Alberta's Oil Sands Product Isn't Getting Cheaper To Ship

Canada's pipeline to nowhere keeps getting worse and worse for Canadians. And it's not like anyone in Alberta is thanking the federal Liberals for buying it and tripling it for them.

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For the past few years, when I’ve talked to energy analysts globally, we’ve tended to agree that Alberta's product will be first off the market as peak oil demand occurs. As a reminder, Equinor, McKinsey, and the IEA all have credible scenarios showing that it will occur prior to 2030. I think it will, thanks to the rapid growth of electrification of ground transportation, the rapid growth of biofuels, and the rapid growth of renewables to power it all.

Others, mostly Canadian oil sands boosters, disagree. Having reviewed their arguments, I feel comfortable in mine. Let's review a bit before getting into the news that triggered this latest article.

In late 2021, I pointed out:

The discount for Alberta's crude is $21 [USD against Brent] right now, and only $7 of that is transportation. The other $14 is because people don't particularly want it and can get alternatives that are cheaper to have delivered and less expensive to process into products that can be sold.

Why the quality discount? Well, Alberta's product is very high in sulphur, aka sour, and has a consistency that's more like tar than a liquid, aka heavy. The combination means that special refineries have to be built to accommodate it and lots of hydrogen has to be used to desulphurize it. The only ones that do outside of small ones in Alberta are in Houston. Sharp eyes will note that making the hydrogen even somewhat less carbon intensive will double those costs at minimum, so the quality discount will be increasing as well.

Why is it expensive to deliver? Well, that's because Alberta has a limited set of pipelines to the only foreign market for the product, the heavy oil refineries near Houston, Texas. The Keystone Pipeline is it, and its expansion through watersheds that would have been devastated if the diluted bitumen that it was to carry had spilled, as pipelines are wont to do, was sensibly cancelled.

The crude is heavy, so it's mixed with a diluent, typically a much lighter petrochemical condensate such as naptha. When it spills on the ground, it's just an unhealthy miasma. When it spills in water, however, the heavy crude sinks to the bottom and the unhealthy miasma is still there. As it wouldn't float, it couldn't be contained with booms and would be much more problematic environmentally and to clean up.

Due to the lack of pipeline capacity, a lot of Alberta's product ends up on rail cars. As I noted in a rail electrification assessment recently, about 70,000 rail cars full of oil transit North America's tracks annually, and while rail is cheap, it's still more expensive than pipelines.

Enter the Trans Mountain Pipeline. That's the one that was proposed to be tripled in capacity over a decade ago. There were about six major barriers to its approval, not least from my perspective is that it was going to be a stranded asset. Certainly the firm which owned it, Kinder Morgan, wasn't interested in spending the money. The idea was that this pipeline was going to cut into that US$7 per barrel transportation discount.

I didn't see that. As I said a few months ago:

The Trans Mountain runs west to the Pacific. For those with vague memories of geography class, Houston isn't on the Pacific, but on the Gulf of Mexico. Tankers would have to sail down the Pacific Coast to the Panama Canal, transit that, and then sail north a long way back to Houston to offload crude. Google Map's distance calculator suggests that's about 12,000 km, four times as long, with more modes of transportation and more fees.

15,000 km of transportation across two modes wasn't going to be cheap. I didn't see it being less than US$7. But Alberta and Ottawa apparently thought economic magic would happen, mostly because they are apparently under the delusion that China wants their crude, when China doesn't have a single refinery that I’m aware of that refines heavy, sour crude, and is electrifying vastly more rapidly than most in the west realize, with 1.1 million electric buses and trucks on their roads already, and internal combustion light vehicle sales falling off a cliff as China buys over 60% of EVs globally, including an awful lot of inexpensive ones from their domestic manufacturers.

So, when the Liberals won federally in 2015, they made a grand deal, removing a couple of federal blockers in return for Alberta's briefly sensible NDP administration to get on board with the federal carbon price, something that's survived three elections so far.

Then Kinder Morgan made it clear that it didn't see the business case, and the Liberals bought the pipeline outright and started construction under the Crown corporation they’d put around it. The carbon price deal was good, but the pipeline purchase sucked. The idea was that the government would build the pipeline expansion and then sell it to someone who wanted to operate it.

Back in March of 2023, the unsurprising news came out that the pipeline expansion had quadrupled in cost to about C$31 billion. That was going to jack up the cost per barrel to transit the pipeline, of course. The Canadian government and hence the taxpayers is backing another C$3 billion in loans for the ill fated tube.

And now, the price tag — at least so far — has been unveiled.

In a June 1 application to the Canadian Energy Regulator (CER), TMC proposed a base toll of C$11-C$12 ($8-$9) a barrel, depending on the type of crude shipped and its final destination.

Yeah, just the pipeline portion of the trip will cost more than US$7. Then there's the 12,000 km trip including Panama Canal fees to Houston. The Trans Mountain Pipeline isn't going to move the needle at all on the transportation discount, and in fact will probably increase it.

Combined with the expected rise in the quality discount, the combination means that as peak oil demand arrives and there's a surplus of light, sweet oil near to water, global buyers will simply buy the cheap, easily transported, easily refined stuff. Alberta's product will stay in the ground. The Trans Mountain will likely never see peak 890,000 barrels a day, and might peak at half of that. It's likely going to see close to no oil by 2040 and go bankrupt.

There are two kickers to this tale of fiscal ineptitude and lack of foresight.

The first is that while Canada is on the hook for about C$35 billion so far, between the original purchase price and the cost of construction, the best guess of Morningstar analyst Stephen Ellis — an oil and gas industry insider who is quite likely in denial about peak oil demand and hence has an optimistic valuation of pipelines — is that it's only worth C$15 billion to any buyer. Unsurprisingly, Canada and its taxpayers are going to be either stuck with this stranded asset, or more likely take a C$25 billion bath on it. Given the likelihood of it being a dead asset by 2040, I can see $5 billion being the final sale price, so a C$30 billion loss for Canada's citizens.

The second kicker is that the pipeline isn't complete, and none of the other projections of costs and schedules have been remotely correct. As the Crown corporation notes in its application for toll price approval, the costs and hence tolls could rise further. Yes, every additional cost will end up in the tolls.

Canada's pipeline to nowhere keeps getting worse and worse for Canadians. And it's not like anyone in Alberta is thanking the federal Liberals for buying it and tripling it for them.

is a member of the Advisory Boards of electric aviation startup FLIMAX, Chief Strategist at TFIE Strategy and co-founder of distnc technologies. He hosts the Redefining Energy - Tech podcast (https://shorturl.at/tuEF5) , a part of the award-winning Redefining Energy team. He spends his time projecting scenarios for decarbonization 40-80 years into the future, and assisting executives, Boards and investors to pick wisely today. Whether it's refueling aviation, grid storage, vehicle-to-grid, or hydrogen demand, his work is based on fundamentals of physics, economics and human nature, and informed by the decarbonization requirements and innovations of multiple domains. His leadership positions in North America, Asia and Latin America enhanced his global point of view. He publishes regularly in multiple outlets on innovation, business, technology and policy.He is available for Board, strategy advisor and speaking engagements.

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