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What Alberta’s Energy East agreement really means

What happens to the oil once it gets east?


 

Jeff McIntosh/AP Photo

Last night, Darcy Henton filed a story which detailed a memorandum of understanding between the Alberta government and TransCanada with respect to the proposed Energy East Pipeline from Alberta to Eastern Canada.

“The province has signed a memorandum of understanding to take up to 100,000 barrels-a-day of firm capacity on TransCanada Corp.’s proposed Energy East pipeline.” –Financial Post, July 4, 2013

I think there are three things people need to consider when evaluating this decision. First, this is not an equity stake in the pipeline or a financial contribution, but a promise to pay for shipping on the pipeline if it is built. Second, Alberta’s move will not in and of itself enable this project. Third, the government of Alberta takes bitumen (and conventional oil and gas) royalties in kind, and their responsibility is to market those products to maximize the value to Albertans. In that sense, what matters is what happens to the oil once it gets east.

What has the government signed? They’ve signed a memorandum of understanding to take up to 100,000 barrels per day of firm capacity on the line if it’s built. What this likely implies, having not seen the MOU, is an option on a take-or-pay contract for shipping services. Under such an arrangement, the government would commit to paying the shipping tolls for up to 100,000 barrels per day regardless of whether or not they actually moved that much product – it’s a subscription service. The government is not taking an equity stake in the pipeline, and will not have to pay anything if the pipeline is not built. Alberta is a player in this market, and there is no escaping it. The Alberta government expects to receive over 200,000 barrels per day of royalty bitumen (PDF) by the time Energy East is in service. They have a couple of choices with respect to shipping – they can sign firm shipping agreements, or hope there is capacity available if they wait for spot shipping at time of receipt. The government has chosen a lower-risk option, but Albertans should ask whether this is the best low-risk option for the government among the many pipeline proposals currently looking to move oil to tidewater from the mid-continent.

There is some risk to the province, which Alberta Petroleum Marketing Commission CEO Richard Masson outlines well in the Henton article. First, Energy East may end up being an expensive option. If the tolls are higher on Energy East than on other systems serving similarly priced markets, the netback to Albertans will be lower for shipping on that line. The province is also subject to market risk, in that prices on the Atlantic coast may not be higher than other pricing points by the time this line is built. I also argue below that they may have increased political risk by going east.

The approval process for a project like Energy East requires the proponent, TransCanada, to demonstrate the need for the pipeline – in short, to show it will operate near capacity and will not simply remove product that would otherwise be shipped on other lines. This process is designed to avoid what Richard Masson discusses in the Henton article – too many pipelines. Generally, firm shipping agreements are the way in which a pipeline company demonstrates that need.

The Energy East proposal is expected to move north of 800,000 barrels per day of product, so the 100,000 MOU from Alberta will not in-and-of-itself make the project viable. In other words, this is not akin to the Northwest Upgrader processing agreement, in which the province single-handedly enabled the project by signing-on. On the other hand, if the province decided not to become involved in the firm shipping market, they would distort the signals received by the regulators in terms of the demand for shipping services, leaving the system short of capacity and lowering the value of Canadian oil in the process.

Now, what worries me about this? I’m worried about what happens to the oil at the other end of the line. The Alberta government’s responsibility is to maximize the value of the resource, and so they must recognize that in-kind oil has a value, and treat it as they would cash. Don’t give someone discounted oil if you wouldn’t give them money, plain and simple.

We’ve seen a lot of discussion of the potential for Energy East to preserve or create refinery jobs in New Brunswick. This is where Albertans should be concerned. If the purpose of the pipeline, from a shippers perspective, is to get world prices for oil, then why would this have any effect on refinery economics in Saint John? They can already access world prices for oil as they are on a port. If the presumption is that, as part of gaining support for this pipeline, the Alberta government is prepared to market barrels at prices below what they would fetch at market, that’s another kettle of fish.

