It is shown that there is no need to export a single barrel of raw bitumen to Asia and the U.S. Gulf Coast to allow unrestricted forecast increases in production from the oil sands.

Keystone XL Pipeline

Trans Canada Corporation’s proposed $8-billion, 1,660-mile Keystone XL pipeline is designed to transport raw bitumen from Alberta’s oil sands to Gulf Coast refineries in Port Arthur,Texas, a Foreign Trade Zone, where more than 40 percent of U.S. refining capacity is situated

The refineries to receive up to 660,000 bbls/day of raw bitumen diluted with condensate via this pipeline are capable of producing refined products such as diesel and jet fuel from heavy, sour crude such as raw bitumen. Any product made in that Zone is exempt from U.S. customs duties and Federal and State taxes as long as it’s exported – and almost all of it will be. According to a spokesman for Valero, which has a 310,000 bbl refinery in Port Arthur, “As for exporting refined products, that is an increasingly important part of Valero’s business…”.

Ernst & Young’s July 2012 Quarterly Report on Oil and Gas shows gasoline demand has continued to decline in theU.S. in contrast withLatin America’s strong demand growth. In the U.S. Midwest, rising new supplies of tight oil and oil sands bitumen continue to put pressure on crude oil prices.

President Obama recently announced his support to get the $2.3-billion, 480-mile southern leg of the Keystone XL pipeline from Oklahoma to the Gulf Coast port refineries approved and built by 2013. The environmentally-challenged 1,180-mile northern leg from Canada to Oklahoma may, or may not, receive approval after the U.S. election this fall. Trans Canada’s announcements on April 17 and July 27 to reroute parts of the northern leg around some of the Sandhills and Ogallala Aquifer areas in Nebraska increase, but do not guarantee, its chances for U.S. approval.

Keystone XL is designed for very high operating pressures – up to 1600 psi downstream of some elevated pump stations. It is planned to be operational by 2015.

Proposed Keystone XL Pipeline Northern and Southern Legs (single short-dashed red); Source, TransCanada Corporation.

Keystone XL Competition

Potential competition from rival pipelines proposed by Enbridge and by Energy Transfer Partners, coupled with rising domestic oil production, particularly in the U.S. Midwest according to a recent Bentek Energy report, lack of certainty regarding federal approval, and environmental and engineering concerns regarding the pipelining of raw bitumen diluted with condensate poses a worrisome risk to TransCanada shareholders for its Keystone XL proposal.

Recently developed new technology for multiple hydraulic fracturing of horizontal wells that has been applied with so much success to tight gas is now being applied just as successfully to tight oil to increase supplies of domestic crude in the U.S. Midwest.

For example, Barry Smitherman, chairman of the Texas Railroad Commission, said that according to some experts, the Eagle Ford Shale in South Texas might hold more crude oil than any find in U.S. history. This creates market risk for the proposed Keystone XL pipeline.

TransCanada Corporation’s rival Enbridge Inc. has recently proposed investing $8.8 billion in itsU.S.pipeline system to export up to one million bbls/day of Canadian crude to the same refineries targeted by TransCanada’s Keystone XL pipeline proposal.

Unlike Trans Canada’s Keystone XL pipeline proposal, Enbridge’s proposed pipeline expansion crosses no international borders and therefore does not require U.S. federal approval.

Comparison of Enbridge and Keystone Proposed U.S. Pipeline System Expansions: Source, LA Times.

Energy Transfer Partners recently petitioned the U.S. Federal Energy Regulatory Commission to allow it to convert its giant Trunkline Gas Company natural gas line, which now flows south to north, to ship crude oil from north to south. It would drain the upper Midwest and Canada of excess crude oil and ship it to the same Gulf Coast refineries.

 Energy Transfer Partners Proposed Conversion of Natural Gas Pipeline System to Crude Oil; Source, ETP.

Northern Gateway Pipeline

Enbridge’s proposed $5.5 billion, 750-mile Northern Gateway pipeline would transport raw bitumen diluted with condensate from near Edmonton, Alberta to a new marine terminal in Kitimat, B.C. at the head of Douglas Channel for export to Asian refineries.

The main line is 36-inches in diameter and would carry an average of 525,000 bbls/day of raw bitumen diluted with condensate. A twin pipeline of 20-inches diameter would transport an average of 193,000 bbls/day of condensate, shipped back to Kitimat by tanker, from Kitimat back to Edmonton.

Recently, Enbridge announced an additional $500 million to upgrade this pipeline’s specifications and operations to improve safety bringing its total cost to $6 billion. Construction is proposed to start in 2014 with start-up in 2017.

