Trans Mountain pipeline: The economics of oil

Billions of dollar at stake in fate of Kinder Morgan project

This is the fourth story in a five-part series on the issues surrounding Kinder Morgan’s proposed expansion of the Trans Mountain pipeline, investigating the history, science, Indigenous reaction, politics and economics of the controversial project. Read part one, part two, part three and part four.

There’s a lot riding on the federal government’s decision to take over the Trans Mountain pipeline twinning project from Edmonton to its terminal in Burnaby.

Kinder Morgan agreed to carry on with its construction plan as part of Ottawa’s offer to buy its Canadian assets, primarily the pipeline and its terminal, for $4.5 billion.

The federal purchase does not include the $7.4 billion construction budget, which is to be financed by Ottawa and Alberta. Kinder Morgan estimates that the first 20 years of construction and operation would generate $46.7 billion, including federal and provincial taxes paid. Over the same period, the company calculates that municipal tax payments over 20 years would total $922 million in B.C. and another $124 million in Alberta.

The Conference Board of Canada estimates the project would create the equivalent of 15,000 person-years of employment in construction and 37,000 direct, indirect and induced jobs each year it operates.

Benefits agreements have been signed with 19 communities, representing $8.6 million in infrastructure, education and training projects. Examples include $500,000 for improvements to Hope Community Park, $290,000 for trails and trades training in Barriere, $845,000 for community infrastructure and training in the Thompson Nicola Regional District, $390,000 for projects and training in Clearwater, $1.3 million to revitalize an Abbotsford golf course and $1.2 million for a new Vedder Greenway trail pedestrian bridge in Chilliwack.

There are another 43 “mutual benefit agreements” with Indigenous communities, 33 in B.C. and the rest in Alberta. Kinder Morgan says those agreements will see $400 million go to the communities, and agreements may be extended as the project proceeds.

Trans Mountain requires its contractors to have Indigenous monitors on its environmental inspection teams at all construction areas, advising on traditional land use and cultural values.

Beyond the direct jobs and community benefits agreements along the route, the project is a key step toward increased spill response capability on the B.C. coast. It also affects the supply of crude oil to southern B.C.’s last oil refinery and bigger refineries in Washington.

And then there are pending oil pipelines to the U.S., and another proposal to build a pipeline similar to the cancelled Northern Gateway pipeline across northern B.C.

Here’s a closer look at the implications.

What happens if there’s a spill

Spill response on the B.C. coast is the responsibility of Western Canada Marine Response Corp. (WCMRC), an industry-funded network of facilities and vessels that works with the Coast Guard to respond contain and clean up incidents.

As part of its Trans Mountain expansion, Kinder Morgan Canada committed $150 million to increased response equipment and bases, conditional on completion of the Trans Mountain pipeline twinning project.

That funding was suspended in April, along with all non-essential spending on the pipeline, with Kinder Morgan seeking assurances by the end of May that further delays and demands won’t be imposed on a project that has already received federal and provincial approval.

WCMRC plans include response bases at Burrard Inlet, on the Lower Fraser River, Nanaimo, Port Alberni, Sidney, Beecher Bay in the Juan de Fuca Strait, as well as an offshore supply vessel to be based at Ogden Point in Victoria. Kinder Morgan’s conditions laid down by the National Energy Board require that those facilities be up and running nine months before the Trans Mountain expansion begins operation.

Ogden Point is Victoria’s cruise ship terminal, and may also be the location of a new spill response vessel financed by Kinder Morgan Canada if the Trans Mountain pipeline expansion proceeds. (Western Canada Marine Response Corp.)

The project suspension puts all that work on hold, said Michael Lowry, communications manager for WCMRC.

“We were close to signing leases in a lot of these spots,” Lowry said.

“We had construction vendors all lined up, tender packages ready to go to start construction this summer.”

The goal of the response bases is to reduce the maximum response time for Vancouver Harbour from six hours to two. The six-hour maximum would then be applied to the entire southern B.C. shipping lane, where in remote places the response time can be up to 72 hours.

In November 2016, Prime Minister Justin Trudeau announced an upgrade to marine spill response for the West Coast. It included two new large vessels capable of towing large freighters or other ships in distress, such as the U.S. tugboat and fuel barge that had run aground near Bella Bella on the remote B.C. coast.

“Canada has the longest coastline in the world, and it’s a poorly kept secret that we haven’t done enough to protect it,” Trudeau said after touring Vancouver harbour aboard a Coast Guard vessel.

Cleanup crew works on Burrard Inlet shoreline after a backhoe ruptured the Trans Mountain pipeline in July 2007. About 224 cubic metres of heavy synthetic crude was spilled, affecting a residential area, a creek and the inlet shore after some of the oil ran down a storm drain outfall. Approximately 95 per cent of the released oil was recovered. (Western Canada Marine Response Corp.)(Western Canada Marine Response Corp.)

That national project was not a direct response to the potential for increased tanker traffic. The B.C. government calculates that while all eyes are on the potential seven-fold increase in oil tankers, the Trans Mountain expansion represents only a six per cent increase in total shipping.

