Energy East's cause of death: Business, politics or climate?

On Aug. 1, 2013, the day TransCanada introduced the Energy East pipeline project, the price of oil was $107 US a barrel. Those were heady days in the oilsands as Canadian oil production was expected to double in the next 15 years to more than 6.5 million barrels per day.

Pipelines were desperately needed.

The Northern Gateway pipeline west to B.C.'s coast was still struggling through its environmental review. The Keystone XL pipeline south to the Gulf Coast had been turned down once by U.S. President Barack Obama and was in the midst of its second State Department review. And Trans Mountain had not yet filed its application to twin an existing pipeline from Edmonton to Burnaby, B.C.

At that point, Energy East made sense, despite the distance the oil would have to travel to an export terminal in New Brunswick.

Even though the tolls were higher because of the distance the oil would travel, Energy East was a contingency plan, it was a break-glass-in-case-of-emergency pipeline. If Keystone XL and Northern Gateway fell through, here was an option that made sense.

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"It's a pipeline that everybody looked at as an expensive solution to a problem, which was rapidly increasing oilsands production growth and challenges going south and west," said Andrew Leach, an associate business professor at the University of Alberta. 

The challenges going south are close to being resolved, and the option of going west is less uncertain now than in 2013. And another major factor has changed: oil prices are less than half what they were in 2013.

"The case for Energy East, broadly, has gotten weaker," said Leach. "We needed the cheapest-cost access to markets, not just access to markets at any cost."

Texas is that cheapest market. It's a shorter trip to a region with refineries that are specifically designed to process Canadian heavy oil.

"You could argue the most attractive destination was always the Gulf Coast, the margins were likely to be more rewarding," said Michal Moore, a fellow with the University of Calgary's public policy school.

A billion-dollar failure

Many Canadian economists were making that argument yesterday, though not everyone was buying it.

The anger from some quarters of Calgary was intense — and directed in particular at the National Energy Board's recent decision to require consideration of the theoretical carbon emissions from both the production and consumption of oil delivered via Energy East.

"The NEB announced these new rules of expanded review of upstream and downstream emissions right at the end of August," said former Alberta finance minister Ted Morton. "I don't think it's a coincidence that within seven days TransCanada requested a suspension of the process."

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Morton says for TransCanada, considering the emissions would have turned the hearing process into a more complex, more expensive and more uncertain undertaking. And the company decided it was out.

The added demands of the regulatory process were another burden on a project that was already making less financial sense.

TransCanada said it would write off $1 billion, essentially in sunk costs related to Energy East. That's money that was spent on the application, with its thousands of pages, and working with communities along the route. Four years after first pitching the project, it wasn't yet at the hearing stage. That was partly due to mistakes made by the company itself. 

"These projects cannot take this long in the regulatory process," said Dennis McConaghy, a former senior executive with the company. "Because ultimately, no company can afford to spend this much money without really knowing what answer they're going to get. It should be a matter of deep reflection on a regulatory process that was dysfunctional."

A 'climate safe world'?

Environmental groups seem to agree the NEB's requirement that TransCanada consider emissions marked the end of the project, but for a different reason.

Greenpeace's Alberta lead, Mike Hudema, suggested TransCanada realized that "there was no place for Energy East in a climate safe world."

But this wasn't the first time the company had been required to take responsibility for the potential greenhouse gas emissions from one of its proposed pipelines. The U.S. State Department also made that calculation for Keystone XL, on two separate occasions, concluding the approval of Keystone would increase emissions but would not have a significant impact on production in the oilsands.  

Oil demand has been steadily increasing in recent years, particularly over the spring of 2017. The International Energy Agency forecasts oil demand will increase by 1.6 million barrels per day this year compared to 2016.

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Oilsands production in total is 2.7 million barrels per day, very much part of the base load of U.S. supply. Oilsands products are finding their way to market, even as pipeline projects stall or get cancelled, and they will have a direct shot to the Gulf Coast if Keystone XL is built, as expected.

The question for many in Alberta, in particular, is why pipelines have to carry the burden of greenhouse gas emissions when it's the population as a whole that's consuming fossil fuels.