Proposed Enbridge Northern Gateway Pipeline; Source, PacificWild.Org.

TransMountain Pipeline Expansion

Kinder-Morgan recently proposed a $4.3-billion expansion of its 715-mile Trans Mountain Pipeline to 750,000 bbls/day by twinning it. This pipeline currently transports 300,000 bbls/d of light and heavy crude oil, as well as refined products like gasoline and diesel, and diluted raw bitumen, in batches to Burnaby and the U.S., via Kamloops and Sumas B.C., from near Edmonton,Alberta.

This 60 year-old pipeline consists of 24-, 30-, and 36-inch diameter pipe. It has a branch pipeline which heads south across the U.S. border near Abbotsford, B.C. to Tesoro, BP, Phillips 66, Shell and US Oil & Refining refineries in Washington state at Anacortes, Cherry Point and Ferndale that rely on crude from the Trans Mountain pipeline. Another branch pipeline transports jet fuel from Burnaby to Vancouver International Airport.

The proposed 450,000 bbls/day expansion would ship raw bitumen, diluted with condensate, from Alberta’s oil sands to Kinder-Morgan’s Westridge Marine Terminal in Burnaby for export to Asian refineries. This would require a large oil tanker to manoeuvre every day into Burrard Inlet, past Stanley Park, underneath the Lions Gate Bridge, through Vancouver’s busy inner harbour and underneath the Trans Canada Highway and CN Railway (Second Narrows) bridges to the Westridge Terminal and back again. The CN Railway Bridge has the highest navigational hazard rating designated by the Canadian Coast Guard. Currently, only one small crude tanker makes that trip about every four days loading an average of only about 80,0000 bbls/day.

Proposed TransMountain Pipeline Expansion (blue); Source, Kinder-Morgan.

 Construction to twin the pipeline is proposed to begin 2015/16 with start-up in 2017.

Environmental Concerns

Only the proposed new Northern Gateway pipeline incorporates a twinned pipeline to export raw bitumen diluted with condensate, often termed “dilbit”, to the coast and one to import recovered condensate and pipeline it back to the oil sands. Neither the Keystone XL proposal or the Trans Mountain expansion proposals have provision for returning condensate. Instead, Enbridge and Kinder-Morgan have applied to reverse the Cochingas liquids pipeline to Sarniato ship 100,000 bbls/day of condensate to augment supplies in Alberta.

According to recent data from Kinder-Morgan, its Trans Mountain pipeline expansion proposal will use the existing line to ship refined products, syncrude, and light crude oils to the coast and the proposed new twinned line to ship raw bitumen diluted with condensate – also to the coast.

Both the Northern Gateway and TransMountain proposals require massive increases in oil tanker traffic increasing risk of a marine oil spill five- to ten-fold. Since both pipeline proposals are for twinned pipelines, the risk of a spill on land is doubled.

The raw bitumen diluted with condensate that would be shipped in the proposed Keystone XL, Northern Gateway, and Trans Mountain pipelines is unlike conventional crude oil. The tar-like raw bitumen must be diluted with large volumes of natural gas condensate, up to 30% by volume, and possibly heated as well, or at least kept hot, to make it pumpable. The condensate diluent is essentially a volatile natural gasoline which contains a significant amount of carcinogenic benzene and other toxic compounds.

Upon accidental release, the volatile, light condensate diluent immediately begins to flash off leaving behind an increasingly heavy bitumen/diluent mix – a process known as “weathering” that is accelerated by wave action and warmth. The remaining residue is the original raw bitumen that is denser than fresh water with parts of it being denser than sea water.

Dilbit is also significantly more corrosive to pipeline systems than conventional crude or upgraded bitumen. The U.S. Pipeline Safety and Hazardous Materials Administration is currently studying whether dilbit requires special regulation with results due by July 2013. Existing pipeline safety standards are not written with this kind of fluid in mind especially if it is heated. If spilled into the environment, this fluid will cause significant health and fire hazards and will cause major cleanup problems as raw bitumen is denser than fresh water and sticks tenaciously to everything it contacts.

These factors make the pipelining and marine shipping of dilbit and the pipelining of condensate back at least an order of magnitude more hazardous than pipelining and marine shipping conventional crude or upgraded bitumen.