There has never been a spill of crude oil tanker cargo in B.C., after 64 years of Trans Mountain delivering crude to the Westridge tanker terminal at Burnaby, and daily Alaska tanker traffic past B.C. for nearly 50 years. Recent spills included a fuel system rupture of the freighter MV Marathassa in Vancouver harbour in 2015, spilling bunker fuel, a semi-refined product carried in large quantities by many ocean-going vessels.

Oil price and investment

Alberta oil is “landlocked,” as a U.S. protest network’s strategy first described it in 2008. Pipeline backers point to the discount on Western Canada Select, as Alberta heavy oil is called by traders, and West Texas Intermediate, the similar grade of U.S. crude.

Between 2012 and 2017, the price difference averaged $16.54 a barrel. As the Fraser Institute pointed out in a May report, The Cost of Pipeline Constraints in Canada, the 2018 price spread is $26.30 a barrel, which works out to an annual loss of $15.8 billion on Canadian oil.

Calculating the investment impact of cancelling third major pipeline project is less certain. The Justin Trudeau government effectively killed the Northern Gateway pipeline by banning crude tankers docking on B.C.’s North Coast, then added downstream greenhouse gas requirements to the Energy East pipeline from Alberta to the Atlantic coast that caused Trans Canada Corp. to abandon the project.

Energy East would have converted existing gas pipelines, moving Alberta oil to refineries that currently depend on imported oil from Saudi Arabia, Nigeria and other sources.

Oil refineries

With Imperial Oil’s refinery at Port Moody long dismantled, the last remaining source of refined fuels in southern B.C. is near the Trans Mountain Burnaby terminal. The Burnaby refinery was acquired from Chevron in April 2017 by Parkland Fuel Corp,, a Red Deer-based company that also owns Columbia Fuels on Vancouver Island.

The $1.5 billion purchase includes more than 100 Chevron-branded filling stations in B.C., marine fuelling stations and an aviation fuels business supplying Vancouver International Airport.

Trans Mountain, one of few pipelines in North America used for shipping refined fuels and crude oil in batches, also supplies the Parkland refinery. News of the Trans Mountain expansion prompted Parkland CEO Bob Espey to express his concerns to the B.C. and Alberta governments.

“Our company’s view is that any measure that restricts the supply of oil to British Columbia would be negative for both the economies and B.C. and Alberta,” Espey said in a statement. “We are committed to doing what we can to serve our customers and will continue to monitor the issue closely.”

The Cherry Point refinery in Washington State(BP)

Washington state’s five refineries, at Cherry Point, Anacortes and Ferndale, receive crude from the Trans Mountain pipeline as well as by tankers from Alaska. With Trans Mountain now over-subscribed, Alberta oil is moving by rail in greater volumes, winding down the Fraser Canyon to enter the U.S. at Bellingham.

A 2017 Washington state ecology department report says the volume of Alberta oil shipped by train to the state has more than doubled, from 7,000 barrels a day in 2012 to 15,000. That translates to 80 to 90 rail cars per week carrying Alberta heavy crude through B.C.

Other pipelines

Alberta’s oilsands crude is in demand in California and the U.S. Gulf Coast, where refineries are built to handle heavy oil such as Venezuela’s oilsands product. Some critics say much of Trans Mountain’s additional capacity would go south, rather than by Aframax-sized tankers across the Pacific to Asia.

Enbridge is working on its Line 3 replacement, from Hardisty, Alberta across Saskatchewan and into the U.S. Construction of the Saskatchewan and Manitoba sections is scheduled to start in the fall of 2018.

U.S. President Donald Trump carried out his campaign promise to approve the Keystone XL pipeline, which faced similar international opposition as Trans Mountain does today. Keystone would run from Hardisty to Nebraska, strengthening Alberta’s historic ties to the U.S. petroleum industry.

Another project that could benefit from Trans Mountain’s expansion being cancelled is Eagle Spirit Energy, an Indigenous-led effort to build a pipeline across northern B.C. similar to Northern Gateway.

Eagle Spirit founder Calvin Helin has backing from the Aquilini Group, real estate developers and owners of the Vancouver Canucks. A lawyer from Lax Kw’alaams on the northwest coast, Helin has worked to secure Indigenous consent for a pipeline route that terminates at Grassy Point, in Lax Kw’alaams territory.

Where the Trans Mountain expansion is opposed by the Squamish and Tsleil-Waututh, Eagle Spirit may have consent for the Grassy Point terminal, which could accommodate larger crude carriers for Asian ports.

Another coastal option is a refinery proposal backed by Black Press chairman David Black, that was originally to be supplied by the Northern Gateway pipeline to a site near Kitimat.

The Trudeau government’s decision to ban crude oil tankers from the North Coast is being challenged in court by Eagle Spirit, but Black has since focused on an innovation that would see Alberta bitumen dried to a solid and shipped by rail hopper cars for processing.

In the event of a land spill, the product could be picked up without significant impact, Black said.

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