Energy East is good for Canada, not the oilsands

No substitute for Keystone XL.

 
The Irving Oil refinery in St. John, Canada's largest, would benefit from cheaper feedstock (Photo: Larry MacDougal/Canadian Press)
The Irving Oil refinery in St. John, Canada’s largest, would benefit from cheaper feedstock (Photo: Larry MacDougal/Canadian Press)

Western Canada’s landlocked oil industry desperately needs additional pipeline capacity to reach new markets. With daunting political roadblocks delaying proposed lines heading to the south and west, the latest hope lies to the east. Enbridge is already reversing flow in an existing oil line between North Westover, Ont., and Montreal. TransCanada Corp., meanwhile, is pushing forward with a much more ambitious scheme, dubbed Energy East. The project faces little opposition so far (unlike the company’s infamous Keystone XL proposal to the U.S.), and many stakeholders might benefit. But Energy East is not in itself a solution to the oilsands transportation dilemma.

TransCanada’s proposed 4,400-kilometre conduit would transport crude from a tank terminal in Hardisty, Alta., east toward Montreal, Quebec City and on to Saint John, N.B. Some 3,000 km of its length would consist of an existing 42-inch-diameter natural gas line. (Use of TransCanada’s gas pipelines fell precipitously over the past five years, the victim of radical shifts in natural gas continent-wide.) Although having pipe already in the ground is a plus, it’s still a big, expensive task: valves must be replaced, pumping stations added, new sections laid. Terminals could be built in Saskatchewan, Quebec and New Brunswick, and new facilities constructed to load crude onto ships for export to the U.S. and beyond.

On April 15, TransCanada began soliciting binding commitments from would-be shippers in a so-called open season. Provided it gets enough interest, the company says it will begin making the necessary regulatory applications to the National Energy Board. Pending timely approvals, it estimates the line could be in service as early as 2017. Capacity could reach 850,000 barrels per day, equivalent to half the current output from the oilsands.

The main appeal of Energy East is that it would allow more Canadians to benefit from their country’s oil wealth. Only limited amounts of Alberta’s bounty flow east today, leaving Eastern Canadian refineries to import some 600,000 barrels of feedstock a day at the world’s highest prices. “I expect this pipeline will effectively eliminate the crude that is coming in from Africa, the North Sea, Venezuela, and Saudi Arabia,” says Stefan Pohlod, the project’s president. That would improve the whole country’s balance of trade. Adding to its populist appeal, cheaper crude might also result in lower gasoline prices for long-suffering Quebeckers and Maritimers.

It’s no surprise, then, that politicians are lining up to support it. Alberta Premier Alison Redford is naturally enthusiastic about a new market for her province’s undervalued oil. Other premiers lend their support, notably New Brunswick’s David Alward. Quebec is a wild card; there, a sizable constituency might object on environmental grounds. Federal Natural Resources Minister Joe Oliver is strongly in favour. Even NDP Leader Thomas Mulcair, an implacable foe of Keystone XL, has endorsed the idea.

But Energy East can only do so much for oilsands producers. Although it would be capable of shipping the oilsands’ kind of heavy crude, the destination refineries in Quebec, the Maritimes and the northeastern United States were designed to handle light, sweet oil. (This contrasts starkly with the U.S. Gulf Coast—destination of Keystone XL—which in the past built awesome heavy-crude capacity to handle now-diminished supply from Venezuela.) “We would expect that the pipeline would initially transport mostly light crudes,” Pohlod says. That would most likely come from tight-oil plays in Alberta and Saskatchewan—and possibly North Dakota, some analysts have speculated. As well, the eastern refineries could take synthetic crude oil—oilsands product that has been upgraded. But with investment in western upgraders effectively halted, future production growth is all about raw bitumen.

It’s possible bitumen from the oilsands could traverse Energy East to be shipped by tanker from Saint John to the U.S. Gulf Coast. It’s also possible that the availability and low price of bitumen could encourage the owners of Eastern refineries to retrofit their plants to handle it—possible, but unlikely. With fuel demand flat to falling, there’s little interest in investing the billions necessary to rebuild aging plants.

“Given that they are more likely to move light, sweet barrels, the East Coast pipelines are unlikely to offer relief to heavy oil differentials,” Robert Johnston, an analyst with political risk consultancy Eurasia Group, wrote in a recent commentary. Energy East has a lot going for it, but it’s no substitute for Keystone XL.

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