What Does the Falling Price of Oil Mean for the Pipelines We Oppose?

Will the falling price of oil affect the construction of the proposed Energy East, Trans Mountain, Northern Gateway and other pipelines? What are the economics of pipelines with multi-billion dollar price tags when the price of oil is now at about $40, well below the break-even point of $65-70 for tar sands producers and the $8 or so to ship a barrel of oil by pipeline?

The Globe and Mail reports, "Energy economists say that a prolonged slump in oil prices will further slow two proposed pipelines already hamstrung by court challenges and community opposition in British Columbia. ...Analysts say that [the slumping price of oil] hasn't yet changed the economic imperative for Canada's oil industry to open up its first major conduit to Pacific markets, but most agree that a months-long downturn in oil prices could slow investment in oil sands expansion, which in turn could decrease the supply of oil available to any future pipelines."

But Norm Rinne, Kinder Morgan's senior business development director, says his company's Trans Mountain pipeline is still economically viable and scheduled to be operational in 2018. He says, "The Trans Mountain Expansion Project has binding, long-term contracts with 13 customers in the Canadian oil producing and marketing business. Fluctuations in North American and world oil prices are normal, expected and factored into the considerations by our customers when signing-on for the project."

And Ivan Giesbrecht, a spokesperson for Enbridge, says his company plans to begin construction of the Northern Gateway pipeline in 2016 and have it operational by late 2019. He says, "We believe that accessing international energy markets is as important as ever for Canada. Getting the best possible return for our resources is important - even with the current fluctuations in market prices."

While they may need to say that to assure nervous investors, Werner Antweiler, an energy economics professor at the University of British Columbia's Sauder School of Business, says the Energy East pipeline could be the closest to getting built.

That's because he says the price differential between oil sold on the global market and within Canada has "evaporated" and isn't likely to return soon. He notes that when a barrel of oil sold for $30 more on the global market than here at home there was a solid case for export pipelines. He argues that the Trans Mountain and Northern Gateway pipelines are "not quite as compelling" now because both are exclusively intended to ship tar sands bitumen to Asian markets. Antweiler says it makes more sense to move oil "to some of the closer markets", and the article adds, "That means TransCanada's Energy East pipeline proposal is likely the closest to getting built, as it would send western oil east to be refined or exported, Mr. Antweiler said."

On the other hand, we have argued that most of the bitumen shipped via the Energy East pipeline would be exported to India, Europe and the United States via a deep water port in Saint John. The report TransCanada's Energy East Pipeline: For Export, Not Domestic Gain estimates that 978,000 barrels a day from the 1.1 million barrels per day pipeline would be available for export.

Much will depend on how long the price of oil remains low.

Jeff Rubin, the former chief economist at CIBC World Markets, says, "Part of the impetus behind constructing new pipelines to carry bitumen from northern Alberta to the U.S. Gulf Coast [the $8 billion Keystone XL pipeline], Kitimat on the Pacific [the $7.9 billion Northern Gateway pipeline], or even all the way across the country to Saint John, N.B. [the $12 billion Energy East pipeline], was to help close the substantial discount between Canadian oil and world prices. ...For pipeline companies with major proposals on the table, such as TransCanada and Enbridge, falling oil prices are a game-changer of the same magnitude that rising prices were a decade ago. Back then, soaring prices created an urgent need to build new pipelines to connect North America's burgeoning supply to coastal refineries and world markets. We're now in a different world."

What perhaps is most disconcerting is that it's "market logic" that could determine the fate of these pipelines rather than the imperative to avoid catastrophic climate change.

A study by researchers from University College London recently concluded that 85 per cent of the tar sands cannot be burned if the world is to limit climate change to 2 degrees Celsius. More specifically, this means that no more than 7.5 billion barrels of oil can be extracted from the tar sands by 2050. Right now about 1.08 billion barrels a year (2.98 million bpd) are extracted from the tar sands and the Canadian Association of Petroleum Producers sees that increasing to 2.35 billion barrels a year (6.44 million bpd) by 2030. The proposed Energy East, Trans Mountain, Northern Gateway, Keystone XL and Arctic Gateway pipelines would move about 1.26 billion barrels a year (3.45 million bpd).

In other words, the climate fuse of these pipelines is very short.

For information on Council of Canadians campaigns to stop these pipelines, please click here.