Enbridge proposes that some of the oil tankers required by their Northern Gateway pipeline proposal will be crude tankers of two million bbls capacity – the largest of their type. Manoeuvring these lumbering behemoths in the pristine waters around Haida Gwaii, across shipping and ferry/liner lanes, and then a total of 120 miles through the island-strewn entrance guarding Douglas Channel and up that shallow, winding, rocky fiord to Kitimat, sometimes in the dark, and in the fog, storms, and wind so typical of weather on Canada’s west coast waters is just asking for trouble. The ingenuity of human stupidity, error, and conceit eventually always trumps any and all safety systems (see: Exxon-Valdez shipwreck and oil spill; Challenger Space Shuttle disaster, BP Gulf blow-out; Costa Concordia shipwreck; Enbridge Kalamazoo dilbit spill; etc.).

Great Circle Tanker Route to/from Asia and B.C. through the Aleutian Islands; Source, Nuka Research Group.

 TheGreat Circle Tanker Routemap shows another potentially hazardous area through theAleutian Islandsfor the hundreds of tankers every year that would transport dilbit from Kitimat toAsiaand condensate on the return trip.

First Nations peoples are united in opposition to both the Northern Gateway and Trans Mountain proposals to construct pipelines through their lands because of unsettled land claims, because of the very large quantity of raw bitumen and hazardous condensate that could be released from a leak in those high-volume, high-pressure pipelines into congested residential, recreational and farmed valleys, and because of the risks massive oil tanker traffic poses to marine life in western coastal waters.

Environmentalists are also united in opposition to both those pipelines through B.C. because of the risks associated with massive marine oil tanker traffic in B.C.’s coastal waters and inland waterways and because of the risks associated with pipeline ruptures into inland watersheds.

Vancouver’s mayor has been particularly vocal expressing opposition to expansion of the Trans Mountain pipeline in order to protect Vancouver’s beautiful marine environs.

In September, 2012 a survey by polling firm Strategic Communications for the Living Oceans Society shows 60% and 50% of B.C. residents surveyed, respectively, oppose the Northern Gateway and TransMountain pipeline proposals.

Economics

The Keystone XL, Northern Gateway and Trans Mountain pipelines are proposed to export a total of 1.7 million bbls/d of crude oil. All three proposed pipelines fail to capture the price differential between raw bitumen and upgraded bitumen, between upgraded bitumen and West Texas Intermediate, between WTI and Brent-priced crude and between Brent-priced crude and refined products.

The total differential between raw bitumen and refined products approaches $150/bbl. Canada’s economy will therefore forego $55 billion/year for each one million bbls/day of raw bitumen exported, but not refined here, by the proposed Keystone XL, Trans Mountain, and Northern Gateway pipelines.

These proposals to pipeline raw bitumen also fail to capture upgrading jobs, refining jobs, jobs at spin-off petrochemical plants and all the associated engineering, support and service jobs required to build, operate and support upgraders, refineries, and petro-chemical plants as well as associated municipal, provincial and federal taxes.

In addition, any twin pipeline system exporting raw bitumen diluted with condensate and importing the condensate back suffers from significantly higher capital, operating, maintenance, insurance and spill clean-up costs than a single pipeline carrying only conventional crude or upgraded bitumen. Furthermore, condensate is priced at a premium to WTI due to demand/supply issues. These factors result in several dollars per bbl higher cost to producers to pipeline condensate-diluted raw bitumen compared to pipelining upgraded bitumen or conventional crude.

There is no lack of domestic capital to invest in oil sands leases, extraction, upgrading and pipelines. For example, Canadian pension plans have total assets of about $625 billion and Canada’s five major banks each routinely post quarterly profits of one to two billion dollars – never mind the value of the assets used to generate such profits.

Bitumen Upgrading

Currently, almost all surface strip-mined raw bitumen in Alberta is upgraded to synthetic crude oil (also termed SCO or syncrude) which is pipeline-quality. However, most bitumen recovered in-situ, i.e., using drilled horizontal well bores and steam injection, is diluted with condensate to make it pumpable. In-situ bitumen recovery is far less disruptive of the surface compared to surface strip-mined bitumen and is forecast to provide an increasing percentage of production from the oil sands as shown by the somewhat dated chart below.

Alberta Supply of Crude Oil and Equivalent; Source, ERCB ST98-2011: Alberta’s Energy Reserves 2010 and Supply / Demand Outlook.

Unfortunately, this requires pipelining and marine shipping increasingly large volumes of toxic, hazardous, and expensive diluents amounting up to 30% of pipelined raw bitumen volumes. While 58 per cent of all crude bitumen produced in Alberta was upgraded in the province in 2010, by 2020 it is expected that only 47 per cent of all crude bitumen produced in Alberta will be upgraded.

