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An economic "heart attack" for Canada?

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Canada’s economic heart is about to explode!

That might sound unnecessarily dramatic and alarmist, but bear with me for a moment and you’ll see it is in fact a fully warranted, even rational warning. First, consider Alberta’s oil sands as one of the main economic hearts of this country, as most economists already do, with the steady flow of bitumen being pulled from the ground serving as a key part of this country’s fiscal lifeblood.

That heart is still relatively young, but it is growing. The Canadian Association of Petroleum Producers expects total western Canadian oil production (which also includes conventional production outside the oil sands) to more than double from current levels of about 3 million barrels per day (bpd) to more than 6.2 million bpd by 2030. CIBC predicts that growth will come even faster, surpassing the 6 million bpd mark closer to 2020.

The problem lies not in the heart so much as its arteries (read: pipelines) to which it is connected. I am not a doctor, but I’m pretty sure if a heart grows faster than its arteries then pressure grows, capacity overflows, and serious problems occur. More than $30-billion in new pipeline infrastructure will be needed by the end of this decade just to keep pace with planned production growth, according to a report CIBC published in August, appropriately titled “our pipes runneth over.”

Still, that gives us another eight years at least before we really need to worry right? Wrong.

Kinder Morgan announced late last week that its Trans Mountain pipeline, which can carry a maximum of 300,000 barrels per day from north of Edmonton to shipping ports in Vancouver and Washington state, was nearly double-booked for December. The pipeline was 72% over capacity for the next month, the Houston-based company said, telling shippers they would be limited to just 30% of their previously booked volumes.

Trans Mountain is undergoing a $4.1-billion expansion that will more than double its capacity to about 750,000 bpd. So that should solve the problem right? Not to keep slapping down your optimism dear reader, but that is again, wrong.

The company has already issued contracts for 508,000 bpd on the expanded line. Nine companies – BP, Canadian Oil Sands (Syncrude), Cenovus, Devon, Husky, Imperial, Nexen, Statoil and Tesoro – all have ambitious plans to expand their own production (in some cases by more than double) and will likely need every inch of extra Trans Mountain space.

Other pre-existing pipelines will soon be unable to handle the overflow. TransCanada’s Keystone network and Enbridge’s Mainline system, which together move the majority of Canada’s crude exports, are currently running at an average 88% capacity and CIBC expects that 12% spare capacity to be "fully utilized by 2014."

Keystone XL and its million bpd capacity would give producers another two to three years of breathing room, the CIBC report said, as would TransCanada’s plan to convert part of its natural gas mainline to oil service, which would also add a million bpd in new oil pipeline space. Although the latter has yet to move beyond the conceptual stage and U.S. President Barack Obama has yet to approve the former.

Add to that growing political resistance to west-east oil pipelines in Quebec being similar to the opposition British Columbia has generated against Enbridge’s Northern Gateway pipeline, and it seems clear that any new oil pipelines going anywhere in Canada remain far from a guarantee.

In the meantime, companies are increasing looking to rails as a means of relieving the pressure, but that can only go so far and train-based large-scale proposals often face intense criticism. Enbridge said Monday it was going to build a new rail line in Pennsylvania that will eventually be able to transport up to 160,000 bpd of Bakken crude.

There is another rail proposal that claims the ability to move up to 5-million barrels of oil per day from the oil sands boomtown of Fort McMurray to Alaska’s main export terminal in Valdez, effectively bypassing B.C. and the political opposition it represents. That proposal would solve this pipeline problem, though one potentially deadly detail is that not a single oil sands producer has agreed to support the project.

With no other new export pipelines beyond Keystone XL and Northern Gateway being proposed, the idea that Canada will run out of oil pipeline space by 2020 (or possibly even sooner if current acceleration trends continue and the world price of oil stays high) is, as the CIBC report concludes, “a sobering thought.”

Canada’s economic heart needs bypass surgery, but we are still waiting for a surgeon with the right tools to step up.

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