Pipelines have never been so popular. For years, the steel conduits followed unseen routes. They carried rivers of crude oil beneath city and town alike, rarely drawing so much as a passing thought from those who depended on their valuable cargo. Today, proposals by Kinder Morgan Canada, Enbridge Inc. and TransCanada Corp. face fierce opposition in a bid to carry more Canadian crude oil – chiefly increased oil sands production – to new markets. In three Alberta Oil interviews, project leaders Ian Anderson, John Carruthers and Russ Girling remain optimistic about their respective projects, while acknowledging that pipelines are hidden rivers no more.
Photography by Colin Way
Dark Horse
Project: TMX phased expansion | Capital cost: $3.5 billion | Proponent: Kinder Morgan Canada
Alberta Oil: Does spare capacity on existing pipelines to the U.S. undermine the case for building – or expanding – westward?
Ian Anderson: The spare capacity you speak of is heading south and east to serve Midwest U.S. markets. We’re seeing increasing demand for market diversification and market reach off the West Coast. Our pipeline has been essentially full since our last expansion and it has been significantly over-nominated over the course of the last six months, which tells us that the time to proceed with the next phase of expansion on the pipeline is upon us.
Kinder Morgan Canada president Ian Anderson
Photograph by Colin Way
AO: How does that sync with current growth projections in the oil sands?
IA: If you look at supply growth out of the basin here, new pipeline capacity to the West Coast is at a minimum four to five years away – whether that’s an expansion of our system or Enbridge’s proposal. Producers have to look out four to five years at increasing supply, and that supply will fill up the capacity overhang that we have right now and there will be more and more pressure for offshore markets.
AO: The bulk of offshore shipments originating from the Trans Mountain system today are headed for U.S. markets in Washington state and California. What role do you see China and Asian markets in general playing in driving export growth?
IA: They will become more and more predominant. You’re right in that 90 per cent of the oil that’s currently moved off our facility in Vancouver goes to California. The remaining 10 per cent is going either to China or to the Gulf Coast. There’s no doubt that California will be a primary market for Canadian exports off the West Coast for some time, but China will play an increasing role as time goes on, both based on their demand and as well as producers here developing markets and looking for new markets.
AO: The flipside to market pull – the demand – is the push needed for new services from producers. Kinder Morgan has butted heads with Enbridge at the National Energy Board over the issue of firm sales agreements. Why is securing binding commercial support so crucial for the TMX proposal?
IA: My view is that the economic feasibility of a significant pipeline expansion – no matter what pipeline expansion you’re talking about on the West Coast you’re talking in the multiples of billions of dollars – and any commitment of capital of that sort requires commercial underpinning. That helps define the scale and the scope of the project. It helps define the timelines expected for the project and it helps define who those parties are that are economically supporting it. I think Enbridge would acknowledge that prior to building anything, and in fact perhaps prior to having final permits, commercial support would have to be demonstrated. It will now be up to the National Energy Board [to determine] what kind of economic support qualifies.
AO: Is it risky to plan a project without that support?
IA: That’s one of the key factors behind Trans Mountain that makes it attractive for shippers. It’s lower risk in that we can design the next phase of expansion to match as closely as possible supply and demand. We can go anywhere from an 80,000-barrels-per-day expansion as the next step up to 400,000 barrels a day, with options in between depending on what the demand is.
AO: The Northern Gateway proposal is widely panned by environmentalists as a threat to coastal communities. How have you managed to avoid the same negative reviews?
IA: One of the primary reasons that our expansion has been as successful as it is up to now is that it’s an existing operation. There’s not as much that’s new about it. Having said that we anticipate that the public dialogue about any expansion to the West Coast that’s going to involve tanker movements is going to come with the highest level of review. We’re confident that we can demonstrate safe operation and safely growing operations.
AO: Is getting Alberta oil to Pacific markets a national priority?
