Time to unclog the pipes

Getting Canadian oil to market is a burning platform for policy-makers. With various well-publicized setbacks, increased pipeline export capacity has been kiboshed or delayed. Facing constrained transport, Alberta has moved on Band-Aid measures to address the stranded supply glut and price discount. However, for the medium and long term, the federal government must get the Trans Mountain project back on track and ensure a coherent and predictable review process for new energy infrastructure. Through November, the plunge in prices for Western Canadian oil underscored the consequences of lapses in getting pipelines built. Long-lead investments in large-scale oilsands production—for example, Fort Hills—have continued to ramp up. With the winter drilling season pending, firms faced deadlines to plan their capital spending and Alberta foresaw a spiralling downdraft for resource royalties. With backing from the opposition, Alberta’s government responded to a historic depression of prices by curtailing production, focusing cuts on larger producers. Most Alberta policy-makers are uncomfortable with the decision to cut production: facing a gushing wound, the government used the most immediate tool available to stop the bleeding. Spot and future markets for Western production have witnessed a price surge from the mid-November nadir of nearly US$10 per barrel for Western Canadian Select. However, since the cuts only take effect in January, the boost to local prices is anticipatory: open questions remain about whether curtailment will restore the previous discount or if low-cost production that is stranded in the basin will continue to depress local prices. The amount that the discount costs Canada is somewhat difficult to estimate: shippers who are able to get oil to downstream markets should receive a higher price reflecting the market at the applicable hub. As of Dec. 6, a heavy oil benchmark like Maya from Mexico is trading at roughly US$60 per barrel for Gulf Coast deliveries. For firms with long-term take-or-pay contracts for capacity on pipelines like Keystone or Trans Mountain, there are substantial profits from the local glut of supply. Depressed prices also mean very cheap feedstock for Western Canadian refineries, boosting profit margins on refined products. However, the situation was untenable for those producers whose supply was trapped locally. Alberta’s output has continued to rise, reaching 3.7 million barrels per day in August and then again in October. With export pipelines running at full tilt, oil shipments are pushing onto railways (potentially crowding out shipments of other bulk commodities) and storage for oil inventories are maxed out. An urgent situation metastasized to a crisis. For uncommitted export capacity, nominations for oil to ship have exceeded available capacity by two-fold. For this uncommitted capacity, shippers are then apportioned the available pipeline capacity as their pro rata share of nominations. This allocation of the uncommitted capacity may distort local pricing by inefficiently trapping low-cost supply in the basin, and the federal natural resources minister has asked the National Energy Board (NEB) to examine the rules for apportioning capacity. All of this has long been simmering, finally reaching a full boil. The current crisis is a consequence of the federal government’s failure to ensure pipelines get built. The Federal Court of Appeal’s August reversal on the Trans Mountain expansion approval took issue with the federal government’s failure to adequately consult with Indigenous peoples. Yet, when completing its consultations on Trans Mountain, this federal government had the benefit of the Federal Court of Appeal’s 2016 decision concerning the inadequacy of consultation on the Northern Gateway project, among a string of recent jurisprudence on the duty to consult. The government has now tasked the NEB with redoing the scoping of the Trans Mountain project to account for impacts from tanker traffic by the end of February, and tapped the esteemed former Supreme Court justice Frank Iacobucci to advise on fulfilling the required consultation. To return shovels to the ground by spring, Ottawa has no margin for error. Looking ahead, the federal push to enact Bill C-69 risks compounding the uncertainty facing project proponents for pipelines and other major infrastructure. Many, including the Canadian Bar Association, have raised major concerns about various confusing procedural and substantive aspects of the legislation. Bill C-69 in its current form risks perpetuating the politicization of project approvals and conflating polycentric policy questions within what should be an administrative, project-specific decision. Certain opponents of pipelines view Canada’s oil as a sunset industry. They ignore the role of an economy-wide carbon price, and the present pricing of greenhouse gases in Alberta, as the efficient tool to reduce economy-wide emissions. This carbon price has encouraged oilsands operators’ innovations to reduce emissions intensity, just the same as for producers of steel, cement, and fertilizer. Stranding Canadian oil is not an economically efficient way to reduce our emissions. The federal government now seems to have a heightened appreciation of the crisis facing Western Canada’s oil sector. Canada cannot risk further delays. Grant Bishop is the associate director of research with the C.D. Howe Institute. The Hill Times