$43 Billion West Coast Pipeline: Why Canada’s Oil Plans Might Hit a Wall of Reality

Here in the Pacific Northwest, we tend to watch our neighbors to the north with a mix of fascination and mild concern. Right now, the concern is turning into a full-blown stare as Ottawa prepares to make a massive decision that could reshape the economic landscape of Western Canada. The federal government is set to decide next week on whether to designate a new pipeline from Alberta to the West Coast as a project of national importance. This moves the proposal from a dream to a fast track through the regulatory approval process. The timing is not lost on anyone. It coincides with a major push by the government to diversify exports away from the United States and simultaneously soothe tensions with Alberta, which is holding a separation referendum on Oct 19. If the pipeline gets the designation, oil producers would have to consider major new investments to boost production to fill the proposed 1,250-kilometre conduit. To do that, they would need to rely on promised new financial and regulatory frameworks from Ottawa and Alberta to enable substantial development. They would also have to get moving on a massive carbon-capture project, which Ottawa has tied firmly to the pipeline’s future. Backers say a new, one-million-barrel-a-day West Coast line would boost Alberta’s ability to get its crude to higher-priced world markets and funnel billions more dollars in royalties into provincial and federal coffers.

Reducing Canada’s reliance on the U.S. market is an attractive prospect given the countries’ fractious trade relationship. Currently, more than 85 per cent of the country’s oil goes to the United States. But the plan is contentious. Critics cite potential effects on marine life off the coast and the fauna and flora along the route. The risk of an oil spill is always a central talking point in these discussions, as is the broader climate impact. Yet there are economic risks for taxpayers that cannot be ignored. The pipeline would cost anywhere from $35-billion to $43-billion, according to the province. Ninety per cent of it would be owned by federally owned Trans Mountain Corp., which would also handle the project’s construction. The remaining 10-per-cent interest would be held by the Alberta Petroleum Marketing Commission, a provincial Crown corporation. Pembina Corp would even contribute to the design. With billions of dollars at stake and an Alberta referendum on the horizon, Ottawa’s decision whether to designate the pipeline a project of national importance on Oct 1 is significant. It is a high-stakes gamble on whether the industry will actually fill the pipe.

Taxpayers and trade seem to be the sticking point for many analysts. Ian Sanderson, a senior analyst with the Pembina Institute, an environmental think tank, says the main challenge facing Alberta producers is not a dearth of export capacity. Instead, it is uncertainty around future demand, prices and the economics of long-term oil infrastructure. With the private sector largely unwilling to participate in the project, the fiscal risk should not be shifted to taxpayers, Mr. Sanderson said in an interview. Instead, public dollars should go to other sectors to diversify the economy; a pipeline would only add trading partners and increase Canada’s exposure to a pretty volatile sector, he said. But not everyone sees it that way. Randy Ollenberger, an oil and gas analyst with Bank of Montreal, argues that a new pipeline is a crucial strategic investment needed to access growing markets in Asia and reduce Canada’s exposure to rising Venezuelan production. We can debate how quickly Venezuelan production is going to grow and what level of investment is required, but I would argue that the genie is out of the bottle, Mr. Ollenberger said. Oil shipments from the South American country to the United States have quadrupled in the last year and could be considerably higher five years from now. At that point, we may be facing some pretty significant competition from Venezuela. Canada should hedge its bets and pursue economies that are still seeing growing demand for oil, he said.