Beyond pipelines

Illustration by Hanna Barczyk

At a summit back in 2014, then-Canadian Ambassador to the U.S. Gary Doer extolled the environmental virtues of pipelines, leaving a lot of people scratching their heads. Sure, it’s safer and more efficient to move oil by pipe than rail, as the Lac-Mégantic tragedy showed. But his suggestion that more pipeline capacity would not influence oil sands expansion and its attendant environmental impacts was disingenuous. Or at least it was back then in a world with $100 oil.

Things change. The accelerating energy transition to low carbon alternatives, coupled with low-cost crude producers like the Saudis protecting their market share by playing with the taps, means we are living in a whole new world of cheap oil – “lower forever” in the words of Royal Dutch Shell CEO Ben van Beurden. Today, even building 50 new pipelines would not spur major capital investment in the oil sands because the economics don’t justify it.

Just ask Suncor CEO Steve Williams, who said as much on a recent analyst call.

This doesn’t mean that existing projects will be mothballed; many of them will continue to employ people and churn out cash for years to come. That’s because although a high oil price of $50-$70 is necessary to justify investing billions into a new oil sands project, the variable costs of getting a barrel of oil from existing operations are much lower (as low as $10 for steamed oil and low $20s for mined oil).

What would new pipelines mean for the Canadian economy? There is no doubt that the current hefty discount on Western Canadian Select (WCS) to West Texas Intermediate (WTI) is hurting us to the benefit of U.S. refiners including the Koch brothers, at a price of up to $7 per barrel on average according to the Alberta government. However, it is an underappreciated point that most of any pipeline dividend would flow directly to foreign shareholders, who own 76.8 per cent of oil sands companies on a market cap weighted basis, according to Bloomberg’s Shareholdings Database (note: the actual foreign shareholdings may be slightly lower due to some peculiarities in Bloomberg’s methodology).

Depending on whose numbers you believe, relieving the current price squeeze on WCS with new pipelines could add up to $30 million a day to the Canadian economy. But this number is likely inflated, according to economist Robyn Allan, who estimates that only 10 per cent of the crude actually faces the discount because producers use vertical integration with refineries, upgrading, long-term shipment contracts for pipelines and the futures market.

It’s true that any pipeline dividend would boost provincial and federal government coffers, but less than you might think due to corporate tax loopholes and a 1 per cent royalty rate for most oil sands producers when oil prices are low. To illustrate, Alberta collected just $827 million in royalties on oil sands company sales of $120 billion in 2016 (note that this figure also includes downstream revenues). In a low oil price world, with the rosiest assumptions possible (i.e., 100 per cent of the high end of the market access discount is eliminated, all of the pipeline dividend flows into taxable profits which are paid at the full 26.6 per cent rate and an average royalty of 10 per cent), a pipeline dividend could mean an additional $2.6 billion in annual corporate income tax and royalty revenues. A more realistic estimate would be a quarter to half that figure.

Beyond a few thousand jobs during construction, new pipelines such as Trans Mountain probably wouldn’t do much for new jobs (or new payroll taxes) either, since they would not spur significant new upstream investment at current crude oil prices.

What would building new pipelines mean for the environment? Unless you believe the energy transition is not for real, there would be minimal impact on greenhouse gasses since new pipelines are not likely to change oil sands economics enough in a low price world to spur significant new investment. Oil tanker spills would likely become a bigger risk with any pipelines that go to west coast tidewater. But if you accept Prime Minister Justin Trudeau’s assessment, the biggest risk factor at play is losing Alberta’s support for the national carbon pricing plan and its ensuing collapse if no pipeline gets built.

Alberta’s United Conservative Party leader, Jason “No Carbon Taxes – Ever!” Kenney, sees things differently, which could be a problem as he is expected to win the provincial election next year. Regardless, delivering on new pipelines would certainly be seen as a good faith gesture in Alberta and Saskatchewan. When a region is hurting economically, emotions run high, so feelings should not be discounted.

So, new pipelines may not matter much for the environment or the economy, beyond maybe a couple billion dollars a year for governments and padding the pockets of mostly foreign shareholders in existing projects. The main potential upside for Canada is the improved acceptance of a national carbon plan. But while it is uncharitable to describe building pipelines to fight climate change as a “crock of shit” or “Orwellian logic” – as David Suzuki and economist Mark Jaccard, respectively, have done – it’s by no means certain that it will achieve a national climate consensus, which has eluded governments since that of Brian Mulroney.

What Canada needs is a different “grand bargain,” which may or may not include new pipelines but most definitely requires a step change in boldness to create winning conditions for all parts of the country in a low-carbon world. This new bargain will include making the most of the hydrocarbon reserves in the Athabasca Basin, while building a bridge from the old-energy economy to the new-energy economy – a combination that could unite as much pan-Canadian support as Sir John A. Macdonald’s railway.

The good news is we have the ingredients to do it.

While the sun is setting on the “rip and ship” model of oil extraction in Fort McMurray, there could be a new dawn of prosperity if we can “pump and polish” or “mine and shine” our abundant oil and gas feedstocks. A silver lining of a lack of pipeline capacity is that it creates a greater itch for game-changing downstream innovation. Low prices are not good news for upstream energy producers, but they are a boon for the downstream energy sector, which can transform low-value feedstock into high-value products.

This includes “bitumen beyond combustion” in forms such as ultra-low carbon plastics, non-combusted petrochemicals and carbon fibres, demand for which is growing in Asia and other markets. We would create many good-paying jobs for Albertans in the process, as Alberta’s Energy Diversification and Advisory Committee points out in a major new report. But this opportunity is not going to just fall into our lap.

The single most important obstacle to this opportunity is capital costs, which are 10 to 15 per cent higher in Alberta than in competing jurisdictions.

The obvious options are federal measures to help bring those costs down and expedited approval for green power corridors from B.C. to Alberta and from Manitoba to Saskatchewan.

The federal government could also provide support to attract the investment capital needed to foster passed-over super-cluster themes such as smart agri-food and sustainable and resilient infrastructure; and for accelerated clean-resources innovation in the most energy-transition-exposed provinces. Alberta Innovates and the Saskatchewan Research Council would be natural partners in this work.

The prime minister has often said the environment and the economy go together like paddles and canoes. The above measures might just get the entire country paddling in the same direction.

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