Canada’s Oil Pipeline To Nowhere Tripling Costs Could Have Built HVDC Across The Country

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Canada has a climate change problem: its fossil fuel industry. It’s just sufficiently big enough at 6%-7% of the country’s GDP that irrational behaviors surface. The tripling of the Trans Mountain Pipeline contains a litany of them.

When it was first put in service in 1952, it made perfect sense. Climate change wasn’t actually understood or a consideration, outside of some narrow academic circles. The economy of the world ran on fossil fuels, and there wasn’t an alternative. The first prototype nuclear power plant, the EBR-1, had barely started operating in the US. This was also pre-oil sands, when Alberta’s Leduc oil reservoir was crude that you could just pump out of the ground. And the American military provided a big push for it as well, wanting the oil for its vehicles without enough proven oil reserves of its own.

Fast forward six decades to 2013. The oil sands were in full swing, with live steam from natural gas cogen plants blasting a thousand meters down into buried deposits of sludge and grit, melting it sufficiently that it could be pumped to the surface where more steam, hot water, chemicals, and hydrogen turn it into something remotely resembling normal crude oil, albeit still very viscous and high in sulphur aka heavy and sour. America is on its way to being a net oil exporter after 40 years of shale oil and fracking innovation.

Lots of the province’s messy crude is being pulled out of the ground, but getting it to market is problematic. Alberta is a long way from water, and the only major buyers for its product are refineries in Texas that had been built to handle the stuff, ones like LyondellBasell’s Houston facility. They were built to refine Venezuela’s heavy and sour crude, so Canada’s product had a place to go without massive refinery investments in the country’s prairies. Getting Canada’s heavy and sour crude to the refineries was a problem, however.

The Keystone Pipeline system to Texas was extended to Alberta and has been in operation since 2010, but isn’t big enough for the production from the various oil sands sites that had been developed and are in operation. And it was pumping dilbit, that is diluted bitumen, which is nasty stuff. Alberta’s product is too heavy to pump through pipes, so it’s mixed with a diluent. That’s a much lighter petrochemical condensate such as naptha. When it spills, the lighter condensate evaporates producing nasty odors and health hazards, leaving tar-like sludge behind. That’s somewhat okay on land, but if the spill is in water, the tar-like sludge just sinks instead of floating, making it even harder to clean up and causing different environmental impacts. Keystone dilbit spills and concerns are a major part of the reason why the US decided to cancel the Keystone expansion, twice, although the most recent ex-President tried to breathe life back into the line.

And so oil trains became a thing, to the delight of the CN and CP railroads, but not so much to the delight of anyone living along the tracks, or for that matter the major oil sands operators like Suncor. While trains are the cheapest form of transportation for most things, they are still more expensive per barrel than pipelines for oil. CNR was running 16-car connected tanker sets that it fills and empties from one end in 2011 when it was my client. Rail companies run about 70,000 cars and 47 million barrels of oil annually.

That came to a head in 2013 when a train carrying crude oil — not Alberta dilbit but North Dakotan conventional crude — came off its brakes and rolled down the hill into Lac-Mégantic in Quebec, exploding in a fiery ball of destruction, killing 47, destroying the town center and leaving an environmental red zone. Amazingly, that was only the fourth deadliest rail accident in Canada.

And so, the tripling of the Trans Mountain Pipeline. The Houston-based owners, Kinder Morgan, had submitted a request for approval a month before the derailment. 980 kilometers of pipe. Tripling capacity to 890,000 barrels of oil a day. All dilbit. But political headwinds. As mentioned, dilbit is an environmental nightmare waiting to happen, especially where it crosses water. And between Alberta and ocean ports lies British Columbia, the majority of whose citizens are much more progressive, liberal, and climate action oriented than Albertans. And also in British Columbia, lots of rivers and lakes, not to mention the ocean waters the ports are on.

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As the crow flies, although pipelines remarkably manage crookedly to avoid golf courses and gated communities but have a magnetic attraction for poorer and ethnic communities of all kinds, the oil sands are about 3,000 km from Houston’s heavy oil refineries. But the Trans Mountain runs west to the Pacific. For those with vague memories of geography class, Houston isn’t on the Pacific, but on the Gulf of Mexico. Tankers would have to sail down the Pacific Coast to the Panama Canal, transit that, and then sail north a long way back to Houston to offload crude. Google Map’s distance calculator suggests that’s about 12,000 km, four times as long, with more modes of transportation and more fees. Alberta crude’s distance surcharge will remain. In late 2021, the distance discount was a third of the $21 USD discount against Brent Crude, with $14 due to the poor quality of the product.