By not upgrading all its raw bitumen production,Alberta is effectively exporting undesirable environmental risk to other jurisdictions by pipeline. As all too apparent at the Council of the Federation meeting of provincial Premiers in July, and by the withholding of Presidential approval of the proposed Keystone XL pipeline, this does not go down well in affected jurisdictions such as British Columbia,Vancouver, First Nations,Nebraska, and east Texas, and undermines the “social contract” to produce the oil sands.

It is necessary only to upgrade raw bitumen enough to make it pumpable to eliminate the environmental hazards, objections, and costs of pipelining dilbit and condensate all over the continent and across the seas.

This can be done by upgrading only enough raw bitumen as necessary to produce a pipeline-quality crude mix. A prime example of such a process is UOP’s Catalytic Crude Upgrading process which utilizes fluidized catalytic cracking to upgrade raw bitumen to pipeline specifications. A stand-alone, self-fueled process of 98% efficiency – compared to the 85% efficiency achieved by current coking upgraders, it produces no waste by-products such as coke as do current upgraders.

Just as all natural gas producers must pay to build and operate plants to remove liquids and impurities from raw natural gas, so too producers of dilbit must pay to build and operate plants to remove condensate diluent and impurities such as fines and sulphur from dilbit. The dilbit “straddle-plant” also produces just enough upgraded bitumen to mix with the remaining cleaned raw bitumen to produce a pipeline-quality crude mix. Mixing conventional crude into the upgraded bitumen downstream further improves crude pumpability.

One or more central dilbit “straddle-plants” near Fort McMurray and/or Edmonton could process multiple streams of condensate-diluted raw bitumen with economies of scale and re-cycle recovered diluent back to the producers.

Upgrading costs are recovered by the higher efficiency of a UOP-type upgrading process, the smaller volumes requiring upgrading, less demanding specifications for pipeline-quality crude compared to syncrude, re-cycling diluent close to the source, economies of scale, and the higher price obtained for upgraded bitumen.

An Oil Pipeline to the West Coast

Chevron operates a small refinery located adjacent to Kinder-Morgan’s Westridge Marine terminal for the Trans Mountain Pipeline in Burnaby. About 50,000 bbls/d of gasoline, diesel, jet fuel, asphalt, heating fuel, heavy fuel oil, butanes and propane are produced every day at Chevron’s refinery from conventional crude and upgraded bitumen shipped to it using Trans Mountain’s existing pipeline. This represents only about 30% of the market for these refined products in the B.C. lower mainland.  The rest of the market demand is met by imports from U.S. refineries or by pipeline from Alberta refineries.

There may be a saving grace for Kinder-Morgan’s proposed TransMountain pipeline expansion if it were to transport only conventional crude and upgraded pipeline-quality bitumen to an expanded Chevron Burnaby refinery. Then, refined products could be transported with a new pipeline from the Burnaby refinery to the Tsawwassen Deltaport on the Strait of Georgia. From there, oil tanker access to the wide-open Strait of Juan de Fucais available after navigation between the Gulf Islands and theSan Juan Islands. This removes all oil tanker traffic from Burrard Inlet and Vancouver’s inner harbour and allows safer and much more environmentally acceptable shipping of high-value refined products, convention al crude and upgraded bitumen to the U.S.west coast and Asia.

Even better, there may be an opportunity to negotiate moving the refinery, marine terminal and tank farm from Burnaby to a suitable location on the west sea coast near the Deltaport in Tsawwassen as shown on the map below. Refineries, marine terminals and tank farms are essentially modular and can be physically moved and set-up elsewhere though it would not be inexpensive.  Kinder-Morgan’s proposed Trans Mountain pipeline expansion will require significant expenditures for extensive physical modifications and expansions to all their existing facilities anyway. For example, their Burnaby Mountaintank farm, consisting of 13 tanks having a storage capacity of 1.6 million bbls, will need to be, at least, doubled in capacity.

Possible Relocation of Chevron Burnaby Refinery and Westridge Marine Terminal and Re-routing of Kinder-Morgan TransMountain Pipeline (yellow)  to Tsawwassen (magenta). Source, Mike Priaro;  Base map source, Burnaby-Douglas MP Kennedy Stewart.

Reversal of Enbridge’s Line 9 through Ontario

Enbridge’s half-century old, existing oil pipeline system through the U.S., which could deliver a mix of conventional crude, upgraded bitumen, and dilbit to southern Ontario, but not the East Coast, is oil spill-prone and not the answer. A spill of dilbit from Enbridge’s pipeline in Michiganin 2010 has resulted in more than $800 million in damages so far with parts of the Kalamazoo Riverstill closed today because of raw bitumen sitting on the bottom.

