Dirty Little Secret

With Alberta oil producers facing uncertain prospects south of the border, many are pinning their hopes on the Asian market – and two multibillion-dollar pipelines set to carry crude to B.C.’s west coast ports. But are we ready for massive oil tankers off our shores?

With Alberta oil producers facing uncertain prospects south of the border, many are pinning their hopes on the Asian market – and two multibillion-dollar pipelines set to carry crude to B.C.’s west coast ports. But are we ready for massive oil tankers off our shores?

A global recession, the like of which hasn’t been experienced for generations, is wreaking havoc on Alberta’s oil sands. In the last few months, oil sands developers have shelved or delayed billion-dollar projects designed to take gooey bitumen from the oil sands and turn it into synthetic crude oil. The price of crude oil plummeted from $US147 a barrel last summer to about $US35 by mid-February, and the global financing pool has virtually dried up. Add to that ominous noises coming from the U.S., Alberta’s only export market, about “dirty oil” (considered environmentally unfriendly because of the large energy and water resources required to separate oil from sand), and it would appear that years of boom are turning to bust.

But all this gloom has done nothing to dampen the enthusiasm of a couple of major pipeline companies that see opportunity in the downturn. Despite the slowdown, Canada’s oil-production future still lies primarily with the tar sands, and if the Americans decide that oil is too “dirty,” then Canada will need to sell it to someone else. And that means pipelines to the west coast and oil tankers to whomever else in the world needs oil (think Asia). All of a sudden, it seems, everybody wants to ship oil through B.C.

There’s a $4.5-billion proposal from Enbridge Inc., dubbed the Northern Gateway Project project, to build a pipeline that will carry 525,000 barrels of oil a day from Alberta to a deepwater tanker terminal at Kitimat, from which point oil would be shipped to markets all across Asia. China, Japan, Korea and even India import oil – and Kitimat’s north coast location makes for a relatively short tanker ride to Shanghai. Kinder Morgan, also lured by the Asian promise, has its own proposal to build a 400,000-barrel-a-day pipeline to Kitimat and plans to expand its existing crude oil pipeline – which runs from Alberta to Burnaby’s Westridge Terminal – from 300,000 barrels a day up to a potential 700,000 barrels a day. Some of that oil is refined in Vancouver for the local market, some is piped through to refineries in Washington state and an increasing volume is loaded onto tankers for shipment to California and Asia.

While not every piece contained within these two companies’ proposals will be built – at least not in the next decade – they do represent a combined West Coast oil shipment capability of more than 1.6 million barrels a day. By comparison, Alberta produces 1.2 million barrels a day from the oil sands now, with the Canadian Association of Petroleum Producers (CAPP) projecting that this number will climb to two million a day by 2013 and three million a day by 2018. “As we grow, it has become a very important question strategically as to what should we do with that oil,” says Greg Stringham, CAPP’s vice-president of oil sands and markets.

For company executives, the decision to build has little to do with current economic – or political – conditions. “There’s a very strong interest in developing new and secondary markets for Canada’s petroleum resources, and that’s what lies at the heart of the project,” says Steve Greenaway, Enbridge’s vice-president of public and government affairs. “It’s the opportunity. Some people might want to point to the recent American election, but frankly our project started long before that. Everyone understands it’s time to do it. There’s a discount we pay for only having one customer. It’s only through developing new markets that we can curtail that discount.”

Jock Finlayson, executive vice-president of the Business Council of B.C., echoes Greenaway’s thinking: “All the projections from the [International Monetary Fund], Goldman Sachs and international agencies point to a world economy that will be more Asia-centric. Part of that will be a hearty appetite for all forms of energy, including hydrocarbons. From a Canadian viewpoint, having the infrastructure to sell into that market is crucial.” [pagebreak]Still, analysts were taken aback last November when Enbridge, in the middle of the current economic swoon, reaffirmed its commitment to go ahead with the Gateway project. The company doesn’t have any signed contracts from shippers or customers – only a financial commitment from them to fund the regulatory approval process. Kinder Morgan, also without contracts, won’t even go that far, waiting instead for customers to commit to actual oil shipments before expanding. “We now are in ongoing discussions with producers and the market about what should be the next stage of expansion,” says Ian Anderson, president of Kinder Morgan Canada Inc.

While both Greenaway and Anderson cast their two projects in terms of another opportunity to diversify markets, they downplay the elephant in the room: the tougher environmental stance of a new U.S. president and the potential loss of the American market. During the 2008 U.S. presidential campaign, Barack Obama made some pointed remarks about America’s need to wean itself from foreign oil – and he singled out “dirty oil” without specifying the oil sands production. Senior members of his administration have been even tougher, with two appointments in particular pointing to tough times ahead for Alberta’s oil producers.

