Sunday, November 27, 2011

Why isn't the Keystone pipeline extension going to eastern Canada?

So much of the discussion surrounding an extension of the existing Keystone oil pipeline system which spans Canada and the United States assumes that the growing production of bitumen (it's not really oil) from the Canadian tar sands is either going to the United States or to China. But the following question ought to be an obvious one to anyone who knows that Canada imports 43 percent of the oil it consumes: Why isn't there any discussion of a new pipeline to eastern Canada where most of the oil consumed is imported?

RELATED UPDATE October 21, 2012: Canadians could free themselves from oil imports, but will they?


Perhaps I should back up a bit for those who are scratching their heads because they know that Canada is a large oil exporter. Canada is indeed a large oil exporter. First, let's note that Canada's total petroleum production was 2.9 million barrels per day in 2010. Canadians consumed only about 1.8 million barrels per day that year. So, how is it possible that 43 percent of their needs had to be imported? (The number was 65 percent for the provinces from Ontario eastward.) The answer is straightforward once you get a glimpse of the North American oil pipeline system. Notice that the one lone pipeline going from Montreal to Sarnia is flowing away from eastern Canada. (Click on the map to see a larger version.)

Source: National Energy Board (Canada)

Most of Canada's oil wealth is found in the western part of the country. And, nearly all of the pipelines run north/south, exporting much of that oil into the United States. When one asks why this is so, the answer given is that this is what has proven to be most economical. Western Canada exports its oil to the United States. Eastern Canada imports most of its oil from abroad. That works fine until there is a disruption in supply. This year, in particular, ought to give Canadians cause for worry given all the social unrest in the Middle East and the civil war in Libya which resulted in substantial output losses.

When Canada's oil riches are combined with its abundance of natural gas--it exports half its production to the United States--and its large deposits of uranium and coal, the country ought to be energy self-sufficient. So, why haven't Canadians pursued energy independence? One member of the Canadian parliament thought he had an answer all the way back in 1972. Don't worry too much if you can't follow his discussion of oil company takeovers at the time. His conclusion, however, is quite clear: The Canadian oil industry is largely foreign-owned and serves the needs of its corporate masters and not those of the Canadian people. Little has changed since then.

The current Canadian government seems nothing more than a subsidiary of the international oil industry which finds it more profitable to ship Canadian crude oil out of the country and add value to it through refining operations elsewhere. So complete is the control of the industry over the government that a witness before a parliamentary committee who broached the subject of Canadian energy independence was told to cease his testimony, and the hearing was immediately adjourned by the Conservative Party chairman who presided.

What might the advantages of building an east-west pipeline from the tar sands to eastern Canada be? Of course, there would be many Canadian jobs created by the building of the pipeline, and that would also benefit the government through increased tax revenues. Ports in the east might become oil export terminals instead of import terminals. Canada would likely build more domestic refinery capacity, both to supply its own needs and to export refined petroleum products. That would lead to yet more jobs for Canadians and yet more tax revenue for their provincial and federal governments. And, that would mean better financed public services for all Canadians.

Naturally, the large international oil companies that control most of the Canadian oil industry want to avoid the high taxes generally levied throughout Canada. Better to ship oil to the lightly taxed United States, refine it there, and sell it back to the Canadians or whoever offers the highest bid.

There is another way in which the international oil companies have thwarted Canadian energy independence. The North American Free Trade Agreement (NAFTA) prevents Canada from reserving more its oil production to itself in the event of an emergency. Canada is obliged to maintain the same ratio of exports to total production that prevails in any preceding 36-month period. No sudden cessation or reduction is allowed unless it is due to a decline in total production, something not in prospect anytime soon in Canada. (It's worth noting that Mexico, a major oil exporter to the United States and a signatory to NAFTA, refused to sign such an agreement.)

NAFTA also prohibits Canada from charging a lower price to domestic oil consumers than to those purchasing exports. It's common practice for countries that are self-sufficient in oil to give domestic oil consumers a discount from the world price, in essence, to control domestic prices. Back in March of this year when vaulting oil prices pushed up the cost of refined products such as gasoline, residents in some oil-rich countries hardly noticed. Kuwaitis were paying 81 cents per gallon for gasoline. Saudis paid 45 cents. And, Venezuelans were paying just 6 cents.