Enbridge’s Line 9 through Ontariofrom Montreal to Sarniais 30-inches diameter and has a current capacity of only 240,000 bbls/day. If reversed, most of its current capacity would be taken up by Imperial’s Nanticoke refinery on Lake Erie in southern Ontario.

On July 27 the National Energy Board approved Enbridge’s plan to reverse the flow of part of Line 9 between Sarnia, Ont., and Westover, Ont., near Hamilton. As a result, some dilbit, and even some imports of light Bakken crude from theU.S., could be pumped into Ontario.

A better plan is to feed only Canadian conventional crude and upgraded bitumen, not imported Brent-priced crude, into Line 9 at Montreal and increase Line 9’s capacity to supply Ontario with enough crude to meet all Ontario’s needs and to provide the opportunity to export any excess to the U.S. Midwest through Sarnia, Ontario.

Proposed Reversals by Enbridge of Line 9 Through Ontario; Source, Enbridge.

Reversal of Portland, Maine to Montreal, Quebec Pipeline

Imported Brent-priced crude oil flows in Montreal Pipeline Ltd.’s 236-mile pipeline system fromSouth Portland,Maine to Montreal,Quebec refineries.  This pipeline system has transported over four billion barrels of foreign crude to Montreal refineries since 1941, largely contributing to Portland’s status as the Eastern Seaboard’s second largest oil port according to the City of Portland.

Currently consisting of one 18-inch diameter line of 192,000 bbls/d capacity and one 24-inch diameter line of 410,000 bbls/d capacity, total pipeline system capacity is 602,000 bbls/d. Pier capacity at Portland can currently accommodate crude carriers of up to 1.1 million bbls capacity.

If it were to be reversed, 600,000 bbls/day of conventional crude and upgraded bitumen (not dilbit) from Alberta, or refined products from Montreal, or both, could be shipped to American markets in the heart of the U.S. Eastern Seaboard,Europe, and Asiavia Portland,Maine. Suncor Energy and Imperial Oil (largely owned by Exxon-Mobil), both major oil sands producers, are co-owners of Montreal Pipeline Ltd.

Existing Portland, Maine to Montreal, Quebec Crude Oil Pipeline (red); Source, Wikipedia.

Politics of a “Canada-First” Canadian Energy Strategy

By far the best solution for all Canadians to the problem of providing sufficient and diverse markets for oil sands production is to build an oil pipeline to ship upgraded, pipeline-quality bitumen and conventional crude to eastern Canada.

Premier Redford of Alberta has repeatedly requested discussion of a Canadian energy strategy with the Prime Minister and her fellow premiers. Two meetings have been held to-date with her fellow premiers but with little yet by way of specific results except for objections and demands by Premier Clark of B.C. in regard to the proposed Northern Gateway pipeline.

Unlike the divisive and destructive National Energy Program of the 1980’s, any Canadian energy strategy can only be an amicable, win-win accord between provinces and with the federal government for the benefit of all Canadians. It is now time for all Albertans to let go and to move on, if not to forgive and to forget the injuries and insults of the National Energy Program.

There are many who have expressed support for an oil pipeline to eastern Canada including: TD Bank deputy Chairman and former New Brunswick Premier and Ambassador to the U.S. Frank McKenna; Danielle Smith of the Wildrose Party; Independent Director of Trans Canada Corporation Derek Burney; Conservative MP for New Brunswick Southwest John Williamson; former and current Bank of Canada Governors David Dodge and Mark Carney, and representatives ofIrving Oil Company in New Brunswick.

There have been a number of heartening political and other developments recently;

1. The Canadian Council of Chief Executives July 2012 report supporting a pipeline to take western crude to easternCanada.
2. The Senate Standing Committee on Energy, Environment and Natural Resources July  2012 report calling an oil pipeline to easternCanadaa “no-brainer”.
3. A softening of statements recently by NDP leader Mulcair on the oil sands and stated support for an oil pipeline to easternCanada.
4. Recent editorials in both the Globe and Mail and the Toronto Star supporting a Canadian energy strategy and calling for national political leadership.
5. Federal Minister of Natural Resources Joe Oliver said, on Sept. 10 in Charlottetown at the Energy Ministers Conference, that he would like to see an oil pipeline from Alberta to eastern Canada.

With the exception of Premier Redford there has been an almost total lack of visionary, charismatic, positive national political leadership for a Canadian energy strategy – let alone one that puts “Canada-First”.