IA: Expanding pipeline capacity to the West Coast is a producer and an oil patch priority. The discounts that Canadian crude sees in the world market today are going to be impacted by many things as time goes on. One of them can be the opening up of new export markets. Now, the question one asks themselves is how much capacity is required and when? That’s where I think our response that has phases to it, that has alternatives to it under different timelines is desirable. [Enbridge president and CEO Pat Daniel] and I would agree, I believe, that at some point I can envision two pipelines to the West Coast. The question is what do you build first, and how quickly do you build them?
Eastern Promises
Project: Northern Gateway | Capital cost: $5.5 billion | Proponent: Enbridge Inc.
Alberta Oil: Enbridge CEO Pat Daniel has called the Northern Gateway pipeline a nation-building project. How can this pipeline be characterized as nation building?
John Carruthers: It’s in our national interest to have competition for resources, ensuring competitive pricing for Canadian oil and mitigating the risk of a single customer. Canada provides the U.S. with about one-fifth of its oil imports. Over 99 per cent of our product goes to one customer. That customer has historically been a very strong one for Canada. But that market is maturing and being captured by one market has an economic impact. The impact is our crude is discounted two to three dollars per barrel. If you look at the United States, it has access to supply all over the world. That is a position we are trying to put Canada in. Accessing alternative, large and growing markets provides critical value for Canadians.
Northern Gateway pipeline president John Carruthers
Photograph by Colin Way
AO: So is the alternative market China?
JC: The primary markets where we would see the most value are China, Japan, South Korea and Taiwan. Now once the oil reaches tidewater it can access any market. We would see crude going periodically to different markets. But those four markets in particular have strong demand. The proximity of Canada to those markets and the fact that they can process Canadian crude is all very positive. Potentially the oil could also go to California.
AO: Enbridge has filed regulatory documents saying two-thirds of the tankers transporting Northern Gateway crude would be headed for the West Coast. So where is the crude going – Asia or North America?
JC: The market is going to decide exactly where the product goes once it gets to tidewater. But we didn’t want to assume that all of the product was going to Asia, so from an environmental perspective we took a conservative approach and ensured we had modeled ships coming from the southern route [where tankers would take crude to the West Coast]. From a market and economic perspective, to access the countries we think are the primary targets; the tankers would typically use a northern route. So we are taking a conservative approach on both cases in terms of making sure we had looked at all the transportation routes to ensure we had done a proper environmental assessment.
AO: No one has signed firm sales agreements for the pipeline’s crude oil. How can you be sure there is a demand for this project?
JC: Before you will get long-term commitments, customers need to see a positive regulatory decision. It’s going to cost us in the order of $250 million to move this project through the regulatory process. We’ve got support from producers in Canada as well as the Pacific Rim market to move the project through this process. That’s a pretty significant commitment and we’ll see further commitments once we see regulatory approval.
AO: Many aboriginal groups in British Columbia are opposed to this project and worry about an offshore oil spill. What measures is Enbridge putting in place to ensure this doesn’t happen?
JC: We are raising the bar significantly to ensure safety. Today you see 1,500 tankers safely go up the channel to Kitimat unaided. But we are going to tether the tankers to tugs to ensure they are safe and we’ll also have a second escort tug. We’ll also establish weather stations and operational safety limits that will address visibility, wind and sea conditions. We’ll install advance radar, the ships will be double-hulled, the ships and crews will be vetted by independent third parties, the pilots will carry redundant navigational systems and we’ll have environmental monitoring ahead of the ship in transit. We will also exceed the Canadian shipping act emergency response standards significantly.
AO: Enbridge has offered a 10 per cent equity stake in the pipeline and a benefits package to aboriginal groups affected by the project. No group has signed on yet – are you concerned this lack of buy-in could threaten the project’s future?
JC: We have met with just over two-thirds of the affected communities and they are looking at those packages. But they have to go through quite an internal assessment and ratification process themselves. But there has been interest in what we’ve had to offer. We’re also looking to meet with other communities we haven’t been able to meet with. The key for us is getting in a position where we can talk about any concerns they have and talk about the project’s benefits.
AO: If it is built, what will the Northern Gateway pipeline mean to Canada?
