The Oil Sands: Westward – How?

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373F2BannerLast summer, I mentioned to our editor that I couldn’t understand why Enbridge chose to route Alberta oil via its Northern Gateway line to Kitimat, with its long and narrow channels to open water, when the Port of Prince Rupert had no such obstacles and was closer to Asia. She told me to find out. Of the three troubling factors about Northern Gateway that I saw at the time, that was the most troubling.

Northern Gateway would send oil sands product almost 1200 km from a collection point at Bruderheim, 60 km northeast of Edmonton, to tidewater at Kitimat at the head of Douglas Channel. 525,000 barrels a day (bpd) of bitumen, thinned with condensate to facilitate flow, would be sent through a 36” line, and 193,000 bpd of condensate would be returned by a 20” line. Thinning is needed because the oil sands don’t produce oil; they give up bitumen, a viscous substance described as like cold molasses, from which crude is produced by upgrading. The lines would be buried a metre underground in a 25 m-wide corridor. Cost is now estimated at $6.5 billion. Shipping from Kitimat would require tankers to negotiate the narrow waters of Douglas Channel to reach open water. Freight has travelled to and from Kitimat by water since an aluminum smelter was built there in the 1950s, but oil is another matter.

Objections to Northern Gateway were three-fold:

  • It provided a market for the oil sands, which should, environmentalists say, be discouraged;
  • It was to be a pipeline through pristine wilderness; and
  • A marine spill is inevitable in the long and narrow Douglas Channel.

I saw the last as the most serious objection. As to the others, whatever one’s judgment of the oil sands, their future does not turn on Northern Gateway’s completion. The merits of their development are a topic in themselves, and not for this article to assess. The pipeline, in part through wilderness to be sure, would be certain to be built to the highest modern standards; Enbridge, embarrassed by spills from older lines, mainly into the Kalamazoo River in Michigan, could hardly afford any risk. Spills may be less of a concern than the effect of a corridor on wildlife. Caribou are reluctant to cross open areas, where wolves lie in wait. Nevertheless, many pipelines already criss-cross this country, as do, of course, transmission and rail lines and highways. It may turn out that the currently vocal but not unanimous First Nation objections can be met and accommodated, or silenced by equity participation. So if the terminus could be moved to the open water of Prince Rupert, perhaps this project would be less the disaster some predict.

Enbridge tells me the Prince Rupert route is “not impossible,” but its litany of engineering hurdles is lengthy. It asserts that a 150 km route down the Skeena River from Terrace would be 65 km longer and entail a 20 km tunnel and a river crossing, and that the route is susceptible to flooding from the Skeena freshet and prone to landslides and seismic activity. It claims negligible navigational risk for Kitimat using double-hulled towed and escorted tankers, and that the narrowest point in a 36 m-deep, 130 km long channel, 1.4 km, does not present undue risk. A Transport Canada review, acknowledging “there will always be residual risk,” has endorsed the scheme. So the trade-off for Enbridge favours Kitimat. It is apparently prepared to weather the gale of objections already raging to the carriage of oil in B.C.’s coastal waters, though last November Al Monaco, the new president, said the decision was not final. For organizations such as Greenpeace, ForestEthics and Ecojustice, and much of the public, any risk in these waters is too great.

In the context of alternative ports, Enbridge’s pipeline competitor TransCanada Corporation has just announced a line to transport B.C. shale gas to a liquid natural gas terminal to be built at Lelu Island, just south of Prince Rupert, probably the closest mainland-accessible point in Canada to Asia. However, it may not follow the Skeena River to its destination. While the route has not been announced, there is speculation, so far unconfirmed, that the line may take a more northerly Nass Valley route to tidewater, then by a long underwater line to the terminal. If TransCanada is indeed considering this expensive bypass of the Skeena for a gas line, Enbridge’s wariness is understandable. Pacific Northern Gas has operated a natural gas line in the Skeena valley since 1968, but it has ruptured from slides more than once. A break in a gas line is not a disaster; the gas dissipates. A large oil spill in a major fast-flowing river is apocalyptic.