Many Albertans remarkably thought that tankers would sail east to China and be welcomed with open wallets. However, China doesn’t have refineries for heavy and sour oil and didn’t build them. There’s lots of light, sweet crude close to water in countries and from firms happy to sign big contracts with China. While China’s oil consumption did climb sharply over the past 40 years, it also has perhaps 600,000 electric buses on its roads, 450,000 electric trucks, buys well over half of all electric vehicles, has more electric light rail transit in its cities than pretty much any other country, and of course has built 40,000 km of high-speed electrified freight and passenger rail in the past 15 years. It’s running electric ships in its inland waters already, with a 1,300 passenger Three Gorges cruise ship springing to mind, and electric container ships for itself and clients as far away as Norway. China is working to bend its carbon curve down as quickly as it bent it up, so it’s not going to be a growth market for an inferior product.

Canadian First Nations opposed the pipeline tripling, at least until they received a much bigger cut of the economic benefits. British Columbia opposed the pipeline, and the then-Premier laid out the economic conditions under which BC would accept the dilbit risks in return for a bigger slice of the pie. The federal government had a couple of substantial environmental protection hoops the pipeline had to jump through. Albertans were furious about all of this completely unreasonable restriction of their rights to sell their product regardless of consequences to others, of course.

And so 2015 rolled around. Was the pipeline in limbo? Would it be built? Oil trains continued to roll south to Texas. And a Canadian federal election occurred. Canadians were increasingly tired of the Conservatives, and the Conservatives were increasingly having to pander to more extreme elements in their base with things like promises of ‘barbaric cultural practices’ tip lines. They lost, badly. The Liberals, under Justin Trudeau, won a majority, in part on a climate action platform including a promised carbon price. The Canadians who accepted science and wanted climate on the agenda rejoiced, for the most part. Albertans and their also carbon-challenged friends in neighboring Saskatchewan were upset.

Part of the equation that’s politically problematic is that climate science has spoken, and Canada’s oil reserves have to stay in the ground if we are going to keep under 1.5° Celsius of warming.

There was an odd and useful alignment of political stars in 2015. Alberta was in the brief period when a mostly sensible government was in place with Notley and the NDP. Ontario was still running under good, non-populist, evidence-based government with the Liberals under Wynne. Trudeau wanted a carbon price. Wynne wanted a carbon price. Notley wanted the Trans Mountain Pipeline. So Trudeau brokered a deal where both Alberta and Ontario supported both the carbon price and the pipeline tripling. The federal government removed two of the six major hurdles to the pipeline being built, the federal environmental blockages. Environmentalists howled, understandably. Trudeau won zero points in Alberta for it, also understandably given the knee jerk conservatism so rampant in that province, and their inability to move out of 1980 when Trudeau’s father suggested a domestic market for crude from the province (something that they have been begging for in recent years). But Canada’s slowly rising carbon price became the law of the land, and has survived two more elections, a significant win.

The Trudeau administration also started cutting fossil fuel subsidies, something the Harper Conservatives had committed to doing with the G7 and G20 in 2009 but didn’t even bother with nicking with paper. Under the Liberals, low-hanging fruit subsidies were cut until they ran into the Gordian knot created by decades of oil leaders moving into and out of governmental positions and lobbying roles that created line items and clauses in an absurd number of different bills, provisions, regulations, policies, and governmental departmental practices.

But the deal wasn’t enough to get movement on the pipeline. Time passed. Much opposition remained. 2018 arrived. Kinder Morgan made it clear that it wasn’t interested in continuing with the expansion. And rich business guy Bill Morneau was Finance Minister. He was a Bay Street guy. He loved deals. And he managed to sell Trudeau and the like on the merits of buying Kinder Morgan out and tripling the pipeline as a strategic national asset. So Canada did, dumping $4.5 billion CAD down the stranded-asset drain. They were going to complete the tripling for the low price of $7.4 billion CAD, meaning Canadians were on the hook for about $12 billion CAD. Then they were going to sell the operating pipeline to a private firm, because permanently nationalizing strategic infrastructure doesn’t fly even in Canada in the current political culture. Kinder Morgan’s stock price didn’t move with the sale, so it was a non-event for their investors. Trudeau won zero points in Alberta and lost points with the rest of Canada, which was a head-scratcher. But there was still the carbon price.

During this, by the way, I was supportive of the original grand deal which brought in the carbon price, but not the acquisition of an assett with decreasing value and its tripling which would maximize climate emissions. In the first case, there were enough other headwinds that it was clearly dead in the water. In the second, it was clear that the government would end up subject to the sunk cost fallacy and probably finish the thing whether it made sense or not.

