Oil Pipelines to Drive Canadian Economy Like 1800s Railway Track
“Pipelines are very similar to railroads,” Monaco said at the Bloomberg Canada Economic Summit in Toronto yesterday. “When you really get down to it, Canada is an export-driven resource economy. This is our foundation.”
The nation’s oil trade, which according to Statistics Canada rose 7 percent to about C$73 billion ($71 billion) last year, is set to grow faster than the total economy. Pipelines already carry 15 percent of Canadian exports in the form of crude, mostly to U.S. markets. Enbridge and TransCanada Corp. (TRP) plan to spend more than a combined C$50 billion to expand networks to the Pacific and Atlantic coasts.
The completion of a transnational railroad line in 1885 opened up much of what is now Alberta, Saskatchewan and Manitoba for settlement, helping to establish Canada as one of the world’s largest agricultural exporters. Pipeline companies are proposing conduits that would help transport millions of barrels of new production from oil-sands projects in Alberta to refineries in eastern Canada, markets in the U.S. and export facilities in Western Canada.
Building pipelines that will move crude from Canada to new markets is the most important driver for the economy, according to Toronto-based consultancy En-Pro International Inc. The gap between Canadian crude prices and U.S. and global benchmarks has widened in the past year as production overwhelms existing pipeline capacity, depressing energy stocks and reducing government royalties and taxes on oil exports.
Production of bitumen, which is refined into fuels, is poised to double from last year to 3.8 million barrels a day by 2022, according to Alberta’s Energy Resources Conservation Board.
“Oil is the commodity driving the economy,” Roger McKnight, senior petroleum analyst at En-Pro, said in a May 16 phone interview. “We’re a commodity producing country and we can’t hide from that. Pipelines define who we are as an economy.”
Canada exported C$100 billion of oil and natural gas last year, said Monaco. That figure will grow at a faster pace than the nation’s economy as production of bitumen continues to expand, Doug Porter, chief economist for BMO Capital Markets, said in an interview in Toronto yesterday.
Pipelines may become “symbols of unity” like the cross-Canada railroad that enabled Western grain farmers to get their wheat to market, Frank McKenna, deputy chairman at Toronto-Dominion Bank, said yesterday at the summit. New oil conduits “would create a national network of energy.”
Enbridge has proposed to increase oil transportation capacity through projects including the C$6 billion Northern Gateway from Alberta to Canada’s Pacific Coast. TransCanada is lobbying for approval of the Keystone XL pipeline from the oil sands to the U.S. Gulf Coast and proposing to convert part of an existing gas line to carry oil to Canada’s Atlantic Coast.
New pipelines will cost more and take longer to be built as operators including Enbridge put more effort into winning public support rather than focusing solely on regulatory approval, Monaco said.
The current lack of pipelines is depressing Canadian crude prices and energy stocks. Western Canadian Select was $21.50 a barrel less than the U.S. benchmark West Texas Intermediate yesterday, according to data compiled by Bloomberg.
“This is C$25 billion a year in value destruction,” McKenna said. There is also C$1 trillion in foregone gross domestic product over the next 20 years and C$300 billion in lost tax revenue during the same period.
Meanwhile, Canadian energy stocks have underperformed U.S. peers by almost 14 percentage points in the past year, data compiled by Bloomberg show.
Rail continues to play a role moving Canada’s natural resources, with shipments rising from the oil sands and shale formations as proposed pipelines are delayed.
The pipeline miracle also may not deliver all its promises, as production in the U.S. also increases, said Michal Moore, a professor of energy economics at the University of Calgary.
“Doubling output from the oil sands is not realistic,” Moore said in an interview. “Oil production in Alberta is likely not going to be an endlessly-expanding vista.”
In the meantime, Enbridge and others will race to meet the demand as fast as they can, in the same way railway barons a century ago chased export markets for Canadian grains and logs.