Pipeline economics: China needs oil, and Canada’s got it

Enbridge makes a case for pipelines from Alberta to the Pacific Rim

by Colby Cosh

Plugging for pipelines

Jianan Yu/Reuters

The UC Berkeley economist Brad DeLong has said that Deng Xiaoping may have been “quite possibly the greatest human hero of the 20th century.” It’s a tough-minded, utilitarian judgment; DeLong knows that Deng, as leader of China, ordered the Tiananmen massacre of 1989. In the other pan of the balance, however, is the successful transformation of China into a free-market industrial power. That transformation, over three decades of Deng’s leadership, multiplied per-capita GDP 50-fold and lifted somewhere between 200 million and 400 million people out of poverty.

The revolution is still ongoing, and it runs on oil. Enter Canada. Hearings into Enbridge’s proposed Northern Gateway pipeline, which would link the town of Bruderheim, Alta., to the Pacific Rim at Kitimat, B.C., are being held now in Alberta and will soon shift to British Columbia. The B.C. phase of the hearings will see Enbridge challenged on whether it can successfully protect B.C. wildlands and the port of Kitimat from environmental disasters like the spill that affected the Kalamazoo River in Michigan in 2010.

But in Edmonton, the topic of discussion has been the basic economic rationale for the pipeline. Put in its simplest form: China needs oil, and Canada’s got it. In truth, however, that pretext could be stood on its head. Canada needs alternative markets for its oil, and China is the obvious one. Right now, the oil sands are more or less forced to take a U.S. Midwest price for their product. With the sudden reflation of U.S. oil reserves, Alberta has been getting an increasingly raw deal. Enbridge consultant Neil Earnest explained to hearing attendees at a Holiday Inn in south Edmonton that it costs about $7 in pipeline tolls to move a barrel of Western Canada Select crude to the Gulf of Mexico. “But the price [of WCS] today at Edmonton is not the Gulf Coast price minus $7,” he explained. Owing to the huge oversupply of crude in the U.S., “it’s the Gulf Coast price minus $30.”

That spread is already eating into Alberta’s treasury: when the government issued its first-quarter financial update Aug. 30, non-renewable resource revenue was down $900 million from the estimate in the 2012 budget. That figure is not for the full year; it is $900 million gone astray in just three months.

The existing pipe links between Edmonton and the Gulf Coast are full—and if and when the Keystone XL line is built, that is expected to fill and remain full, too. That leaves the marginal barrel of Alberta oil competing in a Midwestern market increasingly awash in oil from the burgeoning Bakken area of Montana and North Dakota, oil that is being transported expensively by rail (and probably anything else that rolls and holds liquid) to American and foreign markets.

The obvious solutions lie to the east, in the central Canadian market, and to the west, in the Pacific Rim countries. That is basically code for “China,” since other east Asian countries are not expanding refining capacity. China is not only building as fast as it can; it is building the kind of upgrading and desulphurization that Alberta’s bitumen requires, being conscious that no one producer will be able to meet its medium-term needs.

The problem with the eastern outlet, according to Enbridge, is that Canadian refining capacity is barely profitable—it is geared for light Brent crude from the North Sea, and it is already more than enough to meet regional fuel needs. The market doesn’t seem interested in building new capacity (especially given the regulatory hurdles). China is, for practical purposes, closer and technically more attractive to the oil sands than Toronto or Montreal—if Northern Gateway gets built.

So how much is access to that market worth? Enbridge hired Calgary economist Robert Mansell to do a “public interest benefit evaluation” for the review panel, and Mansell, in turn, plugged price estimates from another consultant into a Statistics Canada model of the economy. Northern Gateway, he says, would yield about half a percentage point in added annual GDP between the pipeline’s opening and 2048; about 900,000 man-years of employment, including 400,000 in Alberta and a quarter-million in B.C.; and over $98 billion in government revenue, almost half of which would go to Ottawa.

