due diligence.

Like missing islands in the proposed Douglas Channel oil tanker route, the industry paints the picture it wants us to see.

Like Enbridge’s false “Path to the Future” ad campaign, the industry tells us the story it wants us to hear.

Like boasting economic benefits from Trans Mountain’s twinning, but refusing to release supporting documentation, the industry shamelessly markets its false benefits without accountability.

Like being told by Enbridge and Kinder Morgan that their control room monitoring systems are capable of identifying leaks and shutting the pipelines off within tight timeframes, while studies show leak detection systems work less than 20 percent of the time.

Like being told by Enbridge and Kinder Morgan that diluted bitumen is the same as conventional oil and when it pollutes our waterways and marine environment it’s easy to clean up.

Easy to clean up as if the spill in Marshall Michigan almost three years ago—which is still not cleaned up because of sunken bitumen—never happened.

On December 12, 2012 in a CBC radio interview in Prince Rupert, Janet Holder, Executive VP of Northern Gateway stated, and I quote “basically we do not see any difference between bitumen and crude oil”. End quote.

When asked by the interviewer about the behavior of bitumen when it hits water she replied, quote “we can easily clean it up in water and in salt water if necessary.” End quote.

Kinder Morgan’s website clearly states their corporate position. And I quote: “What happens if there is a leak and diluted bitumen is spilled? Is it harder to clean up than conventional crude? No.” End quote.

What do they take us for?

These companies cannot and should not be trusted.

But it’s not just the risk of Enbridge and Kinder Morgan and how they can’t be trusted as transporters of crude, it’s the oil sands development export strategy driving the need for bitumen pipelines and what it means for the Canadian economy that can’t be trusted.

With pipeline proponents we have to be aware of how they deliver their message, carefully deconstruct what the message is, and dig deep to understand what they’ve elected not to tell us.

For almost two years Enbridge told us the benefits from Northern Gateway would come from higher prices paid in Asia for our oil.

Pipeline proponents, and elected leaders, like Minister of Natural Resources Joe Oliver, told us this would contribute economic benefits to Canada.

What they didn’t tell us, and what my evidence filed with the National Energy Board last year disclosed, was that they planned to apply higher Asian prices on every barrel produced and sold in Canada every year for not one year, or five years—but every year for 30 years.

When refineries pay higher prices for their feedstock, they do pass these price increases onto Canadian consumers and businesses. That’s the primary purpose behind accessing new markets—get the highest price possible for one barrel and pass it onto all barrels.

We all know that higher oil prices mean a decrease in family purchasing power. As families adjust, they cut back spending or go deeper into debt.

We also know that when businesses face higher energy costs, they cut in other areas, like wages or postpone investment, leading to slower growth—or resort to downsizing and layoffs.

So whenever you are told access to foreign markets secures higher prices for our crude and this benefits Canada, know oil producers plan to charge those higher prices on every barrel they produce. And when they do, their refineries pass it onto us.

We don’t need to access Asian markets. The market access Canadians need is getting western Canadian crude to eastern Canadian refineries where the demand is more than 750,000 barrels a day.

Quebec and the Atlantic Provinces are almost completely dependent on foreign crude oil imports from volatile and uncertain markets—the same markets we are told China is trying to protect itself from by importing our crude.

These refineries in eastern Canada pay higher prices for their imports because they are priced off an international benchmark called Brent.

Satisfying eastern Canadian refinery demand requires a quality of oil those refineries can process so this means oil sands bitumen needs to be upgraded in Alberta before it can be used in any, and all, Canadian refineries.

Traditionally, Alberta upgraded about 60% of the bitumen pulled out of the ground. In 2007 Alberta promised the rate would rise to 72% bringing with it the benefits of value added, meaningful jobs, and greater tax revenue.

Alberta’s oil producers announced a wide range of upgrading and refining projects to make that goal happen. These projects would have taken Alberta’s already strong downstream activity up a notch and securely established a domestic value-added supply chain.

Then came the financial crisis and the upgrading projects were scrapped—in Canada.

In the US—particularly the Gulf Coast—investments in refineries were made—including investments made by Canadian oil producers with US refinery interests—these enhancements were made to accept Canada’s bitumen.

So instead of a Canadian upgrader, we get Keystone XL—a bitumen export pipeline to the United States.

And we all know China’s refineries—owned by the Chinese government’s National Oil Companies like Sinopec, Petro China and Chinese National Offshore Oil Company—CNOOC, who just bought Nexen—want our bitumen.

These National Oil Companies, which began buying the rights to our oil beginning in 2005, are all oil producers in Canada, are not stupid, and want to take the bitumen value added back home to Asia.

By 2017 Alberta will only upgrade 48% of the bitumen it produces and by 2021 it will be closer to 43%.

Chopping local downstream projects breaks the value-added chain. Canada’s oil resources increasingly become a pool of raw crude waiting to be siphoned off along pipelines serving economic development and energy security needs of other nations.

This why back in 2008 when Prime Minister Harper was running for re-election he promised bitumen would not be shipped to Asia.

His government continued to publicly support upgrading oil in Canada right up until Enbridge filed its application for Northern Gateway in May 2010. Exporting unprocessed bitumen is not good for Alberta’s value added and it’s not good for the environment—its only good for a handful of very large companies.

I have to tell you. Canada’s bitumen export strategy is like watching a cannibal eat with a knife and fork and being told its progress.