JC: This project provides huge benefits to producers and to Canadians in respect to gross domestic product. That value all across Canada would be in the order of $270 billion over the 30-year life of the project. You would also see job creation in the order of 558,000 jobs. If it isn’t built, then that opportunity is lost to Canadians.
Southern Discomfort
Project: Keystone XL | Capital cost: $8 billion | Proponent: TransCanada Corp.
Alberta Oil: Other pipeline companies are looking to build projects that export Canadian crude to Asian markets. Why is TransCanada advancing a project to export crude oil to the U.S.?
Russ Girling: If we want to grow Canadian oil sands production by two to three million barrels a day over the next decade or two, we need to find a place to put that oil. We think the most logical place is the U.S. Gulf Coast. It consumes somewhere around 8.5 million barrels a day. Around five million barrels a day of that supply is imported. We think that is an important market to develop, and the response we’ve had to our pipeline from both refiners and producers would indicate that is where the marketplace wants it to go.
TransCanada Corp. president and CEO Russ Girling
Photograph by Colin Way
AO: Has TransCanada been surprised by how difficult it’s been to get the project approved stateside?
RG: We aren’t necessarily surprised. We permitted the first two phases of the Keystone project in approximately 24 months. The U.S. Department of State concluded last year that the pipeline would have a limited environmental impact. But because of changes in the environment – you had the Gulf Coast oil disruption and some pipeline disruptions throughout the U.S. – that’s obviously caused regulators to want to ensure they have asked all the appropriate questions and looked at the appropriate issues. Our primary goal is ensuring public and environmental safety in everything we do. If we have to go through some extra lengths to make sure that is the case, I don’t have an issue with that.
AO: Opponents of the Keystone XL expansion say pipeline spills will be more likely because the oil sands crude it will carry is more corrosive than other types of crude oil. How do you respond to that claim?
RG: This will be the most technically advanced, safest pipeline that has ever been built that I’m aware of. It will have the highest strength steels and the best monitoring equipment. There will be 16,000 sensors in the system, which monitor changes in pipeline dynamics on a second-by-second basis, so it can detect minute changes in pressure and tell us what is going on in that pipeline. There has also been misinformation used by our opponents to delay and cause confusion in the project. That misinformation includes contending that Canadian bitumen is more dangerous and corrosive than other types of crude oil. That is patently false. To the extent it was corrosive it would cause problems to our facilities and to facilities downstream. You can bet if that occurred, our customers would be pretty upset with us.
AO: Why then has the Keystone expansion been such a lightning rod for criticism in the U.S.?
RG: The lightening rod is the development of the Canadian oil sands. Our opponents believe that if they can delay or have the permit denied for our pipeline, it will delay or retard the development of the Canadian oil sands. But it’s my view that whether this pipeline is permitted or not, the world wants this crude oil. Canada will develop it responsibly and will find new markets for it if the U.S. denies the permit.
AO: What is the biggest challenge TransCanada faces in advancing a project this large?
RG: The biggest challenge is up front – creating the commercial underpinning to allow the project to move forward. It’s not necessarily building the project itself. The major breakthrough for the Keystone project has been the response from the marketplace as to the need for this project. We started with a project that was going to ship 435,000 barrels a day. We very quickly contracted that up to almost 100 per cent. Then we extended the project to Cushing, Oklahoma, and then to the Gulf Coast. Since then our contracts have moved somewhere closer to one million barrels a day of the 1.1 million barrels a day of commercial capacity we made available. That has removed the uncertainty of whether the market wants this project or not.
AO: If the Department of State doesn’t approve the Keystone XL expansion, what will be lost?
RG: The U.S. would be dependent on about a million barrels a day of oil from Venezuela and Saudi Arabia. There would be a security of supply issue and a large wealth transfer that would leave the U.S. and North America and go elsewhere. The U.S. would also forego the opportunity to create about 20,000 jobs and about $20 billion in economic stimulus that doesn’t require any government funding. This project is shovel-ready. From Canada’s perspective, it would lose the opportunity to access what we think is the very best market for Canadian crude oil. So I think it would be a tragic event if the U.S. were to deny this permit.
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