There is little doubt most Canadians support a comprehensive energy strategy. In September, 2012 Nanos Research asked a group of 1,000 Americans and 1,000 Canadians, “Thinking about the future direction of energy policy, do you think the best course of action is to develop a continental energy strategy which ensures the supply of energy for the U.S. and Canada or a strategy which focuses on exporting energy?” Sixty-three per cent of Canadians favoured a continental energy strategy, as did 73 per cent of Americans while only 16.9 per cent of Canadians and only 8.7 per cent of Americans favoured an energy export strategy.

Unfortunately, Premier Redford’s active solicitation of foreign investment, particularly in China, works against any “Canadian” energy strategy. Already, more than two-thirds of all oil sands production in Canada is owned by foreign entities according to a recent analysis. Countries such as China use state-owned enterprises to pursue national energy interests in Canada while others, such as the U.S, use companies with strong informal ties to the state, such as Exxon-Mobil, to do the same.

The Canadian Security Intelligence Service has expressed concern about risks to national security as a result of takeovers of Canadian companies by Chinese companies.

In theU.S., approval of the proposed Keystone XL pipeline has become a significant election issue.

An Oil Pipeline to the East Coast

On June 27, TransCanada Corporation CEO Russ Girling announced that “…the company believes that converting one of its under-used gas lines (to send oil to eastern Canada) is technically and economically feasible.” In a more recent private communication Trans Canada stated “We are working hard at options to move oil east. Stay tuned.”

Most recently, in October, Alex Pourbaix of Trans Canada announced that formal plans would not be forthcoming for several months.

TransCanada Natural Gas Mainline to Eastern Canada (blue); Source, TransCanada Corporation.

A 3,300-mile long crude oil pipeline system from Alberta to Nova Scotia, via Ontario and Quebec, is a big project. The justification is the third-largest proven oil reserve on earth (some have questioned Venezuela’s reserve calculation methodology awarding itself the second-largest proven oil reserves). But a comparable pipeline building challenge, Trans Canada’s natural gas pipeline to eastern Canada, was successfully met 55 years ago and has shipped gas ever since.

Using preliminary engineering rules-of-thumb, a brand-new 2550-mile oil pipeline system of two million bbls/day capacity to Montrealin eastern Canada, using large diameter pipe in the existing right-of-way, could be completed for $12 billion. Cost savings and minimal environmental damage result by using the existing natural gas pipeline right-of-way and by placing oil pumping stations on existing natural gas compressor sites wherever possible.

If it is possible to re-purpose unused gas pipe in the existing right-of-way the cost could be much less than $6 billion. However, considering potential damages from leaks and oil spills, laying at least some new pipe may be a wise strategy.

A new 40-in, 750-mile pipeline of one million bbls/day capacity fromMontrealto deep-water East Coast ports and refineries, with a right-of-way paralleling the TransCanada Highway, could be built for $4 billion.

Assuming an average pipeline toll of $8/bbl and an average throughput of 1.5 million bbls/day over a 50-year life, total pipeline revenue of $220 billion is ten to twenty times the capital and operating costs for the pipeline. This is a terrific project business return by any measure – though pipeline tolls and return on capital must be approved by shippers and regulators.

But the real value of this pipeline is economic. Based on a value of $200/bbl for refined products, two million bbls/day of Canadian bitumen extracted, upgraded, pipelined to eastern Canada and there refined, and consumed or exported, will contribute more than $150 billion/year to Canada’s economy and balance of payments. And those economic benefits do not include spin-off benefits to local economies and governments associated with upgrading, pipelining, refining, petro-chemicals and port activities.

It is likely fuel prices in Alberta will increase once bottlenecks to world crude markets are removed with sufficient pipeline capacity. Therefore, it is important that a “Canada-First” Canadian Energy Strategy finds a way, acceptable to Albertans, to keep domestic fuel prices a notch below world levels for all Canadians.

Atlantic Canada Deep-water Ports and Refineries

Atlantic Canada has access to six, safe, deep-water ports with existing marine oil tanker terminals atLevis, Que.,Saint John, N.B., Halifax/Dartmouth, N.S.,Canso,N.S., Come-by-Chance, N.L., and Portland,Maine.

The exceptional main harbour of the Strait of Canso Superport, one of the best deep-water, ice-free ports on the east coast of North America, can accommodate tankers even larger than Very Large Crude Carriers of two million bbls capacity. The Superport Strait is 12 miles long, up to one mile wide, with a limiting depth of about 90 feet.

 Atlantic Canada Deep-water Ports and Refineries; Source, Mike Priaro.

