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The Gateway Pipeline

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The Gateway Pipeline

In May 2010, Enbridge filed its regulatory application with Canada’s National Energy Board to build the $5.5 billion Northern Gateway Pipeline, a twin pipeline system connecting Edmonton and a new marine terminal in Kitimat, British Columbia, to export crude oil and import condensate. The CEO of Enbridge, Patrick Daniel, wrote a column in this past Saturday’s Financial Post extolling the benefits of this pipeline, one that would open up Asian markets for Canadian oil.

In almost evangelical tones, Daniel concluded:

“(W)e can take the steps required to bring Canadian oil to markets around the planet. We can responsibly, sustainably and safely construct and operate nation building projects like the Northern Gateway. We can make the most of the opportunities available to us and build on our strategic advantages as a responsible, democratic trading nation. We can build an even stronger Canada for future generations.”

While I wipe the tears from my eyes and stop waving the Canadian flag wildly, let me just observe that Mr. Daniel has no compunction about facilitating the sale of Canadian oil to a country that is far from a democracy and violates rights on a regular basis. So much for corporate social responsibility, but I leave this for another blog.

Enbridge operates a massive network of pipelines throughout Canada and the US. The company’s growth is dependent on its ability to charge higher prices for transporting oil and gas (but prices are subject to regulation), and to develop new pipelines and capacity. If Enbridge cannot get support for projects such as the Gateway Pipeline or other similar projects, the company’s growth prospects fade rapidly. And with lower growth rates, it should become much more difficult for the company’s directors to justify annual compensation for its CEO in the $6-$7 million range.

Aside from benefiting Enbridge and enriching its senior management team, would this pipeline really matter for the Canadian oil industry, in particular the producers? Would it enable the industry to sell more?

The oil market is global. If Canadian oil companies can produce more, could they sell the extra volumes without the Gateway Pipeline? Most likely they could. If global demand grows in line with the growth in supply, and assuming that there is no excess capacity in the market, the growth in the production of Canadian oil would be absorbed, even if the only two markets available for it are the US and Canada. Other competing sources of supply might be squeezed out of these two markets, but they would find their ways to other markets, including Asian markets.

If there is excess capacity, or demand grows less rapidly than supply, the growth in the production of Canadian oil would still be absorbed in the US and Canadian markets alone, albeit at lower prices. Access to Asia would not prevent a drop in crude oil prices in this scenario.

If the US were ever to get serious about reducing its dependency on oil by introducing a massive carbon tax, Canadian oil producers, especially those in the oil sands, would be seriously impacted. Access to Asian markets might provide an outlet in this case. But oil prices would drop so dramatically in this scenario that a significant portion of Canadian production would not be competitive or viable. Thus, even in this scenario, the Gateway Pipeline likely would not help. And do we really want to invest billions of dollars in projects subject to this risk?

Do we need this pipeline? From a “strategic” point of view, the answer is no!

Nevertheless, I could support the pipeline if Enbridge were willing to truly turn a new page in dealing with First Nations in Canada. To do so would require that Enbridge and it partners in this pipeline offer the First Nations, at a minimum, the following: a royalty payment starting somewhere between $1 and $3 per barrel passing through the pipeline – the payment should be indexed; and a minimum 10% equity stake, at no cost, for the privilege of being allowed to build a pipeline that crosses their traditional lands. Otherwise, let’s look for better ways to nation build.

The opinions expressed in this blog are personal and do not reflect the views of either Global Brief or the Glendon School of Public and International Affairs.


1 Comment

  1. This article was just one more example of excellent insight, of which you never seem to run out. Whatever you’re smoking I want some. If Enbridge’s strategy is simply to keep investing in avoidable infrastructure then perhaps they’re dead in the water just as you concluded. What the CEO ought to be doing is redesigning his business model because later than sooner there will be a revolution in the energy industry and a business which is as capital intensive as Enbridge can’t afford to keep assuming the status quo. As for the Natives well, I don’t think a wealthy white business man like Patrick Daniel actually cares and I doubt he waves the Canadian flag.

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