Alberta's Imminent Pipeline Capacity Dilemma
New pipeline approvals in Canada have been a hot topic recently but have been mired in controversy. In late 2016, the Canadian federal government approved the Trans Mountain and Line 3 pipelines while simultaneously rejecting the Northern Gateway project. Meanwhile, the proposed Energy East pipeline remains in limbo.
Growing environmental concerns combined with civil society’s demand for increased involvement in the decision-making process are hindering new approvals. In contrast, the oil industry has voiced their concern that regulatory uncertainty is actively driving away investment.
This puts Alberta in a tough spot. The opposing interests must be delicately balanced as they have very real consequences. If pipeline approvals happen too fast, regulators and the Canadian government risk losing the confidence of their constituents from environmental stewardship and public trust perspectives. If pipeline approvals happen too slow, this severely hampers Alberta’s ability to export its valuable resources to market and compete on a global level.
According to the Alberta Energy Regulator's ST3: Alberta Energy Resource Industries Monthly Statistics, oil sands production accounted for 83% of Alberta’s total crude oil production in 2016. Of that, approximately 62% took the form of raw bitumen, while the remainder was processed into synthetic crude oil within the province’s 5 upgraders.
The Canadian Association of Petroleum Producers (CAPP) released its annual Crude Oil Forecast, Markets and Transportation report in June 2017 that estimated Western Canadian crude oil production will grow to 5.4MMbopd by 2030. This growth was forecast to be driven heavily by the oil sands, which would undergo a 53% increase in production from today’s rates. The report also estimated that 39% additional pipeline capacity would need to be installed to bring the additional 1.5MMbopd of production to market.
Noting that Alberta’s upgraders are running near capacity, combined with the unlikelihood that any new upgraders will be built in the province for the foreseeable future, we can reasonably assume that CAPP’s production growth forecast from the oil sands would largely take the form of a raw bitumen product. Raw bitumen is a highly viscous substance. Current industry practice involves blending bitumen with a diluting agent (diluent) in order for it to be transported down a pipeline to feed refineries south of the border. The bitumen-to-diluent blending ratio typically ranges from 60:40 to 70:30.
When it comes to getting our resources to global markets, the decision-making process in Alberta to date has been sequentially reactionary, where experts: forecast additional capacity needs, assess what is currently working, and simply propose to do more of it. This is the 'more production, more pipelines' model.
The 'more production, more pipelines' model is predicated on the assumption that the current way of doing things is the best way of doing things. But what if it’s not? Then, combine this question with the reality that environmental concerns and civil society’s demands are having a tangible impact on the approvals process, and you suddenly have a profound incentive to rethink your approach.
The solution to Alberta’s imminent pipeline capacity dilemma lies not in our ability to get new pipelines approved, but rather, rethinking how we can better utilize our existing infrastructure. We need to start by asking ourselves ‘what do we even want to be sending down our pipelines’?
As previously mentioned, nearly one-third of every barrel of diluted bitumen sent down a pipeline is occupied by diluent – a substance that only contributes to the cost of transportation. If we were to cut our diluent dependency, we would realize increased effective carrying capacity in existing pipelines in addition to an array of other economic benefits. This would be a game changer. Not only that, this would be something we finally have control over.
If we were to remain operating at status quo, we could easily spend the next decade navigating through the rigorous new pipeline approvals processes in order to get our production to global markets. Alternatively, we can proactively take control of Alberta’s destiny by rethinking the way we handle bitumen, thereby making better use of our existing infrastructure. What do you say?