A couple of years later in 2020, the cost estimate rose to $12.6 billion. In 2022 it rose to $21.4 billion. And now, a scant year later, it has risen to $30.9 billion, four times over original estimate. Insurers have dropped out of the deal, although not all of them, so the risk isn’t spread nearly as broadly. The corporation the government formed to own and build the pipeline is claiming that late in 2023 it will be operational, which I find to be as believable as I found the original cost estimate of $7.4 billion. The firm blames a litany of woes from labor, raw materials, ongoing opposition, oceanic rivers and COVID-19. Some of them may even be true.

I have been using this graphic from Professor Bent Flyvbjerg’s excellent book How Big Things Get Done a lot recently and not just because some of my analysis of the natural experiment in China around scalability of wind, solar, and nuclear is included in it. It’s a chart which sorts 25 categories covering over 16,000 megaprojects globally by their likelihood to finish on budget.

Scan down to find pipelines. They are barely over the line from roads in terms of reasonable completion on budget and only two down from transmission. Pipelines are linear surface assets with highly repeated tasks that we build a lot of, so don’t have a ton of fat-tailed risks. Not sure what’s going on with Trans Mountain, but at four times the cost over initial budget, it’s clear that the initial budget and plan were nonsense and that it’s a significant outlier for pipelines.

So now Canada is north of $35 billion CAD expended or committed on this pipeline to nowhere. Why do I say it’s a pipeline to nowhere? Because Alberta’s crude will be first off the market with Venezuela’s when peak oil demand arrives, most likely later this decade. As oil demand starts to decline instead of rise, the market will adjust itself to lowest cost producers, ones that have sweet, light oil close to water crude that is cheap to extract. Like Saudi Arabia, which has among the lowest operational costs in the world. Canada’s expensive to extract, process, distribute, and refine product will see an ever increasing quality discount until it’s no longer profitable to operate existing oil sands and they start to shutter one by one. I expect provincial exports of barrels of oil will start declining early in the 2030s and the first major operation will shut down by 2035 or so.

The 590,000 barrels per day that are supposed to go through the Trans Mountain cost more to ship than the barrels that go through the existing Keystone. Trans Mountain volumes will diminish one for one with Alberta’s exports until it’s moribund and the Keystone will keep pumping dilbit until the end, barring some long-tailed risk.

Oil trains, of course, will be hit as soon as the Trans Mountain pipeline goes live, perhaps in 2024. All of those 70,000 cars carrying 47 million barrels of oil annually will be scrapped, along with the rail revenue that goes along with them. Given that pipelines are a lot safer than oil trains, that’s okay. But the Trans Mountain won’t be seeing its capacity of 215 million barrels of oil a year regardless, and with $31 billion and counting of debt hanging over its head, its financial projections are nonsense. The likelihood that Canada will find a buyer for the asset are nil unless Canada’s government eats the debt and just sells the asset unencumbered.

Given all, the likelihood that the Trans Mountain will be bankrupt and defunct by 2040 is high. Given that the average age of pipelines is about 33 years, it’s not going to pay for itself. It’s definitely not a strategic national asset.

So what could could Canada have done with $33 billion instead of giving false hope to its dying fossil fuel industry and oil and gas supporters in Ottawa?

Well, my new mantra is that HVDC transmission is the new pipeline. Big energy pipes running overhead with much higher capacity than high voltage AC lines. 3% to 3.5% losses over 1,000 km. Zero carbon. Shifting renewable electricity from wind, water, and solar from where it exists in overabundance to where it’s needed. Strategic energy interdependence between good neighbor provinces, countries and continents.

How wide is Canada? About 9,000 km. How much does high-capacity HVDC cost per kilometer? About a $3 million CAD per kilometer for 10 GW of capacity including substations, overhead lines and towers. For $35 billion CAD, Canada could have had a massive 10 to 15 GW HVDC line linking Canadian provinces and linking down into the US in multiple points to bring clean renewable energy from wherever it happened to be in surplus to where ever it happened to be in demand. It could run along the rail lines as part of an overhead catenary electrification of rail as a strategic national initiative, decarbonizing and eliminating noise and pollution from that key transportation segment.

That’s Canada’s energy corridor of the future. A cross-Canada HVDC connector wouldn’t be a stranded asset in a double handful of years. HVDC transmission is lower risk than pipelines for cost overruns.

The Trans Mountain Pipeline was a bad idea from the start. Dropping federal opposition to it in 2016 to bring in the carbon tax was a good choice. Everything after that has been and will continue to be a spiral into the abyss.