Energy East critics in Eastern Canada need lesson in pipeline economics

energy eastYou can always find a point in time where conditions are such that if you start the project that day, it wouldn’t be economic. – energy economist Robert Mansell

The number of media pundits trashing the Energy East project as uneconomic from the outset is amusing as hell. None of them is an economist. Nor did they ask an economist their opinion about the pipeline’s viability. Yet, their uninformed opinions will sway many readers in Eastern Canada, and no doubt a few in Alberta as well. They shouldn’t.

energy east

Alan Freeman. Photo: iPolitics.ca.

For instance, here’s Alan Freeman, a former business journalist and communications flack for the Canadian government, now an Honorary Senior Fellow at the University of Ottawa’s Graduate School of Public and International Affairs, bloviating about Energy East on the iPolitics site:

The Energy East pipeline was never a Plan B project. It was a Plan C project — and it was always a stretch. Its wonky economics were only going to make sense if oil stayed at $100 or more a barrel, and if every other project to expand pipeline capacity — Keystone XL, Northern Gateway, Kinder Morgan — failed.

Hundred dollar oil a necessity? Every other pipeline project must fail?

Says who?

That’s not a frivolous question. We journalists aren’t experts, we interview experts. So where is Freeman’s expert? Where is the on-the-record interview with at least one energy economist who says Energy East’s economics were wonky?

Energy East

Terence Corcoran. Photo: Twitter.

Here is Terence Corcoran of the Financial Post, who at least took the initiative to dig up an old IHS MarkIt study that showed Energy East would need $16 ship a barrel of oil from Alberta to New Brunswick, and a couple more bucks for a supertanker to float it over to Asia.

It’s a good bet that, even with full regulatory approval, Energy East would still look like a long-term investment loser without some confidence that oil prices would stabilize at something like $100 a barrel.

This bit of outrageous prognostication was preceded by a reference from a 2011 report that claimed the Alberta oil sands needed an “oil price floor between $65 and $95” to be viable and markets are never that stable.

That was 2011, this is now, when oil sands giants like Cenovus and Suncor have been steadily driving down production costs to the point where they are profitable at $40/b or less.

Economist Dinara Millington of the Canadian Energy Research Institute told me in an interview Thursday that the SAGD (steam assisted gravity drainage) producers are introducing new technologies that over the next decade will likely lop another $1o to $15 a barrel of production costs.

energy eastMillington’s comments illustrate an important point: in the oil and gas world, things can change pretty quickly (some things can also change way too slowly, such as the Calgary-based industry’s 1950s-era political and communications strategies, but that’s grist for future columns).

Horizontal wells, hydraulic fracturing, innovative new drilling rigs, Big Data/analytics – these are just some of the innovations that have transformed production over the last decade or so.

Arguing that Energy East is not economic based upon today’s cost structure and technology mix is a mistake, as respected energy economist Robert Mansell explained to me in an interview. Mansell has over 40 years of experience in academia and the industry, and has worked on many significant pipeline projects.

You can always find a point in time where the conditions are such that if you start the project that day, it wouldn’t be economic. But that’s not the way you design these projects. You look at the economics over a long period of time, through the ups and downs of high prices, and changes in competition. Most importantly, once you’ve actually built it, you’ve got an advantage in that you only have to cover your operating cost to keep it running and wait for those periods where you actually are making a lot of money to recover your fixed investment.

That’s the point of view an expert. He’s not alone, as you can see in yesterday’s column.

Now, yesterday I wrote that we didn’t really know TransCanada’s reason for withdrawing its Energy East application from the National Energy Board review process.

Thanks to diligent work by Jason Markusoff of Maclean’s, we now have the company’s letter to the NEB, which says:

…the existing and likely future delays resulting from the regulator process, the associated cost implications, and the increasingly challenges and issues facing the Projects, the Applicants will not be proceeding further with the Projects…

The letter also notes the offer of assistance from New Brunswick and the federal Environment Dept. to help TransCanada prepare for the upstream and downstream (e.g. refineries, car owners in other countries) greenhouse gas emissions assessment the NEB imposed upon Energy East in Sept.

“There is also the question of jurisdiction that arises from the NEB decision,” it says.

This is a subject that hasn’t been addressed yet. In Mansell’s opinion, “…just all the constitutional issues associated with that alone, I mean, we would be years and years before that ever got sorted out, if ever.”

To sum up, TransCanada is four years into the process, has already spent $1 billion, still hasn’t even begun hearings, the Trudeau Government’s “modernization” process has turned the review into a quagmire full of uncertainty…and the regulator has just imposed a condition (downstream emissions) that has no precedent and perhaps serious constitutional issues.

Every expert I interviewed stressed that TransCanada’s calculation to proceed or quit was complex, probably included factors not yet made public, and given the inertia behind huge infrastructure projects like Energy East, was not taken lightly.

But it’s pretty clear from the letter and my interviews with energy economists and industry insiders that the mess Prime Minister Justin Trudeau and Natural Resources Minister Jim Carr have made of NEB “modernization” and the serious uncertainty that introduced into the regulatory process was a substantial factor in TransCanada’s decision.

Perhaps the most important.

Or you can believe the specious arguments of Freeman and Corcoran that TransCanada, one of the leading North American midstream companies, doesn’t know its business and can’t do basic math.

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Posted in: Markham on Energy

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