For most Canadians, the 700,000 km of crude oil and natural gas pipelines that criss-cross the country are out-of-sight and out-of-mind.
Until the massive energy infrastructure intersects with international politics, the economy and environmental activism.
Projects like Keystone XL, Enbridge’s Line 9, Northern Gateway bristle with controversy (despite U.S. presidential candidate Mitt Romney’s pledge Friday to approve Keystone on his first day in office).
But the pipelines that carry millions of barrels of oil and millions of cubic feet of natural gas could transport Canada itself into the ranks of the world’s energy super powers.
But only if we move beyond our single biggest customer, the U.S., and begin supplying energy to the rest of the world – particularly energy-gobbling emerging markets, soon.
“Canada would be competing with a lot of other countries for access to those markets. That window of opportunity will not last forever. Even though we may have an abundant source of those products, at some point people are just not going to knock on our door if they can get the supply from somewhere else,” said Philippe Reicher, vice president, communication and stakeholder relations for the Calgary-based Canadian Energy Pipeline Association.
Canada’s first big oil and energy pipelines were built in the 1950s when the country’s population was booming.
For decades, the pipelines connected Canadian producers to consumers in the U.S. – the biggest energy users in the world.
The good news is that Canada has been increasing its share of the U.S. market. America still gets most of its oil, about 40 per cent, from OPEC. But a full 25 per cent of its oil now comes from Canada, its largest individual supplier.
The bad news is the market is shrinking.
In 2011, the U.S. imported just 45 per cent of the liquid fuels it consumes, down from a record high of 60 per cent in 2005.
As the U.S. economy begins to show signs of life following the devastating financial crisis and recession of 2008, demand for gasoline and petroleum products has not returned to previous levels, economists say.
With millions of people still unemployed, there are fewer people are driving to work. Consumers still worried about their jobs and their finances are less likely to travel. Increased fuel-efficiency of cars and trucks has also curbed demand.
Observers say even the Internet is having an impact, as young people opt to telecommute, as well as shop and connect with peers online, rather than get into cars.
“There has been a shift and it remains to be seen how permanent it is,” said Warren Mabee, assistant professor and director of Queen’s Institute for Energy and Environmental Policy at Queen’s University.
Across North America, young people aren’t making as much money as they used to, and owning a car costs much more than it used to.
“The starter [housing] market in Canada is no longer a little bungalow in Leaside. It’s a little condo in the Distillery District. People’s money is tied up in creating that nest egg. They won’t spend the disposable income they have left buying a car. They’ll hop on the subway to go to work,” Mabee said.
Contrast that to demand in China, where car culture is rapidly taking hold amid unprecedented urbanization. Currently the world’s second-largest oil consumer, its demand is expected to grow to 9.9 million barrels per day this year. By some estimates, the country could reach U.S. consumption levels, some 20 million barrels each day, by 2020.
At the same time, the U.S. has boosted its oil and natural gas production – through often controversial means such as hydraulic fracturing and shale gas developments in places such as North Dakota, Utah and Wyoming.
The country now produces 5.7 million barrels of oil a day, up from 4.95 million in 2005. By some projections, output could reach 7 million barrels by 2020.
The Canadian oil sands in northern Alberta is currently the world’s third biggest source of crude oil. Last year’s output was 1.6 million barrels per day. That’s expected to jump to as much as 2.5 million barrels by 2020.
Crude oil production now accounts for 41 per cent of the Bank of Canada’s commodities basket, up from just 15 per cent in 1998.
The combined result of lower North American demand, and higher supplies from Canadian oil sands and projects in the U.S. is a glut of supply that’s driving down the U.S. price compared to the world market for the commodity.
Inventories at Cushing, the delivery point for West Texas Intermediate oil, situated about 60 miles west of Tulsa, recently touched a record high of 45 million barrels. That’s why West Texas Intermediate currently trades about $16 (U.S.) or $17 a barrel below the price for its international counterpart, Brent crude. At times during the last 18 months, the price gap has touched $27.
With western Canada shipping as much as 1.2 million barrels a day to the Midwest, the price difference means millions in lost revenues.
That same oil if shipped to Asia could fetch the world market price.
“All the other oil prices in the world are moving together, but WTI is trading at a discount. This one price has become divorced from everything else because that oil can’t get to a port,” said Leslie Preston, economist at TD Economics.
Canada has infrastructure pipelines, but not the crucial infrastructure elements to access Asian markets.
“We don’t have the capacity to put oil into tankers beyond the little bit that comes out in St. John’s and in Vancouver. It has to run into the states and from the states it can go into the world market,” Mabee said.
According to an estimate by the Canadian Energy Research Institute, if Keystone XL, the proposed $7 billion pipeline by TransCanada that would carry oil sands crude from Alberta to the U.S. Gulf coast, were scrapped, and none other built, Canada would forego $632 billion in additional GDP over the next 25 years, with Alberta bearing the bulk of the loss.
Enbridge and Enterprise recently completed the reversal of the Seaway pipeline to move oil from Cushing to Houston-area refineries. That should alleviate some of the glut.
TransCanada Corp. said in late April it is considering converting its underused mainline, Canada’s largest natural gas pipeline, to transport oil, shipping more crude to eastern consumers.
Meanwhile, Enbridge’s Northern Gateway from Alberta to Kitimat in B.C., faces powerful opposition in B.C., as does a proposal by Kinder Morgan Canada to expand the Trans Mountain line between Edmonton and Vancouver.
Activists contend the oil sands pollute water and the environment, and the risk from massive oil spills are not worth the boost to the economy.
The latest proposal to raise the ire of activists is sure to be a proposal by Enbridge to reverse the flow of oil in its Line 9 pipeline between Sarnia and Montreal, in order to carry western oil to eastern markets.
The company argues the move would benefit the Canadian economy and the oil industry, while environmentalists worry the move would pave the way to eventually carry tar sands oil to New England.
Mabee argues that Canada needs a national energy strategy to balance economic and environmental concerns, as well as develop insight into foreign markets.
“These are rocky waters. Energy exports are up to two-thirds of our balance of trade. That’s largely oil. We need to make sure that we protect our economy and that means having some foresight and intelligence on where these markets are going. That can help us decide how many new projects do we want going ahead,” Mabee said.