A few months ago, there seemed to be just three main issues. Since then, things have gotten more complicated. The federal government has become ever more determined to find off-shore markets for Canadian crude since the completion of TransCanada’s Keystone XL line to the Texas gulf coast was put in doubt by the U.S. election. President Obama’s emphasis on the environment in his inauguration speech did not help. The possibility of off-shore sales would result in a major increase in revenue; the current price for Alberta oil is well short of the world price because of the “captive market discount”: the market is landlocked to central North America. 99% of Canada’s crude oil exports are to the U.S. The Globe and Mail reported recently that the price for Canadian heavy oil was nearly $37 (U.S.) below the North American benchmark West Texas Intermediate, resulting, according to Alberta’s Energy Minister Hughes, in a subsidy to the U.S. of $20 to $30 billion annually. The development of “fracking,” hydraulic fracturing, whereby previously unavailable hydrocarbons are now recovered by the injection of water under high pressure to induce their release, has led the International Energy Agency to predict that the U.S. will become “all but self-sufficient in net terms” in energy by 2030. Though environmentalists tell us that fracking will lead to contaminated water tables and aquifers, it is now widely practised, and U.S. self-sufficiency is not good news for Alberta. Given the importance of the oil sands to Canada’s current economy, bad news for Alberta is bad news for Canada.

First Nation objections to Northern Gateway have the most impact. Under the consultation and accommodation obligation on government laid down in 2004-05 by the Supreme Court (see LawNow November/December 2007), First Nations must be consulted in advance of any activity that might adversely affect their Aboriginal right to hunt or carry out other traditional activities, and valid concerns must be reasonably accommodated. These will be formally identified in the National Energy Board and Canadian Environmental Assessment Agency’s Joint Review Panel process. While the duty to consult and accommodate is the Crown’s, to be carried out prior to granting any authority to proceed, in practice a proponent will typically offer a variety of advance inducements to secure Aboriginal support. While Enbridge declines to disclose detail, its public position is that it expects its offers of equity positions to attract the support it desires. It also funds participation in the consultation process. Under the Supreme Court’s doctrine, First Nations do not have a veto, but court challenges to the adequacy of consultation and appropriateness of accommodation could tie matters up for years. The issue is further complicated by the perhaps sincerely-held but incorrect belief that the UN Declaration on the Rights of Indigenous Peoples, is binding in Canada. Canada’s endorsement in the absence of ratifying legislation has no legal force (see LawNow March/April 2011), but may have a good deal of political weight.

Northern Gateway has attracted much of the public’s attention, not to mention opposition, perhaps because it was the first proposal to connect Alberta to Asia. Enbridge, though, is by no means alone in trying to fill that need – if indeed it is a need. Oil sands objectors would vehemently disagree. Kinder Morgan, a huge Houston-based energy company, operates the 1150 km Trans Mountain oil pipeline that has transported both crude and refined oil in “batches” at 300,000 bpd since the 1950s. In January, Kinder Morgan announced plans to expand and twin Trans Mountain to 890,000 bpd. As the only existing oil pipeline to Canada’s west coast, expansion has a great competitive advantage over a new line. The corridor and terminal already exist, though expansion to increase capacity three-fold would be an undeniably major project. Nevertheless, the environmental assessment and aboriginal consultation requirements for expansion within an existing corridor would be far less than for the new largely wilderness corridor needed for Northern Gateway – “brownfield,” as they say, rather than “greenfield.” A major issue would be the increase in tanker traffic the full length of Vancouver Harbour – Burnaby to English Bay – from five vessels a month to 34, more than one a day. The proposal can be expected to meet stiff opposition in the Lower Mainland. Kinder Morgan’s spill record is less than perfect: it won’t help that six hours elapsed before an operator attended to a 90,000-litre spill at its Sumas tank farm in the Fraser Valley a year ago. As a “mere” upgrade, Trans Mountain has so far evaded much scrutiny, criticism remaining focussed on Enbridge. The least that can be said now is that Northern Gateway has a full set of challenges, both for approvals and from competition.

Pipelines are not the only route to offshore markets. Some odd alternatives are mooted. A First Nations-endorsed company called G Seven Generations Ltd. wants to build a 2,400 km rail line to haul oil from Fort McMurray to connect with the Alaska North Slope line to Valdez, Alaska, where it would take advantage of existing infrastructure and supplant the apparently declining supply of Alaska crude. G7G claims a single track could carry an incredible three times the capacity of Northern Gateway, and says it has major support for the route. Rail is a less efficient, more costly, more polluting and far riskier means of shipping oil than pipelines, but has acquired appeal for shippers as a result of environmental opposition to pipelines, as well as its flexibility in moving oil quickly to markets to which no pipeline exists. The advantage of building an $8.4 billion rail line to Alaska when CN’s line through Edmonton to Prince Rupert presumably stands ready is not obvious. G7G’s answer may be that only a dedicated line would have the needed capacity. In any case, rail is another competitor to Northern Gateway. So are proposals to move oil eastward by new or redirected pipelines, either to Churchill or to Saint John – closer to India, it has been pointed out, than is Kitimat. Finally, the Alberta government has recently said it would like to see a refinery built in the province, though in March 2012 it rejected a First Nations proposal to build one. This would increase revenue and produce jobs, and eliminate the shipping of bitumen and the twinning of lines, though the major cost of refinery construction makes it unlikely. In August, David Black, a B.C. newspaper magnate, proposed a refinery for Kitimat, though nothing has been heard of this since. Certainly crude is safer to ship than bitumen, but it makes sense to upgrade at the initial stage rather than the midpoint, if only to obviate the need for twin lines.

