Pipeline Politics

The fate of two key oilsands projects is anything but certain. In red, above, Keystone.

This article appears in the September issue of Oilweek.

By Peter McKenzie-Brown

A web of oilsands pipelines is spreading from Canada’s oil hub at Hardisty, Alberta into American markets. At the beginning of summer, TransCanada’s Keystone Pipeline began delivering 435,000 barrels of oil to refining centres in Illinois. This fall, Enbridge’s Alberta Clipper will begin delivering an additional 450,000 barrels per day to Superior, Wisconsin.

That’s just the beginning, though. The Alberta government believes US imports from the oilsands will increase from today’s level of about 1.5 million barrels daily to nearly 4.3 million barrels daily in 2030, and there is plenty of potential to expand production beyond those numbers. So much expansion calls for a lot of pipelines. Will they reach primarily into the US, or will East Asia also become a key market?

The answer lies with the fate of two great pipeline proposals – TransCanada’s Keystone expansion and Enbridge’s Northern Gateway lines – which are both before the regulators. Although they reflect fundamentally different approaches to the market, TransCanada’s Keystone Expansion and Enbridge’s Gateway line represent vitally important industrial links from Alberta to the outside world. In different ways, the two proposals are embroiled in a conflict of old issues pitted against the new.

The old issues are technical and economic. The barrel of oil is blackening everywhere as supplies of light, sweet oil decline, and global demand is rising. Oilsands production is increasingly available and needs markets. The world’s big refining centres need feedstock and have the capacity to refine bitumen; pipelines are efficient and safe. The proposed pipelines are mega-projects which will provide jobs and economic stimulus. Oil-importing countries around the world want to develop secure, longer-term supplies.

The new issues are soft and ecological. Some environmental groups are aggressive against hydrocarbons, especially bitumen; they have successfully painted the oilsands black and want to further punish Canada’s merchants of dirty oil. Citizens wanting a greener world worry that the pipelines may lead to industrial accidents which spoil the environment. Politicians respond by supporting green measures that are sometimes ill-considered. Regulatory hearings drag on for months or years, and court challenges add to the delay.
In different ways, these are the issues facing Keystone and Gateway. Taken together, they are a fascinating study in pipeline politics.

Keystone
The Keystone Pipeline focuses entirely on delivering oilsands oil to US markets. The first phase of Keystone line began deliveries to the US Midwest in June.

About 3,500 kilometres in length, the pipeline transports oil from Hardisty, Alberta to US refineries in Wood River and Patoka, Illinois. The Alberta section involved construction of some 375 kilometres of pipeline, pump stations and terminal facilities from Hardisty. The next section involved the conversion to oil of nearly 900 kilometres of TransCanada’s natural gas mainline in Saskatchewan and Manitoba. The American section, to Illinois, is about 2,200 kilometres in length.

That was only the beginning, however. Phase II will involve a 480-kilometre extension from Nebraska to the marketing/refining and pipeline hub in Cushing, Oklahoma. Then comes the $7-billion Keystone Gulf Coast Expansion Project – approximately 2,700 kilometres in length, 36 inches in diameter, with completion planned for 2013. If constructed, this line would extend the system to 5,150 kilometres of total length: from Cushing it would be extended to Port Arthur, Texas and possibly also to Houston.

Keystone already has capacity of 435,000 barrels per day, and that will increase to 591,000 barrels per day with completion of the Cushing leg at the end of this year. With the completion of the expansion, the project would be able to deliver 1,100,000 barrels per day. Completion would run the total tab for the Keystone project up to US$12.2 billion.

War of Words
The day after TransCanada Corp.’s outgoing chief executive officer Hal Kvisle went to Wood River to ceremonially turn on the Keystone tap, Alberta premier Ed Stelmach published a half-page ad in the Friday edition of The Washington Post. His letter was partly a response to a letter to Secretary of State Hillary Clinton from 49 Democratic representatives. The letter urged her to halt the Keystone expansion on grounds the bitumen represents damaged environments in northern Alberta and higher carbon dioxide emissions in North America. For construction to proceed, the project needs approval from Clinton’s State Department.