First, California congressman Henry Waxman was elected chair of the U.S. House Committee on Energy and Commerce. A committed environmentalist, Waxman helped write the 2007 Energy Independence and Security Act, which includes provisions that would ban U.S. federal agencies from buying fuels with heavier carbon footprints than conventional oil. He singled out Alberta’s oil sands as just the kind of oil he was talking about. Most ominous, according to a report in Embassy magazine, Canada’s ambassador to the U.S. Michael Wilson and Gary Mar, lobbyist for the Alberta government, organized a meeting with Waxman to discuss these issues, only to be stood up by the congressman. Second, Obama appointed Steven Chu, head of the Lawrence Berkeley National Laboratory, as his energy secretary. Chu is an alternative-energy advocate, likes the Kyoto Accord, and is also not a fan of oil sands extraction.

On this side of the border, federal Trade Minister Stockwell Day was not available for an interview, but in response to an emailed question said that Canada is working with the Alberta and U.S. governments “to ensure that oil-sands-derived oil is not unfairly singled out.” Day also said that the two pipeline projects were “private sector decisions,” but agreed that they would allow Canada to develop new markets for its crude oil exports. Within days of Obama’s election, the Harper government also publicly announced its desire to develop an integrated climate change policy with the new administration.

With storm clouds brewing south of the border, it’s no wonder that a couple of very expensive pipeline proposals to the west coast suddenly look attractive. And that has Will Horter and his Victoria-based environmental group Dogwood Initiative concerned. Horter doesn’t like tar sands oil either, but he particularly doesn’t like it if it means a sudden switch in focus from pipelines to America to oil tankers off B.C.’s north coast. His organization has launched the Tankers are Loony campaign, designed to raise public awareness about the threat of oil spills that tanker traffic would pose. The organization has produced and distributed tens of thousands of plastic decals that can be attached to a loonie to make it look like the loon is swimming in an oil spill. (The Royal Canadian Mint says anything that defaces coinage is illegal, but a cease and desist letter has not slowed down the campaign.)

Horter questions Enbridge’s urgency to build the pipeline to Kitimat and warns that it will face an avalanche of opposition, both from affected First Nation bands and environmentalists. “We’ll make this a national issue,” he says. ”And if we can do that, we can perhaps get legislation passed that will impose a ban on all tanker traffic in northern waters.” Environmentalists have long believed that the federal government in 1972 imposed a ban on oil tankers transiting northern waters such as Hecate Strait, Douglas Channel, Dixon Entrance and Queen Charlotte Sound. Horter says he can produce all kinds of references to the moratorium in numerous government reports – “But the original document has been mysteriously misplaced, or it never existed. The original doesn’t exist.”[pagebreak]While both government and industry agree that there is a moratorium on offshore oil and gas drilling, neither accepts that any kind of moratorium is in place to stop tankers from sailing into B.C. ports, loading or unloading oil and sailing away again. Perhaps muddying these waters is a voluntary exclusion zone that keeps U.S. tankers bound from Alaska to Washington state west of the Queen Charlotte Islands. “There never was a moratorium,” says industry consultant John Hunter. “The environmentalists are cherry-picking a few statements in the federal scientific review panel [on offshore drilling]. If there was a tanker moratorium in 1972, how did Hartley Bay and Kitimat and all those places get their fuel oil? Where were the notices to shipping in the register saying tankers are banned? Why did Imperial Oil build a [coastal] tanker in 1973 knowing that tankers up and down the Inside Passage have been banned since 1972? How does Vancouver Island get 100 per cent of its fuel today? There is a moratorium on offshore oil and gas; there isn’t one word on tankers, because, if there were, our coast would be shut down.”

Horter concedes that he doesn’t have enough of a smoking gun to clear up the confusion – hence Dogwood’s position now that what is needed is strong legislation to clear it up, once and for all, by banning tankers. Dogwood and other environmental groups have largely ignored the existing – and growing – oil tanker traffic through Kinder Morgan’s Westridge Terminal. But it may well be that current shipments through Burnaby to Asia will provide the test needed for more and more commercial transactions to Asia, and ultimately bigger ships through Kitimat. Crude oil has very specific qualities, and refineries are often designed to process specific kinds of crude oil. The oil shipments through Burnaby to Asian refineries are being done largely to test the ability of those refineries to handle the Alberta crude.