These represent comparisons, Mansell adds, with a fairly conservative “base case.” In the no-Gateway scenario, the model assumes that Keystone XL will go ahead, that there will be enough rail capacity to move excess Alberta oil to some markets, and that the oil sands would not be “shut in” by political action. If any of these assumptions changed, the Northern Gateway relief valve would become all the more valuable. Perhaps the biggest problem with the model, one nobody raised at the Holiday Inn, is that it envisions continued growth and political stability in China. Chairman Deng, after all, is not running the show anymore.




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Pipeline economics: China needs oil, and Canada’s got it

  1. We need our oil! Keep the crude in the country and in turn the jobs.

    • Fuel consumption is falling in North America, so doesn’t it make sense to sell oil to those who need it?

      • But why sell them the oil, why not refine it here and sell all of the other products?

  2. Either we’re open for business or we’re not.

    Let’s get on with it

  3. Enbridge’s economics, prepared by Mansell, are highly questionable, and contestable.

    But, not surprising, given who they were prepared for.

    • Exactly.

      The number that has me most confused is the claim that the NGP would bring 250,000 man-years of employment to BC….really?

      Say 3 years to build and then 33 years of operation and maintenance. Even if 10,000 people are involved in construction for the entire 3 year period (which seems ludicrous), that leaves 220,000 man-years, which is about 6700 people to operate the pipeline. Maybe, if they are operating a bucket brigade to move the oil from the BC border to Kitimat.

      Reminds me of the replacement Champlain Bridge announcement from sometime within the last year, where it seemed that operation of the bridge involved disassembling every car at one end, carrying it part by part to the other end, and then re-assembling the vehicle. At least that is what the man-years of employment numbers suggested.

      I would like to see more details (for both projects).

  4. Could the drop in provincial resource-based revenues also a factor of the drop in natural gas prices to historical lows?

    • For sure. Shale gas extraction in the NE US has really depressed natural gas prices as we now have a glut of supply.

      Prices should rise once BC starts exporting LNG in 2015 (I think).

    • You do realize that Facism and Communism are defined to be on opposite ends of the political spectrum. You are correct in the sense that China is a Facist state claiming to be communist. Perhaps it would be more accurate to call them a Nationalist One-Party Republic, though then again, the Chinese refer to themselves not as communists, but as a Single-Party Socialist-Market Republic. They’ve never been Communist as per the definition of Communist, though there was a revolution under that banner. The truth is that China has never been truly Communist, and still isn’t. Their system is remarkably similar to both Canada’s and the USA’s, except that there is only a single political party. Considering how our political parties operate, that really doesn’t make a huge difference overall. They are technically free-market in the sense that they have unregulated businesses, as we do, and prices aren’t set by the government for the most part, just as in Canada. In almost all countries the government is the largest single player in the market. Though, I’d agree in the sense that their economy is a planned economy, yet, so is ours. In the end, the truth is that what you call Communist Chinese Facism is almost identical to our own way of governing in North America. The question is, do you have the problem with the Chinese as a people, or is it the government model (which we largely share), or is your problem the inability to distinguish propoganda from reality?

  5. “The biggest problem” with the model is that it doesn’t factor in the cost of destroying the Earth’s ecosystem. A lot more than $98 billion.

    • Wow, a pipeline can do all of that?

  6. Currently Enbridge employs roughly 6000 people to operate 26,000 km of liquids pipelines and roughly the same length of gas pipelines, as well as having other business ventures….so in very rough terms lets say 50,000 km of pipelines for 5000 workers, so about 10 km per worker.

    The NGP will be 2 lines, each about 1200 km, so 2400 km total, which, based on the above ratio, would need about 240 new workers. Multiply that by 35 years or so and you get 8400 man-years of employment.

    Sure would like to learn when and where the other 640,000 or so man-years of employment (AB + BC) occur.

  7. I think the Keystone will go forward after the election, regardless of who’s elected.

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