Alberta bolsters pipeline push as price gap pinches profit

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With no place to transport burgeoning supplies of crude oil, Canada's energy industry, and the provinces and investors that depend on it, has reached a moment of crisis as profits bleed from one of the country's most economically important sectors.

Alberta Premier Alison Redford on Thursday said there's been a "monumental shift" in the economics of Alberta oil, as delays in the construction of new pipelines pinch the thick profits that have long sustained both the energy industry and the broader Western economy. Alberta this week warned depressed prices for its crude resulting from choked markets for its landlocked oil could lead to bigger deficits and spending cuts for the government.

Alberta needs new pipelines to reach new markets and give its oil sector a boost, "because this is about a product that we need to get to market," Ms. Redford said. Economic woes are spurring a "profound change in the way that Canadians look at the world, the way we look at our economy," one she hopes will win support for pipeline projects.

Record discounts for Albert crude in recent weeks are now spurring a strong new push by the oil patch to make the case that more needs to be done, and fast.

"We're at a spot today where we need more capacity as soon as we can possibly get it online," said Russ Girling, chief executive officer of TransCanada Corp., the Calgary pipeline company whose Keystone XL project which would carry Alberta oil to the Gulf Coast, and has been delayed for more than a year after critics raised concerns about the impact of a potential spill on a critical U.S. freshwater aquifer.

Environmental concerns have similarly created uncertainty over Northern Gateway, the Enbridge Inc. pipeline proposal to the British Columbia coast.

In the meantime, the financial picture for the entire country is being muddied as Canadian crude becomes a dollar-store brand, sold on the cheap. Some now say the entire country is being hurt, to the advantage of others.

"Any time you are producing a non-replaceable commodity at a 50-per-cent discount to world pricing, and you are unable to access that pricing, you're losing money. It is a wealth transfer from the producer to the buyer," said Sandy McIntyre, chief executive officer at Sentry Investments in Toronto. "So we're giving … 1.6 per cent of GDP subsidy to buyers of our oil. Is that smart?"

Mr. McIntyre said amid the struggle to build new lines, there is an urgent need for Canadian provinces to co-operate on projects that could help alleviate the problem. He suggested the current situation – where some provinces have directly and indirectly opposed new pipelines – is fraught with irony.

"Alberta can't force B.C. to allow a pipeline. Alberta can't force Quebec to reverse a pipeline. And Quebec looks at it and says: 'Well, I don't want your dirty oil. Send me your money, but I don't want your oil,' " he said.

At the same time, pipeline companies are scrambling to fix a problem that has simmered for years but now has broken into the open. TransCanada Corp., for example, is now working to make a new cross-country crude project into an export line to eastern U.S. markets.

The Calgary pipeline company is finalizing the details of its eastern Mainline conversion, an idea that would see the company pump oil through existing pipelines that carry natural gas from Alberta to Central Canada. Initial plans called for that oil to be used to feed refineries in Ontario and Quebec, displacing expensive imports those facilities now use.

But as the oil patch faces full pipelines into its traditional Midwest U.S. markets, TransCanada has begun to examine its potential for exports.

In an interview, TransCanada's Mr. Girling pointed to the roughly 1 million barrels per day of crude used by refineries along the U.S. Eastern Seaboard. Those refineries are using expensive oil from foreign sources, as well as shipments of U.S. crude arriving by rail.

TransCanada has begun discussing a project to use part of its Mainline, plus new stretches to extend its reach, to carry oil Saint John, and then by sea to the United States.

"We've provided those interested parties with the economics of doing that, and it's far more attractive than railing it in," Mr. Girling said.

New Brunswick, where Irving has a major oil refinery, has "deepwater port facilities where they import all of that oil today. So that provides a potential outlet for growing production out of Canada," he said. The details have not been finalized, and TransCanada is looking at several options, including barging oil from Montreal and Quebec City, ahead of a planned announcement in the first quarter of 2013. But the urgency is clear.

Mr. Girling and others say the export pipeline system out of Canada is, today, "effectively full." The TransCanada project has an advantage in that roughly 80 per cent of the pipe is already built.

Yet the prospect of sending Alberta oil through Quebec for export is almost certain to stoke more of the criticism that is already inflicting financial pain on the energy industry.

"If the oil is meant to go offshore, it completely changes the debate in Quebec, because then there's nobody who would be supporting it," said Sidney Ribaux, executive director of Equiterre, an environmental group based in Montreal.