TORONTO (miningweekly.com) – Canada is expecting a boom in oil production from its prolific Alberta oil sands deposits; however, production from the world’s third-largest proven oil reserves, after Saudi Arabia and Venezuela, is hampered by a lack of sufficient transport to markets, resulting in lower prices for Canadian crude.
In much the same way as the transcontinental railroads of the 1880s acted as economic enablers and opened up the Canadian hinterlands of Manitoba, Saskatchewan and Alberta to settlement and agriculture, so new oil pipelines transporting crude to coastal refineries and markets, and refined petroleum products back inland, are expected to have an enormous economic impact on Canada, driving economic growth.
Canada is desperately seeking alternative oil transport networks to its inadequate rail infrastructure to boost an industry that last year accounted for C$100-billion in exports of oil and natural gas, Al Monaco, the country’s largest pipeline operator Enbridge’s president and CEO, said at a recent Bloomberg Canada Economic Summit, in Toronto.
“It’s a very exciting time to be in the pipeline business. It’s not too often that you get the supply fundamentals and the demand fundamentals lining up extremely well. So, at this point, you’ve got a producer push of volume that wants to get to market. You’ve also got a market pull,” he said.
MARKET PUSH AND PULL
The Canadian Association of Petroleum Producers’ (CAPP’s) ‘2013 Crude Oil Forecast, Markets and Transportation’ report expects Canadian crude oil production to more than double to 6.7-million barrels a day by 2030, up from 3.2-million barrels per day in 2012. This includes oil sands production of 5.2-million barrels a day by 2030, up from 1.8-million barrels per day in 2012.
CAPP VP for markets and oil sands Greg Stringham told Mining Weekly that conventional tight oil production was increasing owing to new technology, allowing the industry to produce oil from formerly uneconomic resources and reversing a significant declining production trend over the last decade.
He said oil sands production growth reflected Canada’s supply potential and the growing international demand for oil. In 2012, the country produced 1.8-million barrels a day, including 800 000 bbl/d from mining operations and one-million barrels per day from in situ operations. By 2030, in situ production is forecast at 3.5-million barrels a day and mining production is forecast at 1.7-million barrels a day.
Canada’s Athabasca oil sands are large deposits of bitumen or extremely heavy, tarry crude oil, located in north-eastern Alberta, roughly centred on the boomtown of Fort McMurray.
These oil sands, hosted in the McMurray formation, consist of a mixture of crude bitumen, silica sand, clay minerals and water. The Athabasca deposit is the largest known reservoir of crude bitumen in the world and the largest of three significant oil sand deposits in Alberta, along with the nearby Peace river and Cold Lake deposits, where crude production majors such as Suncor Energy, Syncrude, Shell Canada, Nexen and Canadian Natural Resources have set up major operations.
“Increasing Canadian oil supply is aimed at markets in Eastern Canada, traditional and new markets in the US (displacing imports from less secure foreign sources) and growing markets in Asia. Our industry is focused on energy security and reliability, economic growth and environmental performance,” Stringham said.
NETWORK OF ENERGY
At the Bloomberg Canada Economic Summit, former New Brunswick premier and current Toronto-Dominion Bank deputy chairperson Frank McKenna argued that pipelines might become “symbols of unity” in the same way the cross-Canada railroad had enabled Western grain farmers to get their wheat to market.
He pointed to new oil pipelines that “would create a national network of energy”.
A broad range of new transportation projects, involving both pipeline and rail, were being advanced to move this growing supply to markets.
Energy giant Enbridge has proposed the increase of oil transportation capacity through projects including the C$6-billion Northern Gateway pipelines from Alberta to Canada’s Pacific Coast.
However, the pipeline project, which entails the construction of two pipelines stretching 1 177 km from the Alberta oil sands to a tanker port on the North Coast of British Columbia (BC), with the capacity to move 525 000 bbl/d of oil, was deemed to hold too great an oil- spillage risk, and its proponents presented too little evidence that risk factors would be mitigated, the newly elected Liberal government of the province, under the leadership of Premier Christy Clark, said recently when it rejected the project.
Other companies are trying to move the oil in other directions.
TransCanada was lobbying for the approval of the Keystone XL pipeline from the oil sands southwards to the refineries on the US Gulf Coast and proposed to convert part of an existing gas line to carry oil to Canada’s Atlantic coast.
While two phases of the Keystone XL project were in operation, a third, from Oklahoma to the Texas Gulf coast, was under construction and the fourth was awaiting US government approval. When complete, the Keystone pipeline system would consist of the completed 3 462 km Keystone pipeline (Phase 1 and Phase 2) and the proposed 2 673 km Keystone Gulf Coast expansion project (Phase 3 and Phase 4).
The controversial fourth phase, the Keystone XL pipeline project, would begin at the oil distribution hub in Hardisty, Alberta, and extend 1 897 km to Steele City, Nebraska.
