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Fading Canadian pipeline ambition

The revival of Keystone XL and Canada's tricky pipeline politics doomed Energy East

Canada's hopes of becoming a global energy superpower took a significant hit in October when TransCanada, the country's largest pipeline operator, unceremoniously cancelled the proposed Energy East pipeline.

The C$15.7bn ($12.32bn) pipeline would have shipped 1.1m barrels a day some 4,500km (2,800 miles) to Canada's Maritimes, making it the country's longest pipeline, and one of the largest in the world. Energy East would have backed out some 0.75m b/d of imports—mostly from Africa and the Middle East—from Canada's import-dependent eastern provinces and helped achieve a long-held goal of Canadian nationalists to make the country self-sufficient in oil.

But sometimes even the best laid plans go awry. In a terse statement, TransCanada chief executive Russ Girling cited "changed circumstances" for cancelling the line, which would have converted thousands of kilometres of existing natural gas pipes for oil service.

The company insisted it was strictly a business decision, but regional politicians immediately blamed the federal government for growing regulatory uncertainty, amid a vow from the ruling Liberals to revamp the country's energy regulator, the National Energy Board (NEB).

The NEB review of Energy East, as with other pipeline projects, has been fraught with controversy and protest from the start, pitting the oil-rich regions of Alberta and Saskatchewan against Ontario and Quebec, and opening old wounds in Canada's confederation.

Initial public hearings into the project were scrapped after the review panel resigned en masse, amid allegations that board members had acted as paid consultants for TransCanada. Then in August, the federal government expanded the scope of the NEB inquiry into the project to include downstream emissions linked to climate change, far beyond the purview of an ordinary pipeline application.

$12/b - Cost of shipping crude through Energy East

The oil companies complained of regulatory "overreach", suggesting it would be akin to holding automobile manufacturers—the majority of which are concentrated in southern Ontario—responsible for tailpipe emissions.

The mayor of Montreal argued that his city would be devastated from a single spill from the line—notwithstanding that the municipality pumps millions of litres of raw sewage into the St Lawrence River each day, drawing predictably off-colour memes on social media. To top it off, Quebec's politicians were ecstatic when the project was finally cancelled, drawing predictable separatist barbs from their disgruntled western counterparts. Yet for all the recriminations and rancour, it became increasingly clear that Energy East was an economic and political pipe dream, considering it would have crossed six provinces, 75 major municipalities and 50 First Nations.

As desirable as some think oil self-sufficiency is—it has been a longstanding policy of the Canadian government for decades—the numbers simply don't add up, either politically or economically.

Energy East always was an idea born of compromise. Stung by the Obama administration's rejection of Keystone XL in the US, TransCanada conceived Energy East as an alternate route to tidewater, assuming it would be easier to get an outlet approved on Canadian soil rather than crossing an international border.

That was the first mistake. After US President Donald Trump hastily approved KXL, the political rationale for Energy East was long gone. TransCanada's preference was always to ship Canadian oil through the Gulf of Mexico, home to the largest refining complexes in the world—unlike the Canadian Maritimes which hosts just one large refinery with more than 100,000 b/d capacity at Saint John.

After the US lifted export constraints, it became much easier to export Canadian oil off US shores where the infrastructure is in place, with a ready and willing market, than off Canada's east coast.

Then there's the value proposition itself. While it may seem politically desirable to replace imported barrels with Canadian crude, the cost of shipping those barrels two-thirds the way across the second largest land mass on earth would be prohibitive.

Estimates from the Canadian Association of Petroleum Producers, an industry trade group, suggest tolls would be as high as C$11-$12/b, more than a third of its current selling price of about C$32/b for Western Canadian Select heavy grades. Once it hit the water, it would have to compete with foreign crudes in a flooded Atlantic Basin, including light crudes coming from tight oil plays south of the border.

In the end, this is what killed Energy East. And with it, Canada's dreams of becoming, in the words of former Prime Minister Stephen Harper, a global energy superpower—one dependent on a single customer for 98% of its exports.

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