There is much unrest in the Land. The New Democratic Party is being torn asunder by those who want to take the Leap (as in, the Leap Manifesto) and those who want to take cash from oil exports. The ruling Liberals are suffering cognitive dissonance from holding both the fervent belief that the future economic success of the country is tied to building pipelines, and acknowledging that many of their most committed supporters are adamantly opposed to such infrastructure.
In both parties, those for and against pipelines seem to implicitly accept the premise that huge amounts of cash will flow from those pipelines. But is this premise true?
How is it that the national debate is not about bitumen and the future markets for that commodity? Instead, people drone on about pipelines, an abstraction of the petroleum production. The mantra has become: "If we build them, money will come." But will it? Is the world market price for bitumen so attractive that success is assured if we can only get it to tide-water?
The answer is simple: No.
The poor business case for oil sands bitumen
The market price for bitumen would not make its extraction a viable business proposition, even if a geologic upheaval sent a great fissure into the earth and salt water flowed through the newly formed fiord to Fort McMurray.
The best price for good quality crude oil and deliverable on the Atlantic seaboard is called Brent Crude. Brent is currently trading up at $44 US per barrel. Western Canadian bitumen is not Brent-quality. It does not yield the diesel and gasoline that the market demands without considerably more refining costs than Brent. That is why it will always sell at a lower price than Brent, even when delivered to the Atlantic by pipeline or train.
Discount from that lower price the cost of shipping in the pipeline and you have a commodity that you are selling for less than $30 USD. This is much lower that the cost of production of the majority of the western oil sands. The newer projects in that deposit must get over $100 US per barrel on the market to be viable. In contrast, the Saudis and other OPEC nations in the Middle East can make money at $30 per barrel. Bitumen is not competitive in world markets - pipelines or no pipelines. And it never will be.
All this talk about getting our vast "oil" resources to market to assure the economic future of the country ignores the true elephant in the room that no Canadian political party - except the Greens - or media outlet seems to want to acknowledge. It is now widely understood and acknowledged globally that the greatest portion (60-to-80 per cent) of already identified petroleum reserves can never be burned.
Keeping oil in the ground no longer a debate
This is not mandated by a new vision of socialist nirvana, nor the conclusion of some band of wild-eyed environmental delusionists. It is simply the rational conclusion necessarily drawn from the physics of the Earth's atmosphere and accepted and endorsed by over 190 nations in a process of scientific study and diplomatic negotiation carried out over 28 years.
We have less than 35 years to wean ourselves completely off oil as a transportation fuel and basic energy source. This means that during the coming decades, there needs to be a steep decline in our oil consumption. Failure to do so will lead to catastrophe and the eventual collapse of civilization.
Canadians have to realize that in a world with plenty of light sweet crude oil, our bitumen is the unburnable oil referred to in global discussions. Our bitumen is the most expensive oil to produce and refine. It is the most costly to get to market from its landlocked location. It has the greatest greenhouse gas emissions to the atmosphere per barrel produced. It is the least attractive form of oil and no one will be buying it in a declining market. The pipelines, if they are built, will stand empty before the bonds sold to garner the capital can be paid off.
So who, then, would lend money to finance such a risky proposition as a bitumen pipeline? I fear the answer is a recurring Canadian tragedy. Already the Alberta taxpayers are on the hook for guaranteeing the first 100,000 barrels per day through the Energy East Pipeline if it proceeds. That guarantee will assure the banks they can advance the first tranche of debt.
But to finance the whole 1.1-million barrels-per-day scheme, a much bigger guarantee is needed. Perhaps that's why so much pressure is being applied to the Prime Minister to make this project a "success." The industry is after the federal government for yet another subsidy in the form a volume guarantee like Alberta's. Who cares if the bitumen stops flowing to non-existent markets in the future, as long as the taxpayer is on the hook to pay millions of dollars in compensation to the lenders for decades.
It increasingly looks like the approvals for one or more of these pipelines will be issued, despite concerns from First Nations, environmentalists and many Canadians. But a reasonable analysis shows there is no business case for the bitumen pipelines. If the private sector truly believes this business case exists, they should put up their own risk capital without any government subsidy or guarantee. Then we'll really find out if that's a leap they believe is worth taking.
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