Tuesday, June 19, 2012

Frank McKenna: Let's build an oil pipeline from coast to coast

By Frank McKenna, Globe and Mail, June 19, 2012
The last spike of the Canadian Pacific Railway was driven in 1885. This was a remarkable accomplishment pitting the indomitable will of our early railroad pioneers against the rugged Canadian terrain. In a country where gravitational forces often move north and south, this ribbon of steel has helped knit the country together both symbolically and economically.

It is time for another bold project, national in scope: A pipeline network extending from coast to coast. This essential infrastructure project would be good for all regions of Canada. It would be an extraordinary catalyst for economic growth. It would be a powerful symbol of Canadian unity.

Much has been made recently about who wins and who loses from Western oil sands. This is the wrong way to look at it. We should turn this challenge into a nation-building exercise rather than encourage a corrosive debate pitting one region against another.
Although the ripple effect of oil-sands development across this country is well documented, a national pipeline, subject to a thorough environmental and regulatory review, would put the issue beyond dispute. The burning platform for the West and for Canada is obvious. We sell almost all of our oil to one customer, the U.S. and we are paying a bitter price for the lack of competition for our resources.
Currently, we suffer two discounts, a West Texas Intermediate differential and a heavy oil differential. At various times this year, these differentials have amounted to as much as $37 per barrel. By one estimate, $630-billion in additional GDP will be forgone over the next 25 years. This is value destruction of monumental proportions. Quite naturally, these price differentials are also slowing down the pace of production and could result in new investments being postponed or cancelled altogether.
It is a simple matter of fact that the U.S. will always remain our primary customer and we need better pipeline access to the U.S. The appropriate approval processes to secure this access are well advanced.
But we also need market diversification. This would require pipeline access to the West Coast and the East Coast. The former is more difficult for a variety of reasons. However, East Coast access is particularly promising.
Firstly, a lot of the pipeline capacity is already in place. Secondly, the East has a significant number of refineries that need access to Western crude.
Just as Western producers are suffering from being captive to U.S. pricing, our East Coast refineries are suffering from being captive to global suppliers. They need Western crude and are currently accessing some of their requirements by rail car, even though it is a more expensive option than pipelines. If we were able to sell Alberta crude into Eastern Canada, where oil is bought at the higher overseas price, we would create better value for Western producers and better netbacks for Eastern refineries. Plus, we would reduce the glut in Cushing, Okla., which could, in turn, impact the price differential.
An Eastern alternative also offers several other huge advantages. Refineries in the East could be upgraded to process heavy oil and even bitumen, which would help address the heavy oil differential. This would result in large capital projects in the East that would mobilize the skilled work force that is currently working in Western Canada. Access to large modules shipped on tidal water and a lower cost of construction would help improve the economics of creating more value-added activity in Canada.
It would also help relieve capacity constraints in the Western basin, which might make other projects much more affordable. Furthermore, having access to tidal water would allow Western crude to be exported into the refinery-dense Eastern seaboard of the U.S. or even overseas to Europe or Asia depending on market economics.
The virtue of the Eastern alternative is that a lot of the pipeline infrastructure is already in place. The repurposing of existing pipelines would allow Western crude to be brought all the way to Quebec, supplying a number of refineries en route.
The missing link is a pipeline from Quebec to Saint John. Construction of this pipeline would allow for access to tidal waters for export and a crude source for the Irving Refinery in Saint John, currently the largest refinery in Canada, a complex structure, capable of using heavy oil or even bitumen from Alberta.
There is mounting support for this project. Political leaders across the political spectrum in Atlantic Canada have voiced their support. It has also attracted support from leaders as diverse as Danielle Smith of the Wildrose Party in Alberta and Thomas Mulcair, leader of the federal NDP.
The Premier of Alberta, Alison Redford, has demonstrated great national vision in talking about “sharing the wealth” of Alberta's oil sands and she is proposing the concept of a national energy strategy. A national pipeline infrastructure could be the foundation for such an important national policy initiative.
Finally, this pipeline could do away with the old debates pitting one region against another. Each region would be a winner. Each region would be a link in a strategic value chain. Each region would deliver tangible benefits to the betterment of the entire country.
Amazing to hear from someone who
a) knows the numbers
b) knowns the provincial and national political system
c) knows the international oil market
d) believes in building a stronger Canada...
                                                                speaking about a national project in the middle of an arid debate over the Conservative government's successful economic strategies!!
While there will inevitably be federal-provincial tensions over such a "national vision" and while there will be strong arguments from those who oppose "mega projects" as a part of our history not our future, nevertheless, we welcome Mr. McKenna's endorsement of this national oil pipeline, and urge all thoughtful and insightful and courageous political and industry leaders to give the matter some serious consideration.
I bet if we were to "mind" McKenna's mind for other national projects, we would be surprised at the wealth of his imagination!

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