Hoping to face down these congressmen, Stelmach argued that the oilsands are a reliable source of energy, and that the province is reducing pollution. His hottest zinger: “A good neighbour lends you a cup of sugar. A great neighbour supplies you with 1.4 million barrels of oil per day.” The response? Heavy-hitting U.S. Congressman Henry Waxman sent yet another letter hostile to the oilsands to the Secretary of State.

Consistently using the pejorative term “tar sands,” he described the Keystone expansion as “a multibillion-dollar investment to expand our reliance on the dirtiest source of transportation fuel currently available.”

The Keystone expansion, he added, “is a $7 billion pipeline that would transport up to 900,000 barrels/day of tar sands crude oil almost 2,000 miles from Alberta to refineries in the Gulf Coast. This pipeline would roughly double the quantity of tar sands fuel currently being imported, and in conjunction with two previously permitted tar sands pipelines that are not yet in full operation – Keystone and Alberta Clipper – would more than triple the quantity of tar sands fuel imported to the United States. The cumulative effect of the three tar sands pipelines would be to increase tar sands imports to over 3 million barrels per day. To process this large increase in tar sands imports, U.S. refineries will invest billions of dollars more in refinery upgrades.”

Outside the American Congress of course, there are many proponents of oilsands imports. According to lobbyist Tom Corcoran, executive director of the Washington-based Center for North American Energy Security, “ensuring access to affordable, reliable energy from our North American allies…should be a national priority. Projects such as the Keystone pipeline ensure increased domestic energy security, stable prices for consumers (and) minimal environmental impacts.” He added that “any evaluation of the indirect (greenhouse gas) emissions (such as from oil sands production or the transportation sector) would be purely speculative.” In all likelihood the energy security argument will prevail in Washington, and Secretary of State Clinton will issue a Presidential Permit allowing the Keystone Expansion to proceed.

Northern Gateway
But with so much resistance to bitumen imports from America’s environmental camp, why not just export the stuff to other countries? That’s the concept behind the other big pipeline project, Enbridge’s Northern Gateway Pipelines. This project is also being jeopardized by environmental concerns, but of quite a different kind.

The $5.5 billion Northern Gateway project would take oil from the Edmonton area to the nearest deepwater port – at Kitimat, on a British Columbia inlet.

To export the stuff would involve building a marine terminal with two ship berths, condensate tanks and 11 petroleum tanks. Only modern, double-hulled tankers could use the terminal, and escort tugs would be in charge of moving them in and out of risky waters. The Enbridge proposal also calls for third-party tanker inspections. The terminal would have a radar monitoring station and first response capabilities in the event of safety incidents or spills.

The 1,172 kilometre dual pipeline project would have a 36-inch pipe able to carry about 525,000 barrels of upgraded bitumen and bitumen blends into export markets every day. For the first time, Canadian oil would have significant access to overseas markets, primarily in East Asia. Northern Gateway would have a parallel 20-inch pipeline for flow of imported condensate from Kitimat to Alberta.

Condensate is the low-density (63o API) mixture of hydrocarbon liquids used as diluent to enable bitumen to flow, and this line would carry 193,000 barrels per day. Domestic supply is very short and there is little potential for internal growth because of declining gas production. To make up for shortfalls, for years the industry has been shipping condensate into Alberta by railway.

This line would thus assist the oilsands industry by opening up overseas markets, but also by bringing in the thinning solution needed to take the product to port. Enbridge wins both ways, but so does the oilsands sector.

Northern Gateway’s condensate pipeline is part of a two-pronged effort by Enbridge to bring diluent to the oilsands and heavy oil sectors. The company’s Southern Lights project from Chicago to the Edmonton area has already begun to fill, and will begin delivering 180,000 barrels per day of condensate this fall. The Southern Lights project runs roughly parallel to Enbridge’s Alberta Clipper line, but in this case the hydrocarbons are coming into Canada for use by oilsands producers.

