Building the pipeline will diversify Canada’s energy markets and give the GDP a considerable boost.
As the economic engine powering Canada’s economy shifts from manufacturing in Ontario to energy in the West, the Harper government is placing a much greater emphasis on diversifying exports of Alberta’s oil sands production.
Despite critics from all over the world who call Alberta’s resource “dirty oil,” there is a thirst for energy in emerging economies such as China and India. And the need for Canada to diversify its markets is becoming even more acute with the resistance to the Keystone XL pipeline in the US and the likelihood demand for Canadian energy there will decline as the country develops its own energy resources.
The Harper government is betting on Enbridge’s $5.5 billion Northern Gateway to help Canada bust out to far eastern markets, but the Calgary company has to wade through political and environmental obstacles as thick and gooey as the heavy crude and condensate the pipeline would carry. There is much work to do before oil sands production flows to the BC coast and is shipped by super tanker to Asia.
The project has been in approval purgatory since May 2010 with enviro-critics citing concerns about the fragile forests of BC’s interior and the hard-to-manoeuvre seaway from Kitimat, BC’s marine terminal. First Nations oppose a pipeline crossing their lands, and BC premier Christy Clark is manoeuvring for a bigger share of the profits. Add to that a recent 10-week extension tacked onto the project’s National Energy Board.
Looking beyond all the huffing and puffing from politicians and other interested groups, what’s in it for Canadian manufacturers, particularly those closely placed in the West?
To start, there would be millions of dollars worth of contracts for manufactured inputs, such as valves and pipes, and boosted demand for heavy equipment, trucks and other vehicles during the building and throughout the pipeline’s 30-year lifetime. Enbridge claims the pipeline would require $35 million in manufactured goods, such as tubular pipe, pressure vessels and pumps, just in central BC. Jean Michel Laurin says manufacturers here won’t be left out of the mix.
“I have no doubt it’s going to be a fairly open market to provide companies bidding on contracts a level playing field,” says Laurin, president of global policy at Canadian Manufacturers & Exporters (CME).
Indeed, Alberta is a place Canada’s manufacturers need to be.
“The resources sector has been driving growth in manufacturing, it’s what kept a lot of those companies afloat since the recession,” says Laurin. “Companies are asking ‘where’s the growth?’ It’s in the natural resources and energy sector.”
Ontario, in particular, would benefit significantly according to Robert Mansell, an economist at the University of Calgary.
“When there’s expansion in the Canadian economy, a lot of that goes back to Ontario because there’s a lot made there. Increased sales of cars, trucks and heavy equipment are the result of expansion in the resource sector.”
Enbridge’s twin-pipeline project would carry up to 525,000 barrels oil sands heavy crude and condensate 1,177 kilometres from Bruderheim, Alta. to a marine terminal in Kitimat, BC each day. The proposed terminal includes two ship berths and 14 reserve tanks for excess oil and condensate supplies. Enbridge, pending approval, hopes to have the pipeline online by 2016.
Should the project be approved by 2013, it would create more than 1,000 jobs and generate upwards of $80 billion in tax revenues throughout its 30-year lifetime.
The project may even be gathering support from unexpected allies; provinces looking for a boost from the oil sands.
Ontario’s premier Dalton McGuinty has blamed natural resource development for stifling the manufacturing sector, but the province is in the process of adding more staff at its Alberta trade office to facilitate opportunities in Canada’s wealthiest province.
“Ontario sending someone to Alberta sends a pretty strong message that more companies and politicians are getting on board with Alberta,” says Laurin.
In fact, there’s $63 billion worth of opportunities for Ontario-based companies over the next 25 years, according to the Canadian Energy Research Institute (CERI). The project would also boost Ontario GDP by 11.4% and earn the province more than $4 billion in tax revenues.
In the West, BC would see the smallest slice of the revenue pie – a point of contention between BC premier Christy Clark and Alberta’s Alison Redford. BC would earn tax revenues of more than $1.2 billion, while GDP would jump by 5.1%, according to CERI. But Enbridge says the project will also need more than $830 million of local BC goods and services.
Big pay day
Alberta is in for the biggest pay day. Provincial GDP is expected to rise by 352.3% over the pipeline’s 30-year lifetime, and it will earn more than $70 billion in tax revenues.
