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Why Canada’s Kinder Morgan Pipeline Purchase Works for Canada

by John Brian Shannon

Let’s get one thing out of the way, right now. Much earlier in Canadian Prime Minister Justin Trudeau’s tenure he should’ve solved the entire Kinder Morgan pipeline situation — and the same is true for former Prime Minister Stephen Harper.

Allowing the situation to drag on for so long that two western premiers got into a trade spat, and Canada looked to foreign investors like a country that doesn’t have its act together, hasn’t served the country well.

It’s likely that billions of dollars of foreign investment simply bypassed Canada since 2000 due to the way the Trans Mountain Pipeline Expansion (TMX Expansion) proposed by Kinder Morgan has been mishandled by the various levels of government in Canada. That missed foreign direct investment (FDI) is gone, never to return.

PM Justin Trudeau scores a win for Canada by nationalizing the Kinder Morgan pipeline project that will run from the Alberta oil sands to Burnaby, British Columbia.

PM Justin Trudeau scores a win for Canada by nationalizing the Kinder Morgan pipeline project that will run from Edmonton, Alberta to Burnaby, British Columbia. Image courtesy of the Natural Resources Canada website.


The Government of Canada Buys a Pipeline Project…

To solve the entire problem (which will likely usher in an entirely new set of problems) PM Justin Trudeau announced on May 29 that the government of Canada will purchase Kinder Morgan’s TMX Expansion project which is one way to change the conversation around this entirely needless, Canadian own-goal fiasco.

Nevertheless, let’s give credit where credit is due! It’s much better that Trudeau (better late than never) decided to take a leadership role on the energy file. Congrats!


…and Plans to Sell it

Which is a great idea! Buy the project with intent to eventually sell it to a pipeline company, an investor group (pension plans love pipelines and other critical infrastructure) or to another level of government. “Hey Alberta! Wanna buy a pipeline?”

Even Kinder Morgan, conceivably, could decide to purchase the TMX pipeline once it is up and running.

Or, (best-case scenario, IMHO) it could be sold off in an IPO where the entire pipeline is sold as a going concern — and although that probably represents the longest-term plan — it’s probably the plan that would net the highest return on Canada’s investment.


Other Options that Should Have Been Considered

Oil and dilbit (dilbit is tar sand material that is mixed with a light petroleum liquid called ‘diluent’ to make it easier to move) can also be moved by rail instead of by pipeline.

Moving oil and dilbit via rail has some significant advantages.

One, in the case of an oil spill, pipeline spills average around 1 million barrels (yes, barrels) while rail tanker oil spills tend to range around 264,000 gallons (yes, gallons) of oil. It’s a huge difference, to put it mildly.

Each DOT-111 rail tanker carries up to 220,000 gallons of oil, and in the case of accident with a resultant spill, typically it is one or two rail tankers that spill onto the railbed and immediate area (usually a service road that is accessible by emergency vehicles) making a quick response easier by orders of magnitude.

Note: DOT-111 rail tankers are being retired later in 2018 and replaced by the much higher safety standard TC-117 tankers.

Also, the rail lines travel directly from Edmonton to the Burnaby oil refinery that is presently the terminus for the TMX pipeline. It doesn’t get any more convenient than that!

The one advantage that pipelines have over rail tankers is the price. Shipping oil by rail is slightly more expensive.

Finally, both pipeline operators and rail companies can suffer labour disruptions (workers go on strike in both segments of the economy) which can result in late deliveries of oil to the refinery. Although, when a refinery has both pipeline and rail access, if one goes on strike the other simply ramps-up their deliveries.


How Justin Trudeau Could Score a Win with Environmentalists

The federal government should take this opportunity to implement a new tax of 6-cents per barrel on all liquids that move through pipelines to cover future oil spill cleanup and land remediation.

Six cents per barrel is practically nothing. But over many years and with that pool of money invested in the stock market, a sizeable fund would accrue that could be used to ensure that future oil spills would be 100% fully cleaned-up and adjacent land remediated to its pre-oil spill state.

Rail companies don’t need such a tax as rail oil spills are infinitesimally smaller and easier to clean-up than pipeline spills.


How Justin Trudeau Could Score an Even Better Win

Every federal regulator in North America should create legislation to streamline new energy infrastructure approvals in exchange for higher environmental standards.

Any pipeline company (for example) that wants to build a new pipeline (of say, 1000 kilometres in length) should submit with their application to the relevant energy regulator, a plan to decommission and remediate 1000 kilometres of land where their obsolete pipelines (some with ‘abandoned oil’ still in them) are leaking or pose a risk to leak with only a few more years of rust eating away at the steel pipe or the gaskets and seals at junctions along the length of the pipeline.

A new ‘Mile for Mile New Build/Old Pipeline Decommissioning Programme’ would solve at least half of all the small oil spills in Canada when measured over the next 22-years.

Background:

Everyone in the oil business knows that the best years in a pipeline’s life are the first 15-years. New pipelines are hundreds of times safer than the pipelines of old and are built with sophisticated technology to monitor oil pressure and to detect spills that may be in progress.