Three of them,Levis,Saint John, and Dartmouth, have refineries that can handle 600,000 bbls/d of Canadian conventional crude and upgraded bitumen. Irving Oil, owner of the low-emission Saint John refinery, was the first oil company ever to receive the United States Environmental Protection Agency Clean Air Excellence Award. Irving has had a plan to double its refining capacity inS aint John to 600,000 bbls/d for at least six years. Montreal refineries would need some upgrading at their front-end to handle a heavier, possibly sour, feed stock. Previously proposed expansions could bring the totals to 900,000 bbls/d on the mainland and to 1,300,000 bbls/d if Come-by-Chance is included as shown in the chart below.

Source: National Energy Board

Marketing of Forecast Production of Oil Sands Bitumen

The 2012 Canadian Association of Petroleum Producers’ Canadian Crude Oil Forecast and Market Outlook indicates Canadian crude oil production will rise from 3.0 million bbls/d in 2011 to 5.6 million bbls/d in 2025 – all of it due to new oil sands bitumen production as shown in the table below.

Source: Canadian Association of Petroleum Producers 2012 Canadian Crude Oil Forecast and Market Outlook.

Eastern Canada imports and consumes about 800,000 bbls/day of expensive Brent-priced crude. Another 1.2 million bbls/day of refined products or upgraded bitumen could easily find markets in the eastern United States,Europe and Asia from East Coast deep-water ports and refineries in Montreal,Levis,Dartmouth,Saint John, and possibly Come-By-Chance, as well as Portland, Me.

Refineries in Eastern Canada, and port refineries and marine terminals on the East and West Coasts could handle all of CAPP’s forecast increase in bitumen production from the oil sands between now and 2025, and beyond, as shown in the table below:

Source, Mike Priaro

It is to be noted that the cost to ship oil from the East Coast to Europe using a Suezmax-class tanker would only be a little more than $2/bbl, and probably much less than $1/bbl from Canso to the Come-by-Chance refinery.  Similar figures apply to ship oil from Atlantic Canada to refineries on the U.S. Eastern Seaboard, the Gulf of Mexico and Latin/South America.

Montreal Area Major Pipeline Hub

Alberta can produce, and Trans Canada could deliver, at least two million bbls/day of conventional crude and upgraded oil sands bitumen by 2025 to a pipeline “hub” near Montreal as shown on the map below.

Montreal Area Oil Pipeline Hub; Source, Mike Priaro; Base map source, Nat. Geo.

From such a hub, 800,000 bbls/d of crude could be pipelined to Ontario, Quebec and Atlantic Canada refineries to displace all foreign crude imports. Another 600,000 bbls/d or more could be transported with a new pipeline to refineries and marine terminals in Saint John,Dartmouth and Canso for export as crude or refined products. A further 600,000 bbls/d of crude or refined products could be exported using a reversed Portland, Maine to Montreal pipeline and even more volumes could be exported to the U.S. Midwest using an expanded Line 9 from Montreal to Sarnia.

All those pipelines radiating from a major pipeline hub nearMontreal, in addition to providing centralized control and flexibility, could also provide the nexus for an expanded petro-chemical industry inQuebec.

Most importantly, a Montreal area oil pipeline hub could also provide an opportunity to set market prices for oil sands production by creating an eastern North America reference price for oil sands crude as well as an opportunity to trade futures and options contracts for Canadian oil sands crude.

The economic power of a major oil hub is shown by the millions of oil futures and options contracts traded each year on the New York Mercantile Exchange based on the price of oil moving into and out of storage atCushing,Oklahoma, the largest oil pipeline hub in theU.S..

It is acknowledged that a critical pipeline hub nearMontrealis not entirely without political risk due to separatist sentiments of some Quebecers.

A “Canada-First” Canadian Energy Strategy

A blueprint for a comprehensive “Canada-First” Canadian Energy Strategy incorporating export of only refined products and upgraded bitumen follows;