Andrew Leach is an environmental economist, energy enthusiast and a passionate advocate for good environmental policy. He is an Associate Professor at the Alberta School of Business at the University of Alberta.


 

What Alberta’s Energy East agreement really means

  1. Presented as a factual analysis, this is a hidden negative analysis of a proposed agreement in principle.
    What they fail to say is that what is good for Alberta is generally good for Canada both in direct economics and in hundreds, perhaps thousands of jobs.
    There is no other resource industry in Canada open to jobs of this magnitude.
    If Alberta has to downsize its oilsands output the immediate effect is to reduce equalisation payments to Ottawa, currently $100 billion over last 8 years, a record for Confederation, which directly assists Quebec and Ontario two have-not Provinces.
    The likelihood is that Keystone will be approved, but the Eastern pipeline will produce many jobs as all the Premiers of these Provinces have enthusiastically said.
    It is also ironic that a recent announcement of record automotive sales from Ford, Chrysler and General Motors pointed at the purchasing Province…ALBERTA. (Sask. a close second)
    All these vehicles were made in Ontario by skilled Ontario workers. We are happy with that as all of us are Canadians. Some writers dont ascribe to that sentiment
    Perhaps a little more positivity will help from these “energy experts”
    Meantime thousands of easterners are welcome to come to Alberta for jobs.
    We welcome everybody y’all with or without a Stetson.
    Join the Calgary party, Edmonton next.

    • More Alberta mythology. [Rolls eyes.]

      This is why you guys don’t have either customers or friends.

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      • The customers we want are the ones paying a fair price for our labours and products.

        Think, if we ditched Ottawa we could import cars for 50% less and not be forced to buy over priced Ontario vehicles, no 284% tariffs of governemtn bloat on Mozzarella cheese….less taxes on shoes, cloths and a lot of hidden stuff too.

        Fact is Ottawa is costing us too much and now wants to limit where we ship product as to suppress prices at our expense.

        • You don’t get to pick your customers….sorry.

          And you have totally screwed up tax information….for example food is higher priced here than elsewhere because of marketing boards.

    • The only thing negative about the post was obvious – don’t promise discounted oil at a tidewater market.

    • Best answer is for the Republic of Western Canada to be born and ditch Ottawa, Ontario, Quebec and the east.

      Economically we would save $100 billion a year in taxes.

      Or Alberta goes on its own. If BC wants to tariff our oil to the pacific, then we can tariff their goods passing through Alberta, and this will force a fair deal.

  2. Isn’t part of the problem that Alberta is already selling its oil at a discount? The province has lots of oil, but it’s hard to transport, expensive to refine, and the province is completely landlocked. If Saint John was buying the oil at 10% below the world price, it would still be a huge win for Alberta.

    As an aside, this statement:

    “Andrew Leach is an environmental economist, energy enthusiast and a passionate advocate for good environmental policy.”

    seems to be full of terms that are rather contradictory.

    • That seems to be a lame attempt to be clever.

      • I find irony a better instrument.

        This announcement, it appears, was made on the same day that Thomas Mulcair returned to Calgary and appeared at the CBC pancake breakfast. Also attending were Alison Redford, Danielle Smith etc.

        Wasn’t it almost one year to the day when he announced in Calgary support for such a idea – shipping AB bitumen east? To which he received, as I recall, much derision, even a couple of blog posts. Yuck, yuck etc.

        Bring out the bucket brigade for all the spilled tears of laughter.

        • Hi Derek.

    • Alberta is now 3rd in line behind Saudi Arabia in oil production; so says the Alberta Conservatives. So; where’s the cash gone?

      • Ottawa gets a lot in income/spend taxes, maybe $100 billion or more every year in income/spend taxes. People get good jobs too. Sure beats the governemtn bloat and toxic business environment of the rest of the country in central and east.

        Plus Redford waste a lot on teachers and government unions and their bloat.

