The new markets that are needed for oilsands products face complex regulatory regime

Oilsands Review — Moving Alberta oilsands crude oil to Asian and western U.S. markets via the Pacific is a crucial part of the future of the Canadian oil industry, says the head of the group representing the pipeline sector.

Brenda Kenny, president of the Canadian Energy Pipeline Association (CEPA), says it’s vital that oilsands crude finds markets beyond North America to develop the full potential of the sector.

“Moving Alberta crude to the Pacific is important, so that as a nation we get as many netbacks as possible in order to finance government services like health care and the [Alberta] Heritage Savings Trust Fund,” Kenny tells Oilsands Review.

She stresses that new markets, such as the Pacific Rim countries, are important to Canadian energy producers. The only existing route for this comes from Kinder Morgan Canada and its Trans Mountain system, which can move 300,000 barrels per day from Edmonton to the West Coast.

Enbridge has said it intends to file an application to the National Energy Board (NEB) for its proposed Northern Gateway crude oil pipeline from Edmonton to Kitimat, British Columbia, in early 2010. In the project, crude would be loaded onto large crude oil ocean-going ships for transport to Asian markets. It faces opposition from environmental groups and local First Nations.

Kenny says there is room for various proposals to move oilsands crude to new markets in the United States as well, including the refinery-rich U.S. Gulf Coast. Two of CEPA’s largest members, TransCanada Pipelines and Enbridge, are locked in a bitter exchange over TransCanada’s plans to expand its nearly complete 490,000 barrel per day Keystone line to the U.S. Gulf Coast—and Kenny isn’t taking sides.

Last October, the NEB held hearings into the planned expansion of the Keystone line, a 4,474-kilometre link that will soon move crude from Hardistry, Alberta, to Wood River/Patoka, Illinois. That line is being extended to Cushing, Oklahoma, and its capacity will be boosted to 590,000 barrels daily by the end of this year.

TransCanada’s proposed Keystone expansion would further grow the capacity of the line to 1.1 million barrels per day, including 500,000 barrels per day that would be delivered to the U.S. Gulf Coast.

For its part, Enbridge argues that there is no immediate need for additional export capacity because oilsands activity has slowed. It also says the existing Keystone line and Enbridge’s proposed Alberta Clipper line to the U.S. Gulf Coast will add one million barrels daily of pipeline export capacity, adequately meeting the demand from Canadian crude producers for many years.

The NEB is expected to make a decision on the TransCanada application later this year.

Without taking sides, Kenny says that new pipeline capacity is essential to move oilsands crude.

“It’s fundamental to crude oil supply in North America. We need to roughly double our pipeline assets in Canada over the next 15 years.”

She says that meanwhile, despite years of lobbying by the industry, there has been little real improvement in the way it is regulated by such bodies as the NEB and various other federal and provincial government departments.

Kenny worries that the needed capacity to move oilsands crude and natural gas to markets will not exist in time because of this regulatory red tape.

She cited the example of the arduous process surrounding the proposed Mackenzie Gas Project, a decades-old proposed pipeline to be built from the Northwest Territories to Alberta. The proponents, led by Imperial Oil, first formerly applied to the NEB for approval in January 2006.

Since that time the estimated cost of the pipeline has ballooned from about $12 billion to an estimated $16.2 and significant finds of shale gas in southern Canada and the United States have thrown into question whether the 1,220-kilometre line, which would ship about 1.9 billion cubic feet of gas per day, is now viable.

The recent NEB hearing process followed the marathon inquiry into a similar Mackenzie pipeline project that was first proposed in the early 1970s, which saw Judge Thomas Berger rule that the project was premature and would cause serious environmental harm to the fragile northern ecosystem, as well as social upheaval. It took four years for the Berger-led inquiry to produce its report.

The more recent regulatory review involved yet another thorough inquiry, this time by a Joint Review Panel appointed by the federal government in 2004.