Says Kinder Morgan’s Anderson, “A lot of work has been done in Canada to ensure adequate export capacity into the Midwest. I believe it’s now time to revisit the West Coast and how quickly those markets will develop.” He goes on to say that once the oil is loaded on the ship, the pipeline company doesn’t always know where that ship goes, but that he’s aware of “a good number of shipments” in the last 18 months that have made their way to Asia, principally to China. “All producers are developing markets in Asia. It doesn’t happen quickly,” he notes. “Like market development for any commodity, it takes time.”

Nearly three years ago, Kinder Morgan dredged the waters around its Burnaby terminal to allow passage for “Aframax” vessels – tankers that displace between 75,000 and 115,000 dead-weight tons (DWT), compared to the 150,000 to 320,000 DWT that the deepwater tankers proposed for Kitimat can handle. Those Aframaxes now come in at a rate of about three a month, with Kinder Morgan loading 36 such vessels in 2007 and 40 in 2008. Anderson says if Kinder Morgan proceeds with the full expansion to the south – and he believes that expansion will probably go ahead before a new line to Kitimat is built – the company would need an additional berth at the Westridge Terminal. At the moment, the company is waiting for Port of Vancouver officials to OK new protocols that would allow the Aframax vessels to be fully loaded. Says Anderson, “We would be able to ship out of there an additional 15 per cent to 20 per cent – a significant gain – and it greatly improves the shipping economics for producers.”

While Horter and the Dogwood Initiative are cognizant of potential Vancouver expansion, they are completely focused now on keeping tankers out of Kitimat and the northern waters. “That northern route is a race to get the approval in their back pocket,” Horter believes. “It’s because of the Americans and the fear they don’t want [Alberta’s oil]; it’s a negotiating ploy. Obama and dirty oil? That set a bomb off in the Alberta oil industry. They’re freaking out. Enbridge wants to do this under a sympathetic government. I think even if they got approval, this wouldn’t be built for more than a decade. I’ll get really nervous if some of these producers start signing supply contracts.”[pagebreak]Enbridge has begun a consultation process, complete with open houses, in various B.C. communities along the Kitimat route and plans to submit a formal application to the National Energy Board later this year. But even if the pipeline gets government approvals with no delays (Enbridge has yet to submit an official application), it won’t be operational for another five years. Kinder Morgan, having just completed the first phase of its Burnaby expansion, has not yet made a decision to proceed with further expansion at Westridge or with a new pipeline up north.

For both companies, the public’s willingness to accept increased tanker traffic may prove the deciding factor. “Any proposal that would rev up maritime shipping focused on hydrocarbons is going to get rigorous scrutiny from the regulators, from the media and from the public,” notes the Business Council’s Finlayson. “But look around the world: Norway is a superpower on energy; their whole economy is built on exporting hydrocarbons. They have very high environmental standards, and their public is just as focused on that as we are.”

As Horter and other environmentalists see it, however, the fact that potential expansion hasn’t yet faced public scrutiny is reason for hope. “We’re optimistic that a legislated tanker ban is possible, and we know from polling that the vast majority are opposed – 75 per cent provincially, 80 per cent from coastal areas. We’ve done four polls, and even Conservative voters are opposed to the tankers.”

But what makes this issue a difficult one for the Dogwood Initiative and a host of other environmental groups is the potential lose-lose as the issue plays out. U.S. and Canadian environmental groups have formed a coalition dubbed Obama2Canada and dogged President Obama during his Feb. 19 visit to Canada. The goal of these organizations is to convince Obama to shun the oil sands. Federal Environment Minister Jim Prentice, on the eve of the Obama visit, struck back at the “dirty oil” moniker that environmentalists have successfully attached to the tar sands, pointing out that Americans get half their electricity from coal-fired generating plants.

Obama walked a very tight diplomatic line when he met the prime minister, at least in public, giving little comfort to either oil sands advocates or oil sands opponents. The two leaders announced only a commitment to a “dialogue” on clean energy. Obama’s lone reference to oil sands during his Canadian visit came in a TV interview with the CBC’s Peter Mansbridge – and his words there were equally noncommittal.

If the environment movement is ultimately successful in convincing Obama to put tar sands oil on an “unacceptable” list, it could well drive an acceleration of the West Coast pipeline projects. That means more, and bigger, oil tankers. The Government of Alberta, which now faces a billion-dollar deficit thanks to plummeting oil prices, cannot afford to be complacent about markets for what will soon be its only significant source of crude oil production. West Coast oil ports must look awfully promising in Edmonton right now.