  3. We’ve seen a lot of discussion of the potential for Energy East to preserve or create refinery jobs in New Brunswick. This is where Albertans should be concerned. If the purpose of the pipeline, from a shippers perspective, is to get world prices for oil, then why would this have any effect on refinery economics in Saint John? They can already access world prices for oil as they are on a port. If the presumption is that, as part of gaining support for this pipeline, the Alberta government is prepared to market barrels at prices below what they would fetch at market, that’s another kettle of fish.
    Red herring, Andrew. If this commitment will, in your own statement, not determine the economics of the project by TCPL or other private sector O&G producers, why should Albertans be concerned? It is primarily a private sector investment, like any other pipeline option. And increasingly viable when you factor in the risks with other options.
    But the latter would be finance, right, not economics?

    • Try reading the post, then get back to me.

      • Well, I didn’t want to go too hard on you on your first post (was Or just wondering if they’re paying per word), but since you asked for it:

        1) You talk of political risk. I can’t think of any politician, provincial, federal, party who is not supportive of this pipeline. Including Elizabeth May. Care to elaborate?

        2) You spend some time trying to describe the CPCN process. Not taking supply from other pipelines. yada yada. Yet, since you wrote a rather lengthy blog for Macleans quite some time ago, describing why Keystone was so crucial, what has happened? CAPP forecasts for already rosy future oil sands production are even higher I believe. Keystone is still in limbo. And it appears that Northern Gateway is a no go, or at least will be locked up in the courts for a healthy length of time. So, is this really an issue of concern? Or just more filler?

        3) Yes, AB can have a different set of priorities than CAPP members. And there may be valid reasons why shipping bitumen (diluted or not) to the Gulf Coast may not be ideal, or let’s say, as ideal as vertically integrated O&G companies that have refineries there. Especially if there is not the capacity to export AB bitumen from the Gulf coast, and AB bitumen producers remain captive suppliers, the only difference is that the point of reference moves from Cushing, south. Now there’s a real political risk if you would care to consider – getting a permit to ship bitumen across the US and export it unrefined or upgraded.

        Lots of smoke and mirrors. Not a great deal of substance here, I’m afraid to say, from my perch.

        Guess that means we’re not talking again. :)

        • Read, then comment.

          • “Common decency and transparency”

          • Precisely.

          • I’ll allow my comments to stand, as is. You sleep on them.

            Thx

          • On your comments:

            1) you are correct that all political parties are in favour of energy east, but they are in favour of it based on different expectations as to who will capture any remaining price spread. As the article states, if support for the pipeline is based upon the premise of oil sold below market to eastern refiners, that would create political risk of such an arrangement being enforced in the future. Such measures are not without precedent in Canada.

            2) you clearly misread my article if you read it as stating that Energy East was unlikely to be approved. It makes sense from both a gas and oil perspective. My point was that this was NOT a case of the Alberta government creating demand for a project which would not otherwise be there.

            3) again, there is nothing in the post suggesting that the Alberta government and CAPP’s interests should be aligned or should not. The post focuses on what Alberta should or should not do with respect to shipping and marketing it’s royalty in kind barrels. In fact, the post notes at several points the ways in which the government’s interests are at odds, even zero sum, with the objectives of CAPP members.

            I hope that addresses your concerns.

  4. What a crock!

    Industry has refused to party with Transalta on this for good reason! The unutilized pipeline has been on the table for 3 years or more; its not a new idea.

    Payments with bitumen in kind means there is no revenue being returned to Alberta. We are still working with conservative designed discounts and a royalty once 30% has dropped to 6% on its way to zero with Bitumen in Kind Royalty.

    This Government is running in circles trying to overcome the obvious fact they have done nothing at all for the 7 years they have known of the crisis. Instead; they cut the province off its royalty following conservative policies rather than provincial necessity.

    This short sighted, ideology driven massive mismanagement has put them centre stage on a pipeline scam that will take this province nowhere.

