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Department of Finance says market argument for Energy East pipeline is weak

TransCanada says the Energy East export pipeline would increase the number of tankers in the Bay of Fundy from 115 to 281 a year. The risk that poses to the Bay and the right whale population is now further outweighed by the market argument for the pipeline evaporating.

A Department of Finance internal memo says the market conditions for the Energy East pipeline have largely vanished.

It’s clear that the proposed 1.1 million barrel per day pipeline is an export pipeline and that its value was in the higher global prices paid for oil. Robert Johnston, chief executive officer and director of global energy and natural resources of Eurasia Group, a Washington-based research and consulting firm, says, “Energy East is about moving heavy barrels offshore — not to the U.S. but to Europe, to India, to more distant markets.”

But now CBC reports, “The market conditions that once made TransCanada’s proposed Energy East pipeline an attractive conduit for Alberta’s oilsands bitumen have now largely vanished, according to an internal finance department memo obtained by CBC News. A pipeline carrying crude to Canada’s East Coast from Alberta was meant to capitalize on the price differential between North American (West Texas Intermediate) and world (Brent) oil prices. But that price differential has shrunk significantly since 2012, with OPEC unleashing torrents of oil on the market, Chinese demand weakening and the end of the U.S. ban on oil exports.”

Bloomberg further explains, “The [Finance Department] document outlines scenarios for how much Alberta’s oil could fetch in 2020 if Energy East is built. The pipeline would transport western crude to refineries in the east and to the Atlantic coast for export, netting producers higher prices linked to the global benchmark, Brent. That compares to prices fetched for most of the Alberta oil that’s currently piped to the U.S. Midwest and priced off the main North American grade, West Texas Intermediate, or carried by rail across the continent.”

The Finance Department now forecasts a difference between a domestic West Texas Intermediate price of $77.54 per barrel and a global Brent price of $81.62 per barrel would be about $4.08 by 2020 (that’s when the pipeline is scheduled to be operational). Bloomberg notes, “Without the large premium for Brent over WTI, the main value of Energy East would come from cutting the cost of transportation to $8 a barrel by pipeline from $14 a barrel by train, the report showed. The combined benefit of higher prices and lower transport costs would range in 2020 from $1.48 to $6 a barrel. The report’s calculations were based on forecasts from the government regulator and commercial researchers.”

The CBC article also highlights, “The report also said ‘the low price environment has led to oil production forecasts being revised downward; meaning that sufficient capacity (from both rail and pipelines) is projected to exist to transport oil until at least 2025.'” The counter-argument to the price decline comes from Reynold Tetzlaff, national energy leader for Canada at PricewaterhouseCoopers LLP. He says, “The pipeline lasts 50, 60, 70 years, so over that term with the volatility you’re going to be able to capture a lot of the value.” In other words, given Energy East would be operational until 2070 or 2090, prices could rebound during that time.

But science has told us that no more than 7.5 billion barrels of oil can be extracted from the tar sands over the next 35 years to limit global warming to 2 degrees Celsius. The Energy East pipeline would move 1,100,000 barrels of oil a day. That means about 401,500,000 barrels per year. If the limit that can be drawn from the tar sands is 7,500,000,000 then that limit would be reached in about 19 years. That means Canada would hit its carbon budget within two decades with only the Energy East pipeline (no other pipelines, no other tar sands production). It would be even fewer years with a 1.5 degrees Celsius limit committed to in the Paris climate agreement.

Given this, we have argued that the pipeline is fundamentally incompatible with the imperative of limiting global warming.

None of this seems to deter New Brunswick premier Brian Gallant. The Globe and Mail reports, “Gallant remains squarely behind the controversial Energy East pipeline project, despite the virtual elimination of the price difference between North American oil and imported crude that provided the $15-billion project with one of its key selling points. …Mr. Gallant acknowledged the importance of moving to a lower-carbon economy but said it will take several decades to get there and, in the meantime, Canada needs to exploit the value of its natural resources to boost jobs and the economy.”

National Energy Board hearings on the Energy East pipeline begin this August. The NEB will then make its recommendation to the federal Cabinet in March 2018. Given decisions are typically made three months after an NEB recommendation, we could expect a decision by the Trudeau government on this in June 2018.

For more on our campaign to stop Energy East, please click here.