North America’s hundreds of thousands of miles of oil and gas pipelines are more than 40-years old on average! That’s a stat that should terrify environmentalists, yet because it isn’t a ‘sexy’ topic for them those abandoned pipelines don’t get the negative attention they deserve. Which is a shame.

If legislation requiring dismantlement of unused or abandoned pipelines and land remediation on a ‘mile for mile’ basis were created, pipeline companies would become ‘part of the solution instead of part of the problem’ and would be perceived more positively by environmentalists and non-environmentalists alike.

According to the National Resources Canada website, at present there are 840,000 kilometres of oil pipeline in use in Canada, not including branch or service lines. (This number does not include ‘abandoned’ pipelines, nor pipelines that aren’t in active use)


Let’s Look at the Score

Prime Minister Justin Trudeau +.5 (for solving a problem inherited from a previous government)
Premier Rachel Notley +1.0 (for successfully fighting for one of Alberta’s main industries)
Premier John Horgan +.5 (for standing up for BC’ers interests as he sees it)
Kinder Morgan +1.0 (for not overreacting during the entire fiasco)
Canadian media +2.0 (for staying on top of it)
Rail companies +1.0 (for staying out of it — but they lost a point for not enthusiastically offering their better solution to the media)
Environmentalists +.5 (for fighting for what they think is right — but points-off for not recognizing that new pipelines are infinitely safer than old pipelines and for not shining more light on the dismantlement of, and land remediation around, leaky old abandoned pipelines)

Prime Minister Justin Trudeau has the ability to dramatically improve his score by regulating a 6-cents per barrel tax on pipelines, and a separate regulation requiring new pipeline applications to offer a ‘Mile for Mile New Build/Old Pipeline Decommissioning Programme’.

Environmentalists could eventually score a +1.0 by supporting a 6-cents per barrel tax on pipelines, and a separate regulation requiring new pipeline applications to offer a ‘Mile for Mile New Build/Old Pipeline Decommissioning Programme’.


Is Canada’s TMX Pipeline Purchase a Winner?

Canada should have no problem selling-off the TMX acquisition once it is completed and moving oil. Practically every pension fund and every other institutional investor will buy shares in the pipeline as they tend to be rock-solid investments with a low-ish, but predictable rate of return.

Within reasonable limits, the longer Canada holds the asset the better the potential return, and as oil prices rise Canada’s return on its investment is likely to improve.

Out of all the bad choices presented to Canadian Prime Minister Justin Trudeau he has made the least-bad choice.

Sometimes, that’s all you can do.


For more information on the TMX Expansion project, please visit the government’s informative National Resources Canada webpage here.


 

Why Justin Trudeau should approve the Kinder Morgan pipeline expansion

by John Brian Shannon

Disclaimer: I have my own renewable energy website and I contribute renewable energy blog posts to another website — so I’m obviously a proponent of renewable energy.

However, back in the day I was an entrepreneur who learned about dealing with various levels of government, about operating within regulatory frameworks, and needing to budget carefully for future large scale projects.

With the foregoing in mind, I offer the following comment about the Kinder Morgan pipeline project proposal (the TMX expansion) that is planned to run from Edmonton, Alberta through to the Westridge oil refinery (Chevron) in Burnaby, BC:

  1. Unfortunately, there are still places where renewable energy won’t work in a cost-effective manner. Eventually, renewable energy technology will develop and become feasible everywhere on the planet. But we still need oil & gas in the meantime.
  2. The past 5 Canadian Prime Ministers and probably a similar number of British Columbia and Alberta Premiers gave tacit approval to the Kinder Morgan pipeline expansion which led the company to believe the twinning of the pipeline would be approved.

For the federal government or any province to pull the rug out from under a company that has been led along for two decades to believe their project would be approved — and which provides a valuable service for people who drive cars and trucks in British Columbia and Alberta — would be unthinkable and two-faced.

The TMX Expansion should be approved based on those points alone as both Conservative and Liberal federal governments have promised the project would be a ‘Go’ and KM proceeded on that basis.

IMPORTANT TO NOTE IF KINDER MORGAN WAS OPERATING IN A TPP COUNTRY: The various levels of government in Canada could be sued for not following through on their tacit approval in recent years — and Kinder Morgan and possibly Chevron would likely win a court judgement worth billions of dollars which Canadian taxpayers would be forced to pay. Not only that, but a TPP court could still order the pipeline built!

However, there is another option which I will cover below.


About the Westridge Refinery in Burnaby, BC

At present, one tanker per week leaves the Westridge refinery (Chevron) in Burnaby BC, sometimes carrying 50,000 or 100,000 barrels of oil, gasoline, diesel, kerosene, or more exotic hydrocarbons like naptha, xylene, toulolene, and other volatile liquids. But once the 2nd pipeline is built, one tanker per day will leave the Westridge refinery.