    Understand; we have sufficient pipelines to handle our product for the next 8 – 10 years! However, India will not build a processing plant until it gets the means to ship the oil by ocean.

    Kinder Morgan have a 700,000 bbl capacity pipeline to the west coast that is majorly under utilized presently.

    The conservatives are trying to appear as if they are actually doing something and will spend any amount of your money proving just that.

    • Alberta is not paying with bitumen in kind, they have signed an MOU to pay to ship the bitumen which they receive in kind from producers and which Alberta markets on behalf of Albertans.

      • When in your wildest dreams have you seen a conservative Government that has done anything; anything at all that shines favorably on the population at large? Fact is; you haven’t.

    • Why should we ship Canadian oil out of the country at a discounted price and pay to bring in approximately 50% of our oil a world prices from other countries. West east capacity and refining in Canada makes infinite sense.

      • Because, for 18 of the last 20 years, we’ve received more for oil sent to the US than we paid for the oil we imported on the east coast, adjusting for quality. Had the east coast pipeline been an option then it would have meant losing money on every barrel relative to what it could have sold for in the US, and thus overall lower wealth generation. That has not been the case for the past two years, which is why projects like this are gaining traction

  5. An essential point is being missed. Even if the differentials between Alberta oil and the world price decrease, the primary advantage for using Canadian oil over world oil, and de-risk refinery investment and jobs in New Brunswick and Montreal is security of supply.

    Yes, over time, the discount the eastern refiners will pay for Alberta oil probably will decrease as Alberta oil because untrapped, but the security of long term profitability and jobs ultimately depend on security of supply, and that is ultimate advantage of using Alberta oil, rather than Saudi oil, or Venezuelan oil, or African oil.

    The Alberta royalty-in-kind program means that the refineries in the east coast also won’t be able to be squeezed by the multinational oil companies, because the east coast refiners will be able to get guaranteed product by making deals with the Alberta government, if necessary or the multi-national oil companies act in their own interests.

    • If the security of supply is worth something, then should that not imply that NB refineries should pay MORE for Alberta supply? A security of supply premium? And no, I don’t expect this to happen because, when you are on a port, security of supply is not a huge risk, and higher world oil prices in times of scarcity can, generally, be passed on to consumers.

    • The east coast has been eaten alive by foreign oil. When oil prices tumbled they were still hung on billions of now overpriced oil. Sure they want a free tap; who wouldn’t?

      The thing is that Albertans are getting absolutely zero for this oil! I say no to the deal until there is a change in Government.

  6. Andrew, I think I see where our disagreement/confusion may lie.
    You are claiming/assuming that the agreement with AB/TCPL is for shipping bitumen.. I think you may be wrong here.
    All of the earlier newspaper columns I’ve seen on this proposed TCPL line indicated light crude. Not dilbit. Nor synbit. Although could possibly include upgraded bitumen, synthetic crude oil, SCO.
    If this is the case, there should be less business risk from AB’s side. B/c presumably no upgraders required in the existing refineries. Maybe some limited process optimization.
    Shipping bitumen, as you suggest, is a whiole different “kettle of fish”. Then you need to dilute 30%, pipeline 30% more. And send tanker ships offshore with 30% more product, find a secure source of diluent (maybe foreign), and at the same time, possibly see the same number of tankers importing foreign crude through the east coast as currently exist. I could see a great deal of public opposition/political risk to this scenario. Then the question becomes where do you upgrade?
    So, are you mixing up AB bitumen (unupgraded) with light crude in this agreement?

    • At this stage, it is more likely that the (edit: majority of firm shipping) agreements will primarily cover lights or mediums, although Irving currently takes a significant amount of heavy blend, and Suncor will likely install a coker in Montreal. I noted that royalty-in-kind barrels extend to lights and mediums from conventional production, but it is by no means obvious to me that the agreement is, exclusively, for shipping light, or that the line will be submitted for the approval process based a light-only line. if you have seen the agreement, as I noted that I had not, please let us know.

