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Currently in the final stage of my doctoral work on the political economy of national oil companies. Here you'll find some of my findings--as well as other musings on oil-related topics. All comments -- civil, civilized or barbarian -- are welcome

Trudeau's failing gamble on Canada’s pipeline to the Pacific

Trudeau's failing gamble on Canada’s pipeline to the Pacific

In October, a federal court ruled that the Canadian government hadn’t consulted communities who live along the route of a pipeline to the sea, putting the fate of expanding Canada’s pipeline in serious jeopardy.

October 2018

It’s legal Groundhog day for plans to expand the Trans Mountain pipeline (TMX). In October, a federal court judge ruled that Aboriginal communities who live along the 1,150 km route weren’t sufficiently consulted. The ruling essentially halts approvals for the C$7.5bn (US$5.75bn) expansion of TMX. And while there is no guarantee that this pipeline expansion will ever get approved, the consequences are potentially disastrous for Canada’s oil sector, the oil-producing province of Alberta, foreign investment real and potential, and the politicians who’ve pushed all their chips on its expansion (Canada’s prime minister included).

If you build it, they will come

Canada produces about 4 million barrels per day (b/d)—good enough for 4th most among oil-producing countries. It’s also believed that Canada holds the world’s second biggest reserves. The problem is that almost all of Canada’s oil and gas is landlocked, which means transport infrastructure is about as important as wells and rigs to produce the oil itself.

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Canada has the bizarre—and suboptimal—situation of being a major net exporter of oil, but with only one buyer; practically every barrel of Canadian oil is sold to the United States. So, while Canada’s upstream (e.g. exploration, production) sector is vibrant, competitive and relatively efficient, it nevertheless suffers from some serious inefficiencies, the most obvious one being in the ‘midstream’ or transport segment of the business.

Canada’s benchmark, Western Canadian Select, trades at a discount to the lighter American benchmark of West Texas Intermediate (WTI), largely due to higher transport and refining costs. Troubles getting Canada’s heavy oil to refineries in the southeastern United States have resulted in a surplus, which in turn has resulted in Canada selling its oil at massive discounts, sometimes as much as 50% its market value. These discounts are estimated to cost Canadian producers about US$20bn a year, or about US$50 million a day.

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This is where an expanded pipeline to the Pacific coast comes in. The pipeline’s expansion would triple existing oil sands capacity to the west coast to nearly 0.8 million barrels per day. Accessing the especially oil-hungry markets of Asia would instantly increase the margins of Canada’s oil sands producers, draw more investment into the sector, relieve the transport bottlenecks to the US, and increase tax revenue to both the provinces (oil-producing and oil-transporting) and federal government in Ottawa.

This is a big reason why Alberta’s New Democratic government pushed so hard for the expansion of TMX in the first place, hoping for a jump in tax revenue and creating jobs.  In 2016, Alberta’s premier, Rachel Notley, walked the tightrope of getting political support for the pipeline while pushing for an unpopular carbon levy. Notley has staked her political future on getting TMX built, something that the recent court ruling will postpone indefinitely and will all but doom her premiership in the upcoming election.

No, Prime Minister

Alberta’s premier is not the only politician who has gone all-in on the pipeline. Prime Minister Justin Trudeau has insisted that the pipeline’s expansion is vital to Canada’s national interest, going so far as to push for the government’s purchase of the entire project from Kinder Morgan for C$3.5bn (US$2.68bn), not to mention the cost of the expansion itself and the rising legal costs to get it approved. No surprise then that it took only minutes for Kinder Morgan shareholders in Texas to approve the sale; they’d spent the past five years trying to sway public opinion, squashing protests, winning court battles (17 in total), and getting permits from Canada’s many levels of government at a cost of C$1bn (US$770m).

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Now, the Trudeau government finds itself in the quagmire of having purchased the pipeline but blocked by the court from expanding it for the foreseeable future. Trudeau’s gambit was high-risk, low-reward. First, pushing for expanding a pipeline that would increase Canada’s carbon emissions from increase oil production while potentially exposing areas adjacent to the pipeline directly contradict his environmental-friendly image; it also all but guarantees that Canada wouldn’t meet its carbon-emission cut commitments outlined in the Paris agreement. Second, the move enraged his supporters in Parliament and in the public. Third, it’s not even clear that Ottawa has the jurisdiction to break the stalemate between the two western provinces (Alberta, the oil-producing one; British Columbia, the oil-transporting one), leaving the Trudeau government in the awful position of having responsibility of the pipeline without the power to break the deadlock. Fourth, the federal government is now saddled with a potential financial albatross, being the owner (and regulator, oddly enough) of a pipeline that may never get built. Fifth, if the pipeline does get expanded—no guarantee there either—it will almost certainly happen after a federal election, a Damocles sword over Trudeau’s head sure to drop at some point over the next eighteen months.

We’ve been here before

Canada’s oil sector is a graveyard of failed pipeline proposals: Northern Gateway, Energy East, Pacific Northwest, Mackenzie Valley gas pipeline. Whatever their economic logic and value, they all died inglorious deaths, provoking bitter political fights and dragging down many politicians’ careers with them. Trudeau is gravely at risk of facing a similar fate. Alberta and British Columbia are bickering with no back-stepping or end in sight; Trudeau’s commitment to climate change, already in jeopardy, will be doomed if the pipeline goes forward; his political allies have moved away from him at what soon will be his most vulnerable time; and TMX, now owned by the federal government and mired in more legal trouble, may never end up getting built.

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