1. Build an oil pipeline to easternCanadato meet all domestic and export needs.
2. Export crude and refined products to the U.S., Europe and Asia from expanded refineries on safe, deep-water, East Coast ports at Levis Que., Saint John, N.B., Dartmouth, N.S., and possibly Come-By-Chance, NL., and from deep-water ports at Portland, Me and the Strait of Canso Superport, N.S., and from a West Coast port at Tsawwassen, B.C..
3. Require upgrading of all oil sands raw bitumen to pipeline-quality crude inAlberta.
4. Approve export of upgraded bitumen only after all domestic crude and refined product requirements are met.
5. End the export of raw bitumen and dilbit.
6. Twin the Trans Mountain Pipeline to transport only upgraded bitumen and conventional crude to Burnaby, B.C.
7. Expand the Chevron refinery in Burnaby to meet all of B.C.’s needs for refined petroleum products and to export the rest.
8. Build a pipeline to transport crude and refined products from the Chevron Burnaby refinery to the Tsawwassen Deltaport on the Strait of Georgia, or, relocate the marine oil tanker terminals and Chevron refinery to the West Coast at Tsawwassen. Either eliminates all oil tanker traffic through Burrard Inlet and Vancouver’s inner harbour.
9. Reverse the Portland to Montreal pipeline to export refined products from expanded Montreal refineries or to export upgraded bitumen to markets in the U.S.,Europe, and Asia.
10. Create a Montreal area pipeline “hub” for the physical distribution of crude and refined products and to set market pricing for oil sands crude as well as creating the nexus for an expanded Quebec petro-chemical industry.
11. Use the Canso Superport to ship crude to the Come-By-Chance refinery as well as for export using VLCCs.
12. Increase royalties on oil sands production to moderate development and provide more benefit to Albertans.
13. Limit and eventually decrease foreign ownership of the oil sands.
14. Reduce the environmental footprint of oil sands operations.
15. Find ways to encourage industry, commerce and average Canadians to consume hydrocarbon products more efficiently, cleanly and responsibly.
16. Remove all provincial barriers restricting the free flow of energy, goods and services between provinces.
17. Develop clean energy in the form of biomass, wind, solar, tidal, geothermal and hydroelectric wherever economic, environmentally appropriate, and approved by affected residents.
18. DevelopCanada’s relatively safe heavy water nuclear reactor technology for power generation, for technology export, and for possible use in the oil sands to reduce the relatively high carbon emissions of bitumen extraction.

The economic benefit of the hydrocarbon component of this “Canada-First” Canadian Energy Strategy is more than $75 billion/year per one million bbls/day of Canadian-owned bitumen processed from extraction through to export of refined products by Canadians.

Summary

Canadians must look after their national interest first before exporting non-renewable raw natural resources.

An oil pipeline to transport conventional crude and upgraded bitumen to eastern Canadacan be operational at least as quickly as any proposed pipeline to export raw bitumen, will cost no more, is much more acceptable environmentally, maximizes economic benefits to all Canadians, enhances the “social contract” to produce the oil sands, and provides national energy security.

By not upgrading increasingly large volumes of raw bitumen production,Alberta is effectively increasing export of undesirable environmental risk to other jurisdictions by pipeline.

Pipelines to export raw bitumen to Asia and the U.S. Gulf Coast are not required to develop Alberta’s oil sands and to allow oil sands production to double by 2025.

Solely from a shareholder point of view, there is significant economic, environmental, and market risk in Trans Canada’s Keystone XL Pipeline proposal.

There are six safe, deep-water, ports, and four refineries, in Atlantic Canada all potentially capable of refining and/or exporting very large volumes of Canadian conventional crude, upgraded bitumen and refined products.

A Montreal area pipeline “hub” will set market pricing for eastern Canada and much of the U.S. eastern seaboard. It would provide control and flexibility for the physical distribution of crude and refined products for domestic consumption and for export, and could form the nexus of an expanded Quebec petro-chemical industry.

Albertans must be more proactive and do a better job managing their world-class resource. Otherwise, a win by the NDP in the next federal election could result in the imposition of National Energy Program-like measures on the oil sands to make up for past Alberta governments’, and the current federal government’s, inadequate economic and environmental stewardship.

Oil pipelines to Canada’s East and West Coastsare not just ideas whose time has come but are absolute provincial and national economic necessities of transcendent value and transformative power. They will be the “energy backbone” of this country and will rival the transcontinental railroad in economic impact and ability to transform and unite this country.

Mike Priaro

919 Canaveral Cres SW

CalgaryABT2W 1N3

403-281-2156

“Mike Priaro, B.Eng.Sc. (Chem.Eng.), U.W.O.,  former member APEO and APEGGA, worked in facilities, production, operations and reservoir engineering, as engineering consultant, and in engineering management in Alberta’s oil patch for 25 years for companies such as Amoco and Petro-Canada. He worked the historic Turner Valley oilfield and brought in under-balanced drilling technology to drill out and complete several of the highest producing gas wells ever in Canada at Ladyfern.  He co-authored ‘Advanced Frac Fluids Improve Well Economics’ in Schlumberger’s Oilfield Review and developed the course material for the ‘Advanced Production Engineering’ course at Southern Alberta Institute of Technology.”

Mike’s only connection to TransCanada Corporation is incidental, long-time ownership of a modest number of common shares and he has no formal connections to Alberta politics.

This edition dated Oct. 23, 2012