Enbridge says Northern Gateway would boost overall Canadian GDP by more than $270 billion and create more than $400 million in employment and contracts for aboriginal communities and businesses.
There’s also the impact the project would have on prices for Canadian crude. A 2009 forecast by the Canadian Association of Petroleum Producers (CAPP) says 10 years after project start-up, synthetic crude pricing would rise by $2.04 per barrel. Athabasca dillbit would jump by $3 per barrel, resulting in an annual net producer revenue increase of $4.47 billion by 2025.
NDP leader Thomas Mulcair, among others, complains the focus on energy will lead to Dutch Disease, the economic malady that caused a downturn in the Netherlands’ economy during the 1970s when natural gas prices peaked. It was blamed for driving up inflation while pushing down export demand for manufactured goods.
Mansell, who was involved in the National Energy Board’s Gateway hearings and spoke about the potential of Dutch Disease, says the pipeline is unlikely to cause such a phenomenon.
“People have latched onto this notion that if one part of the economy is doing well, it’s bad for the rest of the economy,” he says. “Northern Gateway wouldn’t drive the growth of the entire resource sector to the degree necessary to create Dutch Disease.”
He says the oil and gas sector is usually cited for the “disease,” but manufacturing could also cause it because both sectors affect the exchange rate.
“If oil and gas is doing well, yes it’s going to drive up the exchange rate a bit, but it’s not just in the oil and gas sector,” he says. “When some part of the economy is doing well, there’s going to be other parts that struggle. It’s hard to say ‘well this sector’s doing well, so we better shut them down so others don’t get hurt’ – you just can’t do it.”
Mansell cites former Bank of Canada governor Mark Carney, who has said Canada’s declining export performance and resulting economic drag is due to an absence of adequate export markets. Eighty-five per cent of Canada’s exports are still going to the slowest growing economies in the world, while only 8% go to high-growth markets.
That’s especially so in the oil industry, which currently has one customer: the US, a market that is destined to contract.
“With the development of non-conventional oil and renewable energy sources in the US, they’re not going to need our stuff,” says Mansell. “That market is static.”
The Paris-based International Energy Agency (IEA) forecasts the US will be energy self-sufficient by 2035, led by a surge in production thanks to technological advances that have unlocked opportunities in oil supplies from shale rock formations, such as the Bakken, which stretches through parts of North Dakota, Montana and Saskatchewan.
The agency’s World Energy Outlook suggests increased US output means imports will fade so much that North America will become a net oil exporter by 2030.
The push in Canada to diversify its oil export markets includes looking closer to home. Both Enbridge and rival TransCanada Corp. are exploring plans to send Alberta crude eastward to markets in Ontario and Quebec by updating existing pipelines. Those plans also include exporting crude from locations in the Atlantic basin.
But opportunities abroad will reign supreme.
Kinder Morgan, another Alberta energy-giant, is also looking to capitalize on major demand in Asia. It’s trying to get approval to build a 900-kilometre, $1.4 billion expansion of its TransMountain pipeline, which currently ships oil from Edmonton to BC’s lower mainland, to increase capacity and have it shipped off to Asia.
Over the next 25 years, the Canadian petroleum industry is expected to add $3.6 trillion to Canadian GDP, 25 million person years of employment and $1.1 trillion in net revenues for federal, provincial and municipal governments.
Indeed, global energy needs are forecast to increase by up to 33% by 2035, with 60% of additional demand coming from China, India and the Middle East, according to IEA.
Manufacturers are certainly on-board with expansion plans.
In an open letter published in February, CME president and CEO Jayson Myers says they would benefit most from the development of new markets created by the energy and resources sector.
“Canada is in a unique position – we can directly benefit from the production of a mix of different sources of energy, including nuclear, hydro-electric, coal, natural gas and renewable as well as high-value, high-paying jobs in the supply of manufactured goods and services in the construction of these energy projects.”
But the Northern Gateway project is more than a pipeline to Mansell.
“This isn’t just about oil, it’s not just about the pipeline, it’s about Canada’s industrial base in general – we have to diversify our markets, and Northern Gateway helps us along that path.”
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This article appears in the Nov/Dec 2012 edition of PLANT West.