Since Canada imports so much of its oil, it has little choice but to accept the world price. (It could subsidize oil using funds from elsewhere in the economy, but that would be extremely costly.) Whether it is good policy to provide low-cost domestic fuel is questionable since such a policy tends to encourage profligate use. Some exporters that could easily afford low domestic oil prices choose just the opposite course. Norway, the world's eighth largest oil exporter, was charging $9.27 a gallon (including taxes) for gasoline in the same March survey mentioned above. The point remains, however; Canada currently has no choice. Its energy sovereignty has been severely restricted.

Of course, Canada could withdraw from NAFTA by giving six months' notice. This might prove painful as the United States would likely retaliate in several other areas of trade and reciprocal relations. In the alternative, the Canadian government could reopen the NAFTA agreement and alter the section on petroleum to allow it to route some or all of its increasing tar sands production eastward within Canada. But, don't look for this to happen anytime soon.

The impression I get is that most Canadians do not even know that their government has essentially given away their energy sovereignty to the United States through NAFTA. The onesidedness of the agreement was made plain by the U.S. rejection of Chinese National Offshore Oil Corporation's attempt to buy U.S.-based Unocal. There was overwhelming political opposition to this acquisition--even though Unocal had relatively small domestic operations--because the takeover represented an attack on American energy security. Any foreign power seeking access to American oil is probably facing an unwinnable fight. Canadians, however, are basically helpless in the face of American demands for Canadian oil. No wonder American politicians speak of Canada's resources as if they are located inside the United States.

Many who are protesting the Keystone XL pipeline--the formal name for a project to extend existing pipelines that would increase the export capacity of the tar sands to the United States--don't want it because they believe tar sands production produces significantly higher greenhouse gas emissions versus conventional oil production. Some also object to the wholesale destruction of forests, cleared to make way for tar sands mining operations which then cause air and water pollution.

To this list of concerns, Canadians should add a query about why their patrimony of oil resources is being shipped to strangers when so many Canadians remain dangerously exposed to disruptions in oil imports transported from faraway sheikdoms. There is no good reason why Canadians must bear such a risk. But there is one bad reason: Canadians have lost control of their energy resources, and those resources have long ceased to be managed for their benefit.

Which begs the question: Would Canadians want that control back if they understood their predicament correctly?


RELATED UPDATE October 21, 2012: Canadians could free themselves from oil imports, but will they?


Anonymous said...

Similar questions can be asked about WTI and Cushings in the USA.

See my blog entry on WTI for more details.

Stoneleigh said...

Canadians, particularly easterners, need to be far more aware of energy issues. We covered this back at The Oil Drum Canada when Gord Laxer first raised the issue, but awareness hasn't advanced at all since then. If anything there's even more complacency now.

Beth said...

Thanks for such a great explanation of the issue. Some of us Canadians are certainly aware of our predicament. Unfortunately, we are stuck right now with a far-right government who is working hard on behalf of big oil. Americans should note that Alberta has basically become the Texas of the North (I lived there for 3 years and left, in part, for political reasons). Questioning the tar sands is a considered heresy, and there is a lot of ignorance. I asked some Calgary friends for their opinion on the XL Pipeline recently and their response was "What Pipeline?". So, you see the problem we have.

Anonymous said...

Someone should tell Darryl Sutter...

Anonymous said...

Other pipelines are going east tho many oppose them as they will just lead to more oil sands exploitation
...Enbridge are currently trying to reverse Line 9 pipeline to take Western oil to Montreal
...TransCanada are proposing "Energy East" converting a gas pipeline to take oil to the Atlantic Coast
But you are right in saying most of this is for the Oil company benefits so they can more easily export oil, not to help Canadians

Kurt Cobb said...

Please see my October 2012 update linked above at the end of the piece which discusses some of what Anonymous relates.

greg85 said...

Guess you had not noticed that if the Canadians could not get the US to extend the Keystone XL Pipeline that the oil extracted from the Albertan tar sands was going to be sent west for export to the Far East(i.e., China). Fact remains that oil is a fungible commodity and its movement across oceans is sometimes more economically advantageous than East-West pipelines. Another aspect that is summarily ignored here is that there are so many requirements for botique fuel blends in each region, that refineries are pretty much stuck on a certain feedstock unless there is significant capital investment to change the refinery around. Since they are not building new refineries anymore (as demand for gasoline in North America continues to decline year to year) you are pretty much stuck with the system you have in terms of pipelines.

Kurt Cobb said...


Please see my link at the end of this piece for an update on the Canadian pipeline situation that was written quite a bit after this one. The western pipeline you refer to wasn't even being seriously considered when the above piece was written. It's useful to look at the date of the pieces you comment on.