All of these are explosive liquids and in an accident where fire occurs could easily destroy (yes, entirely destroy) the 2nd Narrows bridge or the Lions Gate bridge, which is why they run under those bridges at 4:00am to enhance their margin of safety. (Thankfully, there are no terrorists in our region)

Kinder Morgan TMX Expansion

FILE PHOTO: Two ships pass under the Lions Gate Bridge that links Vancouver with North Vancouver. Image courtesy of CBC.ca


Proposal to Enhance Shipping Safety in BC by Relocating the Westridge Refinery to Deltaport

I propose relocating the Westridge refinery in Burnaby BC to Deltaport BC, and that the federal government of Canada and the provinces of British Columbia and Alberta offer significant investment, allowing public safety to be dramatically improved.

NOTE 1: I’ve spoken to Ray Lord who is highly respected within the petrochemicals industry and remains the chief spokesman for Chevron’s Westridge refinery and he seemed interested in my idea to move the refinery to Deltaport.


Instead of a 2nd Pipeline – Move the Oil by Rail to Deltaport

It’s magic that Deltaport is the terminus for CN Rail and by using the rail option to move petroleum it means the proposed 2nd pipeline would never be needed.

Public safety would be dramatically improved, Chevron would have two crude oil transportation modes to keep it running, and in the event of a spill it’s well documented that rail spills are orders of magnitude smaller than pipeline spills.

NOTE 2: Pipeline spill incidents average 1.2 million BARRELS of oil, while rail tanker spill incidents average 220,000 US GALLONS. A huge difference!

This option would allow 3 shifts at the relocated refinery instead of 2 as is the case now, and even allow the refinery to continue operations in the event of a failure along the existing pipeline route.

NOTE 3: KM would lose the ability to build the new pipeline but allow it to neatly step out of a public relations nightmare — and it might choose to become an investor in the new Deltaport facility and not lose a cent of profit in the process.

All for less than the cost of a potential legal action brought by Kinder Morgan and possibly Chevron too.


A Fund to Remediate Pipeline Oil Spills

A 6 cents per barrel of oil tax should be applied to all liquids that move through pipelines in Canada which should be held in a trust fund to deal with future pipeline spills. The fund could be invested and the returns would increase the total value of the fund.

NOTE 4: Railways don’t need such a tax as they can’t continue rail operations along that line until the spill is cleaned up, so they’re already highly motivated to clean up rail spills ASAP.


If Canada, British Columbia and Alberta kicked in funding to relocate the refinery:

  • No longer any need for the TMX Expansion
  • Thousands of jobs would be created to build the new Deltaport refinery
  • Public safety would increase by orders of magnitude in British Columbia
  • Chevron, environmental protesters, and Kinder Morgan would be happier

And all that government investment would eventually be recovered through taxes.

Even Chevron liked my idea.

Energy East: Or Value-added Refineries?

by John Brian Shannon | April 9, 2016

The Energy East pipeline only makes sense if global oil prices rise past $80 per barrel and there’s no guarantee we’ll see anything like that before 2020.

Crude oil Forecast 2016-2020 by Trading Economics

Crude Oil forecast 2016-2020: Crude oil is expected to trade at $35.00 per barrel by the end of this quarter, according to Trading Economics global macro models, and analyst expectations. Looking forward, we estimate it at $29.50 in 12 months’ time.

Meanwhile, Iran is set to add 3.5 million barrels per day by 2020 to the global oil markets which will easily meet (practically) flat demand, keeping oil prices below $80/bbl.

Not only that, Iranian crude oil is either #2 (sweet) or #3 (sweet) while Alberta’s oil ranges from #4 (sour) to off-the-scale sour. Alberta’s crude is so sour that it must be blended with #3 (sweet) or better before refineries will accept it.

A typical Alberta oil rig. Image courtesy of MACLEAN'S.

A typical Alberta pumpjack. Image courtesy of MACLEAN’S

Why would any refinery want to buy Canadian sour crude when they can buy Saudi #3 (sweet) or Iran #3 (sweet) for the same, or lower price? Alberta’s crude sits at an average of #4.75 (sour) with two other negatives attached — much higher extraction costs (the average Alberta extraction cost is $56.20 per barrel) along with higher refining costs.

Investopedia primer on the petroleum industry

What would capture the interest of voters, would be the Alberta government guaranteeing the financing of oil refineries located within and sized to accommodate the needs of each Canadian province.

Each province could have it’s own refining capacity sufficient to meet 100% of annual provincial demand — plus 30% (for export) to bordering U.S. states.

Existing rail links can already get the crude oil to existing refineries and to the future refineries proposed in this blog post. For those worried about oil spills when shipping by rail, they are usually limited to a few rail tanker cars and are microscopic when compared to pipeline spills.

Instead of being ‘hewers of wood and drawers of water’ how about some value-added contributions to our economy by building our Canadian refining capacity, and doing some much needed value-adding to our petroleum exports?

It’s the next logical step for the Alberta government.


Bonus Graphic courtesy of MACLEAN’S

In 2005, the resource sector contributed 40% of Alberta government revenue. It has fallen to 6%.

Energy East pipeline: Good case, or lost cause? In 2006, the Alberta resource sector contributed 40% of provincial government revenue. It has fallen to 6% in one decade and is still falling. Image courtesy of MACLEAN’S.