Trans-Alaska Pipeline

TransCanada’s proposed Energy East pipeline could provide Canada with an outlet for Alberta’s oil sands that sidesteps political opposition obstructing competing projects heading south and west. But with the shift in oil demand growth from the Atlantic Basin to the Pacific, moving oil east may be a second-best solution.

TransCanada’s Keystone XL and Enbridge’s Northern Gateway pipelines – both seeking to get production from oil sands to market – are stuck in political limbo.

Keystone XL, which would terminate on the US Gulf Coast, has become a foil for US environmental activists. And recent statements by US President Barack Obama regarding its potential contribution to greenhouse gas emissions have reduced market confidence in the project’s future.

For more on the Keystone XL pipeline, click herehere and here.

Northern Gateway, which would run from Alberta to Kitimat on British Columbia’s western coast, continues to face strong opposition from environmentalists and First Nations. The pipeline was formally rejected by the government of British Columbia in May owing to safety concerns, though Alberta-BC talks are ongoing about possibilities for moving oil sands to western ports.

Canada’s oil sands resources are massive. Alberta has nearly 170 billion barrels of bitumen reserves. And the country has much to gain from finding a more efficient way to get them to market. With the futures of Keystone XL and Northern Gateway uncertain, Canada may pursue a third and arguably less contentious option – the proposed 1.1 million barrel per day Energy East Pipeline from Alberta and Saskatchewan to Eastern Canada.

Screen Shot 2013-10-02 at 10.02.05 AM

Source: TransCanada

The Economist Intelligence Unit points out that Energy East has some major advantages over Keystone XL and Northern Gateway.

  • A lot of the pipeline is already built.

Energy East would convert an existing natural gas pipeline to carry oil from Burstall, Saskatchewan to Cornwall, Ontario, while new pipeline sections would be needed in Alberta, Saskatchewan, Manitoba, Eastern Ontario, Québec and New Brunswick, according to the TransCanada website.

The 1,400 kilometers of new pipeline would be in areas where TransCanada already has the needed rights-of-way, says the EIU. “As part of the process of determining the ideal route for proposed pipelines to take, the NEB [National Energy Board, Canada’s energy regulator] requires companies to negotiate with landowners. Having existing agreements in place thus greatly improves TransCanada’s chances of success.”

  • It has political support.

Energy East would not transit the US or British Columbia, and it has backing from the governments of provinces through which it would pass. The EIU lists Canadian prime minister, Stephen Harper, Natural Resources Minister Joe Oliver and New Brunswick Premier David Alward as proponents.

And it would provide domestic (and potentially cheaper) feedstock for Canada’s refining industry in the east. “Currently, east-coast refiners must buy in the vast majority of the oil that they process from Saudi Arabia, Nigeria and elsewhere, at great expense. Total shipments to the east coast amount to around 750,000 b/d,” said the EIU. The share of imports in total Canadian refinery receipts fell from around 50% in 2005 to closer to 40% in 2012, according to the Canadian Association of Petroleum Producers. But the share of imports in oil refined in Eastern Canada is 86%, according to TransCanada.

Energy East could also provide a means for Canada to export crude oil from eastern ports. “Because of the limitations of Canada’s oil transportation network, Canadian producers have been obliged to accept less than market price for their products. Energy East could potentially open new channels for international exports,” TransCanada said.

Tom Kloza, chief oil analyst for Oil Price Information Service, pointed out that there are Atlantic Coast refineries in the US, such as PBF’s Delaware City, that could take heavy sour crudes.

But “most of the European refiners run sweet blends,” Kloza said. And European and US oil demand is expected to grow much more slowly than demand in emerging markets, led by China and India. This would seem to indicate that access to an export outlet better suited to supply Asia, in particular, might be preferable.

“Moving the oil to the Pacific would seem to make the most sense,” Kloza said. “Most of the 9 million bbl/d or so of new refining that will be launched this decade have been designed to run heavier full bodied sour crude.” Even exports from the Gulf Coast would have less distance to cover to reach Pacific Rim markets.

But when it comes to marketing options, Canadian oil sands producers will likely take what they can get. “Market access is our biggest issue right now, so whether it’s Gulf Coast, West Coast or East Coast, we support all options,” CAPP spokeswoman Geraldine Anderson told Breaking Energy.