      • It seems that the conventional royalty in kind stuff didn’t survive the editing process (since, as you’ve noted, the article was pretty long). Perhaps it should have stayed in.

    • “We’ve made a commitment to sell barrels of bitumen,” Alberta Energy Minister Ken Hughes said in an interview. “100,000 a day, for 20 years. By the time this pipeline gets built, we’ll have access to some four times that available to be used.”

      Pretty much every article I have seen on the MoU claims it is with respect to shipping oilsands (diluted or synbit) bitumen.

      Further, the open season does not appear to be light oil only, so it seems that the question is still open, so to speak. Alberta seems to be looking at it as a bitumen export (either to eastern Canada or international) option.

      As usual, if you have documents suggesting otherwise, please post.

      • I find many newspapers and politicians interchange crude oil and bitumen at will without knowing the difference or differentiating.

        Energy East Pipeline Project

        This is a proposed 4,400-kilometre pipeline that will carry between 500,000 and 850,000 barrels of crude oil per day from Alberta and Saskatchewan to refineries in Eastern Canada. It will create a new domestic market for Western Canada’s oil production and potentially open a new channel for international exports in the future. The project will benefit Canadians economically across the country by creating jobs and ensuring a stable, secure supply of oil.

        Call it the bitumen bobble.

        One party to the agreement, however, who should know the difference is TCPL itself. So, check out their website on this project here:

        http://www.transcanada.com/6246.html

        If you read through it, they consistently mention crude, no mention of bitumen or its blends. For example:

        Energy East Pipeline Project

        This is a proposed 4,400-kilometre pipeline that will carry between 500,000 and 850,000 barrels of crude oil per day from Alberta and Saskatchewan to refineries in Eastern Canada. It will create a new domestic market for Western Canada’s oil production and potentially open a new channel for international exports in the future. The project will benefit Canadians economically across the country by creating jobs and ensuring a stable, secure supply of oil.

        TransCanada will hold a binding open season from April 15 to June 17, 2013 to obtain firm long-term commitments from interested parties for the Energy East Pipeline Project. This is the next step in the process in determining the commercial viability of converting more of the capacity of our Canadian Mainline from natural gas to crude oil service, in order to supply Eastern Canadian markets with oil produced in the West. At this point, we know that this project is technically and economically feasible.

        • My previous comment does not appear to have come through, but your crude oil vs bitumen distinction is a red herring. See the description on the same page for KXL, for which the plans clearly include dilbit. They still refer to it as a crude oil line, because dilbit is crude oil for pipeline purposes.

          • but your crude oil vs bitumen distinction is a red herring.

            Not as far as the public is concerned.

            If there is anything that TCPL and Enbridge *should* have learned from Keystone and Northern Gateway is to be upfront and fully honest. No one likes surprises.

            Having said that, perhaps you are right. In which case, AB must already have some ideas/preliminary feelers sent out to some refineries as to what might work, economically.

            Btw, as an aside, prior to investing $$$ to allow the processing of Venezuelan crude, I believe Gulf Coast refineries entered into long term contracts with Venezuela. Similar with EnCana and BP Whiting Indiana (joint venture) before a major upgrade to process AB bitumen. So, it’s not unheard of – in fact, almost a prerequisite.

            Just b/c its govt of Alberta, I wouldn’t automatically dismiss it. As some tend to do.

          • I wouldn’t dismiss long term contracts at all, hence the last paragraph of my post.

          • Not many of my comments are directed at you, specifically, despite appearances. More for general clarity of the readers. And to further the arguments.

            There are some important distinctions, in a complex topic. :)

  7. It really means NEP II – Constraint of where the market can ship product. Without Pacific access, it means they get our resources cheaper. Just Ottawa working against the west.

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