But, big oil’s cannibalization of our resource sector is not all.

Because bitumen is so dense, like tar or wet cement, in order to flow down a pipeline it requires diluent, like condensate. Condensate is a high quality oil by-product from natural gas and shale oil.

Up until 2005 Canada was self-sufficient in condensate production. When we produced a barrel of bitumen and mixed it with domestically produced condensate to make dilbit, we exported a barrel of dilbit.

Not true any more.

By 2006 condensate demand began exceeding domestic supply and oil sands producers started importing it from the US.

To import condensate you need pipelines. That’s why Enbridge reversed its Southern Lights oil export pipeline in 2010—to import condensate.

That’s why Kinder Morgan is reversing its Cochin pipeline to flow from Illinois in the US to Alberta.

The need for more condensate import pipelines is why Enbridge’s Northern Gateway project includes a twin pipeline—one dedicated to import condensate from the Middle East.

But the untold real clincher with this raw resource export strategy—as if a growing reliance on imports from the Middle East is not enough—in order to export diluted bitumen instead of upgrading it in Alberta, twice as much pipeline capacity is required.

Why twice?

You need the pipeline to bring condensate in, and when you mix it with bitumen at a ratio of 30% condensate to 70% bitumen, you need the same amount of pipeline capacity to export the condensate back out.

Because diluted bitumen is denser than upgraded or conventional oil, it also moves slower. Trans Mountain’s current pipeline transports about 60,000 barrels a day of heavy crude.

Kinder Morgan explains to its shareholders that when that volume is replaced by light oil, the capacity of its existing 300,000-barrel a day pipeline becomes 400,000 barrels a day.

So before we know it, twice the pipeline capacity is required to transport a barrel of diluted bitumen than if bitumen is upgraded to synthetic crude oil in Alberta.

Before leaving pipeline capacity, there is a critical distinction I want to point out between “applied for capacity” and “designed capacity.”

This distinction will be of particular importance here in Burnaby later this year when the terms of reference for Trans Mountain’s twin are developed.

It’s common knowledge that Northern Gateway is intended to transport 525,000 barrels a day of crude oil and 193,000 barrels a day of condensate.

It also understood that this triggers an average of 220 Aframax, Suezmax and Very Large Crude Carriers a year in the Douglas Channel and Hecate Straight.

This capacity is the scope of the environmental risk being reviewed by the National Energy Board.

What is not commonly known is that Northern Gateway has been designed to ship 60% more crude oil and 40% more condensate by simply adding pumping power.

And the supertankers needed to transport it? Well its not 220 a year, but closer to 340 a year—almost two supertanker transits a day in BC’s northern coastal waters.

More crude. More condensate. More Tankers. More Risk. Way more risk.

Spill risk is not additive—it’s exponential. If there are 60% more oil tankers there is more than a 60% increase in the risk of an oil spill.

None of that risk is being considered in the current approval process for Northern Gateway, but capital expenditures for expanded throughput are.

Northern Gateway recently informed the NEB they intend to increase the number of storage tanks at the marine terminal. These additional storage tanks facilitate expanded throughput.

Suncor intends to ship oil on Northern Gateway. At the recent Kinder Morgan Toll Application Hearing, Suncor explained to Kinder Morgan that, Founding Shippers on Northern Gateway can compel expansion, that it has been commercially contemplated, and is expected to be more efficient as its a streamlined regulatory process.

Until 2005 Kinder Morgan’s Trans Mountain pipeline capacity was 225,000 barrels a day. In 2005 and 2006 they applied for expanded capacity to 300,000 barrels a day under a streamlined process. This triggered a growth in oil tanker traffic in Burrard Inlet from about 22 tankers a year in 2005 into 69 tankers a year by 2010.

At no time has an adequate terrestrial and marine environmental assessment been conducted on this increased volume, nor has the unique risk presented by diluted bitumen been assessed.

Now Kinder Morgan plans to twin Trans Mountain and has a 36” diameter pipeline proposed—the same diameter as Northern Gateway’s oil pipeline.

It is possible that the proposed Trans Mountain twin has designed capacity much greater than what we are being led to believe. If this new pipeline can move up to 850,000 barrels a day this would mean the system flowing into the lower mainland of BC could accommodate over 1.2 million barrels a day.

That would mean either more supertankers—bigger supertankers—or both. We know in 2011 Kinder Morgan planned to dredge the Burrard Inlet to accommodate Suezmax supertankers, which can ship an average of 1 million barrels a day.

It becomes very important later this year when Kinder Morgan submits its Application to the NEB that the terms of reference cover full designed capacity and the risk of this capacity—not just the capacity Kinder Morgan wants us to see.

Crude oil pipelines through British Columbia make no economic sense.

Oil tankers along our coast make no economic sense.

We need to develop an energy policy in Canada, Made in Canada, for and by Canadians.

This is not what big oil wants, but it is what our country needs.

We have to say “no” to these pipelines and “no” to oil tankers along our coast, not just for the economic and environmental good of BC, but for the entire country.

We have to say “no” to corporate plans that crowd out British Columbia’s economic development and put at risk our domestic economy and existing jobs.

And when British Columbians stand behind a firm “no” to oil pipelines and a firm “no” to oil tankers along our coast what we are really saying is a definite “yes”.

“Yes” to a better economic and environmental future for British Columbia, for Canada and all Canadians.