TransCanada’s operational Keystone pipe-line system currently had the capacity to deliver 590 000 bbl/d of Canadian crude oil into the Mid-West refining markets. In the summer of 2010, Phase 1 of the Keystone pipeline was completed, delivering crude oil from Hardisty to Steele City, Nebraska, and then east through Missouri to Wood river refineries and Patoka, Illinois.
Phase 2, the Keystone–Cushing extension, was completed in February 2011, and the pipeline from Steele City, Nebraska, to storage and distribution facilities at Cushing, Oklahoma, is a significant crude oil marketing/refining and pipeline hub.
The Keystone XL proposal, which would comprise Phase 3 and Phase 4, was reported to face lawsuits from oil refineries and criticism from environmentalists and some members of the US Congress. In January 2012, President Barack Obama rejected the application amid protests about the pipeline’s impact on Nebraska’s environmentally sensitive Sand Hills region.
TransCanada then changed the original proposed route to reduce “disturbance of land, water resources and special areas” and Nebraska governor Dave Heineman approved the new route in January 2013. On March 22, 2012, Obama endorsed the building of the southern half, which begins in Cushing, Oklahoma.
Canadian Prime Minister Stephen Harper’s Conservative government is doing everything it can to lobby US officials to approve new cross-border crude oil shipments.
Houston-based Kinder Morgan was also seeking to triple the amount of crude oil that currently moved through the 60-year-old Trans Mountain pipeline that runs from Alberta to BC. The $5.4-billion expansion would pump 890 000 bbl/d from the oil sands mines to an expanded Westridge marine terminal, in Burnaby, BC, which raised fears of repeat catastrophic accidents in the region’s pristine wilderness, such as the sinking of the Exxon Valdez in Prince William Sound, Alaska, on March 24, 1989.
The Council of Canadians has estimated that, should the expansion proceed, up to 360 more oil tankers a year would enter the Burrard Inlet and the Strait of Georgia.
There is also preliminary talk of a new west-east pipeline within Canada that would send about 800 000 bbl/d of diluted bitumen from Alberta to refineries in Quebec and on Canada’s East Coast, most likely Irving Oil’s massive Saint John refinery, in New Brunswick – the largest in Canada and one of the ten biggest oil refineries in North America.
Canadian oil producers were also con- sidering a pipeline north to the Arctic Ocean, seemingly hoping that the emerging ice-free shipping routes could be a path to get more crude to market. To that extent, Alberta has hired a consulting firm, Canatec Associates International, to study the feasibility of a pipeline to Tuktoyaktuk, in the Northwest Territories.
According to Sun News, Energy Minister Ken Hughes called the $50 000 study a “preliminary scouting expedition”.
With projects prodding all four directions from Alberta to find suitable routes to move the crude out, all signs point toward continued Canadian efforts to expand oil sands extraction in Alberta, and the provincial government continues to provide massive subsidies in support of tar sands development.
“Timely regulatory decisions on these new infrastructure projects will enhance Canada’s international competitiveness in terms of attracting the investment needed to support production growth and realise market opportunities, benefiting all Canadians,” the CAPP’s Stringham said.
Authorities face the difficult task of weighing up the economic benefits of oil pipelines with the environmental and public concerns when taking a decision on each project.
New pipelines would also cost more and take longer to build, as operators, including Enbridge, put more effort into winning public support than into focusing solely on regulatory approval, Enbridge’s Monaco said.
The inevitable opposition to these pro- posals will come against the backdrop, of the fact that, despite a spate of relatively small oil spills from pipelines in recent months in both Canada and the US, no other example could more aptly demonstrate the deficiency involved in moving large quantities of crude by rail than the July 6 fatal partial destruction of the town of Lac-Mégantic, in Quebec, when a fully laden Montreal, Maine & Atlantic Railway oil train derailed and exploded, killing up to 50 people and cutting a swathe through houses and shops.
As a result of the accident, Canadian and US authorities were expected to increase the regulatory burden on rail shipments of crude and petroleum products, which could result in increased capital and operating costs for rail companies, ratings agency Moody’s Investors Service said.
Moody’s said the accident was expected to limit the near-term growth of petroleum freight, raising costs and tightening restrictions for North American oil producers that required rail to send their products to the east and west coasts.
“The Quebec derailment – likely North America’s worst rail accident since 1918 – would inevitably lead to increased US and Canadian government scrutiny and permitting delays, along with higher costs for shippers. These higher costs will be credit negative for North American rail companies, which have experienced a boom as crude shipments from the midcontinent, North Dakota and western Canada offset falling coal shipments,” Moody’s said in a statement.
The agency noted that crude producers focused on the Bakken shale oil formation, which depended far more on rail than on pipelines for transport, would be under increased pressure if there were a slowdown in crude shipments by rail.