Like so many Canadian energy projects, Northern Gateway cannot escape constitutional wrangles. British Columbians see more risk than reward in a new pipeline, especially given the tortuous Douglas Channel route to the Pacific. B.C. Liberal Premier Christy Clark, facing an election in mid-May in which she will have an uphill fight against the NDP headed by Adrian Dix, has to balance Aboriginal opposition and the strong environmental sympathies of many British Columbians with the pro-development weight of the business lobby. Clark, arguing that the rewards are Alberta’s while the risks fall to B.C., famously demanded a share of Alberta’s royalties as the price for allowing Northern Gateway to proceed. Premier Redford told her to get lost, at which point she turned to Enbridge for compensation based on the risk to B.C. Clark wants to gain enough from Enbridge to ensure the survival of her government. Dix is resolutely opposed. The federal government badly wants access to Asia for Alberta oil, so if Dix becomes premier and sticks to his guns, a federal-provincial battle is inevitable. While the overall project is federally regulated, many provincial permits will be required at various stages. Under s. 92.10 (a) of the Constitution Act, 1867, works connecting provinces are excluded from provincial jurisdiction. If, however, Ottawa were to dispute the permitting authority B.C. will certainly attempt to assert, the Conservatives will see a donnybrook to rival that of the National Energy Program of 1980, this time alienating B.C. to favour Alberta.

Despite the array of obstacles, Enbridge appears to be confident of NEB – or Cabinet – approval. Beyond the $300 million the review process is said to be costing, it plans to gamble another $150 million on pre-approval engineering studies. Under the Canadian Environmental Assessment Act, 2012 (part of omnibus “budget” Bill C-38), Cabinet can now approve a project rejected by the NEB. Asked about the government’s position on Northern Gateway, Prime Minister Harper, in a startling conversion, promised that any decision would be based on “science.” One is entitled to be sceptical; as one right-leaning columnist put it recently, “the Conservatives [have] revealed an almost monomaniacal obsession with easing resource extraction for purposes of bolstering future economic growth.”

Increasingly, though, the focus is shifting to a Canada-wide petroleum strategy. Northern Gateway is now far from the only game. Premier Redford has called for a national energy strategy, though she insists on calling it “Canadian” to stress the role of the provinces. Gil McGowan, President of the Alberta Federation of Labour, has argued for oil being sent to central and maritime Canada. Not to be left behind, Enbridge plans to reverse the flow in its “Line 9” from Sarnia to Montreal to allow western crude now reaching Sarnia to be refined in Quebec. Natural Resources Minister Oliver says this would show eastern Canadians the benefits of Alberta oil sands development. TransCanada, too, is considering converting its underused 1950s-built “Mainline” gas line from Alberta to the east to oil. It is reported to be exploring the economics of supplying China from Canada’s Atlantic seaboard. In a speech in May, David Dodge, former Bank of Canada Governor, said Northern Gateway faces too many obstacles, and Alberta oil should be shipped east. In June, Frank McKenna, former premier of New Brunswick and deputy chair of TD Bank Group, called for a coast-to-coast pipeline. Regions would no longer be at odds; “each region would be a winner.” Pointing to the irony that eastern refineries process only imported oil, while Canadian oil is captive to discounted U.S. prices, he argued that a national oil connection would be the 21st century equivalent of the C.P.R. This would eliminate reliance on imported oil, yet provide for export of surplus. The economics of this await analysis. Perhaps Canada will yet choose to upgrade our resources so that we will no longer be known as just hewers of ore and drawers of oil.

About John Edmond

John Edmond is an Ottawa lawyer with an interest in constitutional law and Aboriginal and resource law. He is an executive member of the Natural Resources and Energy Section of the Ontario Bar Association.

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