Looming Engagement
As described earlier, the Keystone expansion is already dealing with political opposition, and its proponents have joined battle with its political and ENGO opponents. By contrast, Northern Gateway has barely begun the struggle. However, the company has employed armies of public relations and public consultation teams to do battle.

Armies they will need, because public opinion on the West Coast seems to be strongly against the project.

According to a poll commissioned by Forest Ethics, an ENGO, 80 percent of British Columbians support a crude oil tanker ban for BC’s coastal waters, while 15 percent think tanker traffic should be allowed. Significantly more British Columbians oppose the Enbridge Northern Gateway pipeline (51 percent) than support it (34 percent). And British Columbians who strongly oppose Enbridge’s pipeline (31.7 percent) outnumber four-to-one strong supporters (8.1 percent).

The basic issues are two: transporting oil across aboriginal territory, and using tankers to transport oil along the B.C. coast. Both of these are greatly complicated, however, by the perception that oil from the oilsands is dirty.

Enbridge needs to secure rights-of-way to construct the line through the lands of 48 Aboriginal communities located along the pipeline route – half of them in B.C. To prepare for hearings in this area, Enbridge commissioned studies on the project’s potential cultural, social and economic effects; its impact on traditional land and resources use; and its potential effects on heritage and archaeological resources. However, in March nine coastal First Nations declared a ban under their traditional laws on the transport of oilsands oil through their territories, and announced at a news conference that they would take whatever steps were necessary to stop the project.

Getting approval for tankers to carry oil through the passage from Kitimat to the Pacific, and thence within Hecate Strait, to the east of the Queen Charlotte Islands, is becoming a political football. In 1972 the Liberal government of Pierre Trudeau imposed an informal ban on oil tanker traffic in this area. At the beginning of summer, Liberal Leader Michael Ignatieff announced that the federal Liberals would formalize a moratorium on crude oil tanker traffic in British Columbia’s northern coastal waters. He was clearly playing to public opinion in the province. Oil tankers have been moving through southern coastal waters for half a century, carrying oil from a Kinder Morgan pipeline terminal in Burnaby at Burrard Inlet without a major spill.

“It’s been (our) vision...to find another market for Western Canadian oil,” Enbridge’s engineering manager Raymond Doering told the Caledonia Courier, which is published in the town of Fort St. James. Gateway has “been described as the largest private infrastructure investment in B.C.” He added that the company has established positive working relationships with 24 First Nations communities in Alberta and 18 of the 24 affected First Nations in B.C. So far, so good. Then he added that there is a small, vocal minority of First Nations people opposed to the project
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“A small group of (First Nations) people object to the dirty oil pipeline?” an infuriated reader wrote in response. “There are thousands of BC people opposed to the dirty oil tankers in our pristine coastal waters....When (an oil spill) happens, the beautiful Orca and Humpback whales, and all the marine life will perish. I don't give a dam (sic) if the dirty tankers have 10 hulls, those are dangerous seas, and hard to navigate. There is still oil collecting on the rocks from the Valdez spill, 21 years ago....”

Struggles
As we said at the beginning, after the engineering and the economics come soft issues which can be hard to deal with. America’s Department of State will make the final decision for the Keystone Expansion – probably buying the energy security argument.

In Canada, the National Energy Board will make the final decision for Gateway. The NEB has appointed a joint review panel to examine the project’s environmental effects, look for ways to mitigate negative effects, hold public hearings and consider comments from the public and Aboriginal peoples, and submit an environmental assessment report with reasons and recommendations about the project to the federal government. Gateway’s fate is far less assured than Keystone’s.

For the oilsands sector, which needs expanding export markets to continue to grow, the pipeline struggles are vital. Watch them closely.