Tuesday, April 14, 2015

Where the new Pembina Report misses the mark on Energy East

Numerous people have sent me links to the Pembina Institute report: “Crafting an Effective Canadian Energy Strategy: “How Energy East and the oilsands affect climate and energy objectives”. Having quickly read the report I must admit to being a bit disappointed. My issues with this report are that, in my mind, it makes essentially the same mistakes that are made in the Council of Canadians report I deconstructed in my previous post “The Energy East Pipeline: Dispelling Some Myths” and by individuals on twitter as discussed at a subsequent post “On the economic and environmental folly of trying to “strangle the oil sands””.  

As I discussed in my previous posts, I am strongly of the opinion that the absence of pipeline capacity is not going to be the tool needed to “strangle the oil sands”. In my opinion the only way to slow, or arrest, the growth of oil sands capacity is through some combination of government action (placing a sufficiently high price on carbon) and the market (reducing demand so that prices remain low enough to make new investment unprofitable). As I have written before, and will apparently need to repeat here, blocking Energy East does neither of these two things. All blocking the development of Energy East will do is to increase the amount of oil shipped by rail because given the current combination of oil prices; installed capacity; capacity under construction; and absence of carbon pricing, virtually all of the existing and most of the partially completed oil sands installations are still going to be completed. Given this reality, the output from those facilities is going to be transported to market by one means or another and in the absence of pipelines that load will be carried by rail. As I have pointed out more times than I care to mention on this blog, oil-by-rail is one of the riskiest, least environmentally sound, ways of getting that crude to market in a Canadian context. 
So I have made some pretty definitive statements above and I suppose it is time for me to provide my supporting rationale. In my opinion, the linchpin of the Pembina report is the importance it places on the presence/absence of the Energy East pipeline on the future development of the oil sands. The money quotes from the report appear on pages 5-6 specifically:
“Pipeline capacity is a key determinant of oilsands growth, in addition to operating and capital cost increases and the market price for oilsands crude”.

Because of the Energy East pipeline’s proposed capacity of 1.1 mbpd [million barrels per day], it could play a significant role in determining how much and how fast the oilsands sector expands. Conversely, uncertainty about — or constraints on — the future availability of low-cost crude transportation acts as a brake on oilsands expansion, as current production has nearly reached the limit of existing pipeline capacity.
The problem with these quotations, and the supplementary assumptions that depend on these quotations, is that the data supporting the statements are entirely lacking. The reference for the first quotation is a report in Alberta Oil by Jeff Lewis (ref). Now I have read the Lewis article several times and I am afraid that for the life of me I cannot see the line they claim to be citing. Rather the Alberta Oil article points out the heavy competition that the Canadian oil sands face with respect to exports to the United States. While the article discusses the transportation of oil, the emphasis is on the risk to the expansion of pipelines network because American supply and its effect on Canadian oil prices. It makes no claim that pipeline capacity is a key but only suggests that capacity, including pipeline capacity, will be a limiting factor. This is an important qualifier as will be discussed later.

The second quotation feeds into an inset text box titled “Moving Crude by Rail”. This text box appears to be intended to provide the critical support for the entire premise of the section which, as noted above, provides the support for much of the later reasoning in the report. The problem with the text box is that it appears to misinterpret its source material: the Canadian Association of Petroleum Producers report: “Crude Oil Forecasts, Markets & Transportation”. In the Pembina report they note that oil-by-rail was approximately 200,000 barrels per day (bpd) in late 2013. The Pembina Report appears to indicate that the CAPP report identifies a limit on rail capacity of 700,000 bpd in 2016 (500,000 bpd more than in 2003). But the problem is that the CAPP report (on page 32) clearly indicates that the 700,000 bpd limit is not contingent on limits in rail capacity but rather on a number of features including “the pace of pipeline capacity”.  Rather, the CAPP report clearly indicates (in both the table and figure on page 32) that current oil-by-rail capacity is around 1 million bpd and is readily expandable to 1.4 million bpd. This 1.4 million bpd greatly exceeds the Energy East capacity of 1 .1 million bpd. The CAPP document also is limited in that it only describes the Canadian situation and does not include US oil by rail capacity.

As I have mentioned several times at this blog, at this very moment the US is expanding its oil-by-rail capacity immediately south of the border in order to transport over 800,000 bpd of Bakken Crude to the US West Coast. As I have written repeatedly, part of this upgrade is to supply the approximately 725,000 bpd needed by the existing US Puget Sound refineries now that their historical Alaskan supply is drying up. As we all know, the Bakken fields are slowly diminishing in production (ref). As their production diminishes this will open up that US oil-by-rail capacity (and the Puget Sound market) just as it is needed by the oil sands producers. So what does this all mean? Well the entire basis of the Pembina Report is that by stalling/Energy East it may be possible to strangle the oil sands, but as I have noted above, in the absence of Energy East the current and planned oil-by-rail capacity in Canada alone can more than replace the capacity provided by Energy East. Moreover, the built-up US capacity will be coming available just when it is needed by the oil sands producers for future developments.

So let’s go back to the original premise of this article. What will it take to slow the growth of the oil sands? Well one again I have to direct you to the article by Dr. Andrew Leach in Macleans. Given the money already invested, either in existing or projects with existing steel in the ground, these projects are going to go forward. Too much money has been invested to simply abandon these facilities and as described in the Macleans article most can continue to generate healthy profits even in the lower price oil markets of today. Given these facts, the only way to limit the growth of the oil sands is on the demand side. This has to be done by putting a price on carbon and providing cheaper alternatives to fossil fuels, because the only thing that can stop to the development of the oil sands is the combined might of government regulation and the market.

So to reiterate my original point, Energy East is not some magic key that can be used to slow the growth of the oil sands. Rather it represents the safest way to transport existing and already under development capacity to the Canadian market. As I have written more times than I care to count, with respect to potential risks to human and environmental health, getting crude oil out of trains and into pipelines is the safest way to go. Even from a greenhouse gas perspective, it uses less energy to transport oil by pipeline than it does by rail. So if you really care about the environment you will stop trying to use these types of harmful half-measures to slow the growth of the oil sands. I know fighting Energy East makes for great sound-bites and will no doubt bring in lots of donations to activist groups and keep lots of activists employed; but it will do nothing to slow the growth of the oil sands. Moreover if we force the future oil sands production out of pipelines and into trains it will result in more rail spills, more polluted watersheds and more potential deaths

1 comment:

  1. Chemist, I have a present for you, the USA Energy Information Agency's 2015 Energy Outlook report:


    Go to page 89, Table A21. It shows what the agency forecasts for Canadian production. It shows Canadian oil production rising relentlessly to what I think may be an excessive rate (I'm in the oil business, but I recognize excessive oil production can strengthen the Canadian $ to such an extent that areas outside the oil producing regions may suffer). If I were the Canadian government I would prepare a national energy strategy and cap production at 5 million barrels per day. But the safe transport of all this crude would evidently be done by pipeline. I also believe upgrading the crude to a syncrude with good cleanup properties is the best long term option, because the export stream is a value added product rather than a raw stream. I also want to repeat the previous comment, that a non destructive technology to upgrade and make a syncrude ought to be used. Non destructive means the process hydrogenates the heavy molecules instead of making coke. This is feasible, the technology is marketed, it's expensive but it is economically viable.

    If there's a concern over the CO2 emissions the offset could be a triplet of nuclear plants to generate the required heat in cogen mode. It works. Canada has over 50 years of oil reserves it can produce and export, and it really needs to have a long term view.

    Note: The report was issued on April 15.