Petroleum products account for much of the North American rail sector’s recent growth, owing to Bakken oil production, largely centred in North Dakota, having expanded far beyond what the region’s pipelines could handle.
Refiners on the US East and West Coasts today buy Bakken and midcontinent crude at prices that satisfy both parties, but they rely on rail, since most major North American crude pipelines run north to south, not east or west.
Rail shipments of crude, natural gas and other petroleum products accounted for only about 6% of car loadings for Class 1 North American railroads a year ago, but volumes were boosted by nearly 40% in the period to June, just as rail shipments of coal declined.
Moody’s said an increase in rail freight costs would slow the growth of crude shipments and potentially widen the Bakken discount, which was a concern for such Bakken-focused producers as Whiting Petroleum, Continental Resources, Oasis Petroleum and Kodiak Oil & Gas. About two-thirds of Bakken’s North Dakota oil production, which topped 727 000 bbl/d in April, reached its customers by rail.
Costly shipping by rail had certain advantages for producers in the Bakken and other mid-continent regions, such as giving them access to higher waterborne pricing and the flexibility to change shipping destinations that long-term contracting requirements on pipelines would otherwise have prevented.
However, the accident threatened to delay further rail-route development, and would prompt a re-evaluation of pipeline transport as an alternative to rail.
PRESSURE OVER KEYSTONE XL
Moody’s also said the Lac-Mégantic accident would put pressure on Obama’s administration to approve TransCanada Pipe Lines’ planned Keystone XL pipeline.
Proponents would argue that the accident points to the need to reduce rail shipments of crude by increasing pipeline capacity, including Keystone XL.
However, environmental activist organisation Environmental Defence climate/energy programme manager Adam Scott told Mining Weekly the grounds for the main opposition to the oil sands crude production in Canada and the US were its climate change implications and that the oil pipelines were seen as critical enablers, which would make the fight against fossil fuel consumption and carbon dioxide emissions much harder.
“Canada’s ‘have to’ attitude toward pushing for oil sands development and pipelines to get the product to market is a missed opportunity to build a green economy by investing in a sustainable green economy.
“Canada is tying itself to future boom-and-bust commodity cycles, instead of investing in exporting green-technology alternatives,” Scott said.
Others, however, feel it is a big step in the right direction for Canada’s Conservative federal government to have recently announced that it would, in future, require existing and new pipeline companies to have at least $1-billion financial capability on hand to cover any spills on Canadian soil.
Natural Resources Minister Joe Oliver in June made the announcement in Vancouver, shortly after he announced that government would raise the absolute liability for energy companies operating off the shores of Atlantic Canada and Arctic Canada to C$1-billion to align accountability with international standards.
He announced new safety rules for pipelines and new financial penalties, which would soon come into force for individuals and companies that violated environmental laws.
Oliver added that government planned to enshrine the currently implicit ‘polluter pays’ principle in law.
Other measures announced by the Minister included requiring companies to appoint an accountable senior officer, whose duty would be to ensure that management systems and programmes were compliant, and to ensure companies’ emergency and environmental plans were transparent and easily available to the public.
Scott, however, disagreed, saying the environmental risks of oil pipelines by far outweighed the potential economic benefits gained from developing a fossil-fuel-driven economy.
MESSAGE TO FEDERAL GOVERNMENT
While the BC Liberal government’s fear of potential oil spillages attendant on Enbridge’s proposal for the Northern Gateway pipelines from Alberta to Canada’s Pacific Coast, which had led it to reject Enbridge’s project proposal, were not an outright rejection of heavy-oil projects in the province, all future proposals would be judged on their merits and measured against the province’s five conditions for pipeline projects.
Those conditions included a fair share of the fiscal and economic benefits of heavy-oil projects, recognising the treaty and legal rights of First Nations and the development of ‘world-leading’ marine and land oil-spill prevention and recovery systems.
Environmental activist organisation the Pembina Institute senior policy analyst Nathan Lemphers at the time said Premier Clark had listened to the concerns of British Columbians, considered the evidence presented by Enbridge and found the proposal failed to address the province’s environmental concerns.
“This decision is a cautionary tale for the federal government, Alberta and the oil sands industry. If they want to see additional pipelines, they will need to accelerate improvements toward regulating upstream impacts of oil sands development and minimising the risk of oil spills,” he stated.
He added that BC’s rejection of the $6-billion pipeline proposal sent an important message to proponents of oil sands pipelines: “It’s premature to start building additional pipeline capacity from the oil sands until we have a credible plan in place to responsibly manage and transport crude from oil sands.
“As the final decision on this pipeline proposal rests in the hands of the federal government, BC’s announcement sends a strong signal to Ottawa that this project is not in the national interest, barring significant improvements,” Lemphers said.