On Dec. 30, 2009,  that panel released a report containing 176 recommendations, covering environmental and social-economic issues surrounding the proposed line. The panel concluded that the proposed project “would deliver valuable and lasting overall benefits…if built and operated with full implementation of the panel’s recommendations.”

While that long-awaited report removed some major roadblocks to the almost 40-year-old dream of natural gas (and likely future oil development) in the north, the NEB itself still needs to rule on the project. In early January, it announced it would begin hearings on the proposed pipeline on April 12, concluding through to April 25 if necessary. The hearings will be held in Yellowknife and Inuvik.

While recognizing the challenges of obtaining new pipeline approvals, Kenny praises Ottawa for its recent creation of the Major Projects Management Office (MPMO), which is designed to coordinate timely federal reviews and decision making for large-scale initiatives.

Despite the positive elements of the Joint Review Panel and MPMO approach, the CEPA head points out that the panel was given no timelines by the federal government when it was created.

Kenny calls the lack of a some kind of deadline for the Mackenzie Gas Project review process a “travesty,” adding that government officials appear to be oblivious to the costs involved for the companies proposing such large-capital projects.

She says regulatory bodies should determine what issues are “showstoppers” before reviewing large projects, with more time allotted to deal with those issues, while less vital concerns are dealt with quickly.

“The length of time [involved in the reviews] is disproportionate to the task at hand.”

CEPA wants to see a system adopted that isn’t as adversarial and bureaucratic, replaced instead by a collaborative and ongoing process.

At an international pipeline conference in 2008, Kenny said that North America was at a “critical juncture,” since it faces a “once-in-a-generation opportunity to build essential pipeline infrastructure in both Canada and the U.S.” But, she said, that will not occur without decisive action by government to assure there is timely decision making.

The need for such government action is even more crucial now than it was in 2008, she says, since some projects have been delayed because of the tortoise-like review process and by the recession.

“[Pipeline] companies have $43 billion in projects [on their books] over the next 15 years, $85 billion including the [proposed] Alaska Pipeline and the Mackenzie pipeline,” she says, adding that much of that investment is jeopardized by the lengthy government review and regulatory process.

“We have some significant energy and environmental issues, but companies need to make a profit,” which is something government policy-makers seem to forget when they allow the review and regulatory process to drag on.

CEPA believes that delaying decisions on major pipeline projects doesn’t make them safer or more environmentally sound, since pipelines are the safest way to transport oil and gas and the safety record of Canadian pipeline companies is virtually unblemished.

“CEPA member companies transport 98 per cent of the oil and gas used in this country and their safety and environmental record is second to none.”

On the provincial level, Kenny says regulations aren’t as time-consuming as federal policies and reviews, especially in Alberta, Saskatchewan, and British Columbia, where most resource development occurs in Canada.

However, she notes that there is a lack of coordination between the provinces and Ottawa.

“We fight way too much between governments, rather than taking a sensible approach.”

In particular, Kenny has praise for the Alberta government for developing its Land-use Framework (LUF), which is establishing a planning approach for the entire province. By creating regional land-use advisory councils for each of six regions and essentially establishing the clear rules beforehand regarding impacts on air, land, water, and biodiversity, industry isn’t faced with unknown factors when it develops projects.

With the trend in the oilsands industry towards the development of smaller-sized projects, the LUF helps industry move ahead with responsible development.

Kenny says one promising initiative that may help governments develop a more productive approach to the energy industry is the Energy Framework Initiative (EFI), which was created by industry associations including CEPA, the Canadian Association of Petroleum Producers, the Canadian Petroleum Products Institute, and the Canadian Gas Association.

The EFI outlines the key elements of an integrated energy policy framework for Canada and is designed to be grounded in principles of sustainable development. The goal of the EFI, through a series of policy papers and conferences, is to stimulate dialogue that will help lead to a sustainable energy future for Canadians.

CEPA, which has 15 members representing Canada’s largest pipeline companies and others involved in the industry, plans to raise its profile in the next few years, but doesn’t want to be viewed as a “corporate lobbying group,” says Kenny.

“I’d like us to be looked upon as good policy people.”