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Pipeline safety threatens Canadian oil-sands expansion

US regulators have reported concerns over the safety of the pipelines

Canadian oil producers are putting on a brave face for the future of oil-sands expansions after a damning report by the US regulators raised serious concerns over the safety of export pipelines to the Lower 48 states.

On 11 July, the National Transportation Safety Board (NTSB) stopped short of accusing pipeline operator Enbridge of negligence in relation to a 2010 leak that dumped 20,000 barrels of heavy oil-sands crude into the Kalamazoo River near Michigan. Instead, the board painted a picture of incompetence and compared the company to the inept "Keystone Cops" in its response to the spill, which took 17 hours to stop the flow after it was first detected.

The choice of words by NTSB chair Deborah Hersman was an indirect reference to Enbridge rival TransCanada's Keystone XL pipeline, which is bogged down under its own regulatory review.

Whether it was deliberate or not, the comparison immediately raised concerns for the safety of all oil-sands pipelines and cast the industry in a troubling light. Almost immediately after the report was released, more than 50 Canadian environmental and aboriginal groups pressed Alberta's government for a top-down review of pipeline safety.

In addition to the 800,000 barrel a day (b/d) XL, Enbridge is proposing the 550,000 b/d Northern Gateway to Canada's west coast, a vital link to opening overseas markets in Asia.

The US report added ammunition to Gateway's opponents, who are worried that a similar spill would foul part of Canada's pristine marine environment. After the NTSB report into the Michigan spill, it would seem that they have cause for concern.

The board outlined a corporate "culture of deviance" where employees failed to follow established safety procedures and take responsibility for a series of crucial missteps that made the problem worse. Control-room operators failed to heed warnings that the line had burst and only shut the line down after visual confirmation of oil in the water.

Following the first alarm, the line was re-started twice, adding an additional 683,000 gallons of crude – more than 80% of the total volume spilled – into Michigan's waters, the report said, calling the accident "needless and tragic".

The NTSB also said Enbridge failed to repair sections of the line after testing showed corrosion as far back as 2004. The regulators have proposed $3.7 million in fines, and Enbridge has not substantially disputed the report's findings.

Clean-up costs are estimated at $800m – and climbing – not including lost revenues from shutting in 1m b/d of exports for more than a month. Nor do the figures include lost revenues for oil producers or royalty payments to Canadian governments, which easily topped $1 billion.

Al Monaco, who will replace outgoing chief executive Pat Daniel later this year, told an oil-sands conference in Calgary that the company will learn from the incident and double spending on safety training and inspections to $400m a year. "We haven't just been sitting around for two years," he said at a media briefing. "We need to put the public at ease and give them confidence that we can operate safely."

It's an impressive sum, but it also raises the question of why it wasn't done sooner.

At stake is future oil-sands production expansion; the pipelines are vital pieces of the Canadian drive to double oil-sands output to more than 3m b/d by the end of the decade. Without the pipes to move those incremental volumes, those plans are effectively dashed.

Imperial Oil chief executive Bruce March said he was confident the pipelines would be there when needed. Canada's oldest oil company, which is 70% owned by ExxonMobil, will bring the first phase of its 350,000 b/d Kearl oil-sands mine on stream later this year. Even before first oil, the company has sanctioned a subsequent expansion that will bring its total investment in the project to more than C$10.9bn ($10.7bn).

Space on existing pipelines is sufficient to soak up the first 110,000 b/d first phase, but new capacity will be needed. Other oil-sands producers like Total and Suncor are also planning to add another 360,000 b/d by 2017.

Those figures don't include thermal in-situ projects, which are expected to add another 1m b/d by 2015. In June, the Canadian Association of Oil Producers said existing pipelines would become full by 2014.

So Canadian oil-sands producers face a dilemma not entirely of their own making. Unless they address the safety concerns raised by environmental groups and regulatory agencies such as the NTSB the problem is only going to get worse.

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