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Smack in the middle of a $15-billion muddle

Albertans think Energy East will save their economy. Environmentalists see Energy East as a foolish investment in the wrong kind of energy technology. Many Northerners see the pipeline as a serious environmental threat.
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David-RobinsonWEB
David Robinson, Economist, Laurentian University, drobinson@laurentian.ca.

Albertans think Energy East will save their economy. Environmentalists see Energy East as a foolish investment in the wrong kind of energy technology. Many Northerners see the pipeline as a serious environmental threat. The premier of Alberta, Brad Wall, has promised to start shooting if Energy East doesn’t go ahead. Wall is blocking Prime Minister Justin Trudeau’s climate policy to get concessions for his province. Trudeau is looking for ways to keep everyone happy. A risky business deal has turned into a three-ring circus. What a muddle!

And Northern Ontario is smack in the middle of their muddle. Forty per cent of the pipeline is in Northern Ontario. That means that Northern Ontario communities will be taking something like 40 per cent of the environmental risk. So what should we think?

The answer involves the business case, national policy, and the environmental impact.

Starting with the business case, I wouldn’t invest in Energy East. The odds are that it will be a big money loser. It is only profitable if East Coast refineries want to buy Alberta light crude oil and super refineries in India want a lot of the heavy oil.

Alberta crude has to be cheaper at the end of the 4,600-kilometre, $15.7-billion pipeline than oil from low-cost foreign producers. But tar sands oil is expensive oil. If energy prices stay low, the East Coast refineries will buy oil from overseas producers.

Pipelines are amazingly efficient. Energy East can get oil to the coast a dollar cheaper than tankers from the Middle East can. That is a tiny advantage. Some existing tarsands operations can cover their direct production costs as just under $23 a barrel. The bad news is that the marginal cost for Russia is only $18 per barrel, and for Saudi Arabia just $3 per barrel. Nigeria, the highest cost OPEC, comes in at just $32.

Twenty-three dollars a barrel is actually the shutdown price for tarsands plants. Even above that price, tarsands companies will take multi-billion dollar write-offs and never build another plant. To make a profit, the plants have to cover capital costs. Rystad Energy UCube in September 2015 put the break-even price for the tarsands at between $65 and $90.

So unless companies expect prices to stay permanently high — say, above $75 per barrel — existing tarsands plants may keep going, but there will be no new operations. Furthermore, U.S. pipelines could eventually suck up the limited tarsands oil, leaving little for Energy East. The project is clearly a risky business at both ends.

But as a citizen, I don’t care as long as there is no government money involved. TransCanada Pipelines is welcome to borrow billions and cut the throat of its shareholders.

This is where national policy comes into play. Governments will almost certainly be asked to contribute. There is a foolish notion that Energy East will help Canada by cutting Eastern Canadian oil imports. The idea is that Eastern Canada should buy expensive Alberta oil instead of cheap Saudi oil. This is Pierre Trudeau’s 1980 National Energy program standing on its own head. In fact, Canada is better off buying cheap oil and exporting goods and services with more labour content.

But what about the environmental question? There is inevitably some risk from spills in Northern Ontario. We have to hope that our government makes sure risks are minimized and that, if there are spills, the pipeline company pays for every cent of the damage. That will increase the costs of the pipeline, but the government is responsible for environmental protection, not pipeline profits.

Energy East will not affect the amount of oil burned over the next 30 years. The supply of cheap oil in the rest of the world is the limiting factor. What will make a difference is a serious carbon tax here and abroad. That is the key environmental issue today.

The really compelling green argument against the pipeline is that it would be better to spend $15.7 billion on developing a green economy. That is true, but it’s not our money.

If TransCanada can pass rigorous environmental conditions, environmentalists should probably sit back and enjoy watching the company lose money.




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