Why Turning Off The Taps Is A Fraught Endeavour

Cartoon image of a huge valve connecting Alberta and British Columbia

Why Turning Off The Taps Is A Fraught Endeavour

During the recent Alberta provincial election campaign, I heard this rallying cry to “shut off the taps” — to cut the flow of oil through the pipeline that supplies British Columbia with its petroleum.

Turning off the Taps

In a marked departure from the normal content of this article series (the impacts of digital on the oil and gas industry), this week I take a look at a recurring call from Alberta’s political class to cut the flow of oil products via the Trans Mountain Pipeline from Alberta to BC (a polite variation of Alberta’s bumper sticker from the 1980’s “let the eastern bastards freeze in the dark”)

In case you’re not across the backstory, Kinder Morgan, having attempted for years to expand their 300,000 barrel per day pipeline to bring more of Alberta’s crude oil to the closest coast, sold the pipeline to the Government of Canada. The Federal Government has permitted the pipeline, and bought it to assure that it would be built. Perhaps opposition to the pipeline is somewhat harder once it’s in public hands as it pits one province against another, federal government against provincial governments, and raises constitutional questions of who has what jurisdiction over commerce.

The pipeline crosses the Rocky Mountains and delivers 55,000 barrels of crude oil every day to the tiny Parkland refinery in Burnaby. The refinery was owned by Chevron until recently, who, like US-based Kinder Morgan, concluded that better opportunities lay elsewhere, and pulled out.

“Turning off the taps” doesn’t sound like much of a threat to anti-oil lobbyists in BC because shutting down the pipeline is exactly what they want, if they assume the pipeline only carried crude oil.

What escapes the broader public in BC is that this particular pipeline supplies many different petroleum products from Alberta’s refining industrial heartland to BC. This is tricky because crude oil for the refinery blends easily with gasoline, jet fuel and diesel, but this pipeline has ways of keeping the products separated as they flow through the various pumps and lines, emerging in BC in as pristine condition as when they left Alberta.

The pipeline plays the critical role in fuelling the BC economy and lifestyle. The NEB estimates that province consumes 96,000 barrels of gasoline every day, and 79,000 barrels of diesel fuel, but the refinery in Burnaby isn’t nearly big enough to supply all that demand. The balance of supply is met by the pipeline.

Is That…Legal?

I’m reminded of that scene from the Star Wars movie Phantom Menace. The representatives of the Trade Federation wonder if their plan to impose a trade blockade of an entire planet is legal. The Emperor intones “I will make it legal” with all the gravity of a fine b-grade villain.

Let’s be clear, governments block trade all the time. Alcohol for personal consumption can’t legally cross many provincial boundaries in Canada. These same rules are showing up in the new cannabis industry. Employment certificates, teachers licenses and business insurance rules block workers from reasonable employment as they cross provincial boundaries.

But is it “legal” to block the trade in a commodity? Well, Bill C-48 will effectively ban the export of crude oil by banning large scale crude loading, unloading and tanker traffic on the northern coast. The bill targets the shipping method. In the same way, lobbyists that oppose oil pipelines are also aiming at shipping, but not what is shipped.

As an aside, Albertans would be interested to know that Bill C-48 doesn’t ban all tankers, just those carrying more than 12,500 tons of crude. In this way, BC’s two refineries can switch from pipeline supply of crude to tidal receipts and still stay in business (a ton of crude by weight is about 7 barrels in volume). In other words, the bill is not all about the environment as is claimed. The bill looks like it provides for the partial energy security for BC’s residents at the expense of economic security for Alberta.

Disrupting Supply

Canadians occasionally experience an outage in power, but most haven’t lived through a disruption in fuel supply. As a rich country with ample energy, Canada does not need to keep on hand large stockpiles of crude oil or finished products. The supply chain is well run. Run-outs are rare. Inventories can be kept razor thin. Sure, the odd fuel station might have to shut down a pump but in general, they’re back in business pretty quickly.

I was in Australia when a specific fuel used by taxis ran out, and suddenly the entire city of Melbourne had no taxis. That week, travellers couldn’t get to airports, patients couldn’t get to doctors (many people on meds shouldn’t be driving), and drunks decided to drive themselves home. Australia’s economy has just 15 days of inventory, in a country largely dependent on imports. It’s likely that BC’s fuel supply chain is also tightly managed, if not more so, because energy in Canada is cheap and abundant.

Shut off the taps, and like Melbourne’s taxis, the economy would almost immediately slam to a halt as there is likely no elasticity in the supply chain, no spare inventories. A whole pallet of anti-social behaviours are likely to emerge, based on the experience of other markets — bans on non-essential consumption, unsafe hoarding, arbitrary market allocations, product theft and pilferage, armed escorts.

If the taps are turned off, the refinery would purchase tidal crude to keep the refinery running. No biggie there — Bill C-48 protects the refinery’s supply options.

But what about the supply of diesel fuel and gasoline? The next available option would be trucks. To supply the missing daily 125,000 barrels of finished products would require incremental movement of up to 1500 tank trailer trucks trundling between Alberta and BC (or one departure from Alberta every 3 minutes), assuming there were facilities to load and unload that many trucks every day, over mountain passes frequently closed in the winter.

The costs are insane when compared to pipelines and far more dangerous, but in pinch, that’s what you do.

BC already pays the highest pump prices in North America. Replace the cheapest way to bring petroleum to the province with the most expensive way and someone has to pay the extra freight. After a period of adjustment, pricing for petroleum in the province will have to go up.

Wreaking a little industrial havoc

Instead of just “shutting off the taps”, Alberta could fiddle with the taps, like a teenager might to annoy his older sister in the shower. By altering the mix of products that flow down the pipeline, Alberta could induce a painful but not crippling level of market discomfort for BC. And altering the mix could likely be carried out by Alberta’s energy regulator. After all, the province has already enacted restrictions in crude production. The pipeline would still be full, product would still be flowing, but the balance would be off.

A few days’ restriction on marine fuel shipments through the pipeline will force fuel sellers to prioritise traffic—do they halt the container business from the port, lay over the cruise ship industry, or cancel ferry services to the islands? Industry can pay for vessel demurrage or stockpile at quayside, but the tourism industry is very brand sensitive thanks to the power of social media sites. Tourists will not be kept waiting. And ferry service issues are front page news when they’re running.

YVR is less dependent on Alberta for jet fuel since the airport has alternative supplies already in place because the demand for jet fuel is so strong. Jets will still fly, but prices to fly to and from Vancouver would spike.

BC is very dependent on diesel fuel, what with all the mines, forestry and agricultural activity. Rotating shortages during the year could be timed to force hard choices on various sectors. BC’s commodity export prices (for wood, crops, minerals and ores), are set by the market and increases in fuel costs might not be transferable to the customer.

Gasoline is the biggest petroleum product category, and some well timed shortages could create real challenges for tourism. BC’s ski industry is totally dependent on gasoline (as the vast majority of skiers drive to ski hills). Then again, fewer skiers at Whistler might suit the locals, who blame Alberta for climate worries.

Rotating manufactured shortages of fuel are hard to plan for. Altering tank allocations at the refinery, beefing up inventories, moving inventories closer to consumption points, and altering supply lines take time and investment. Less fuel consumption means lower tax revenues, both from pump sales and declines in economic activity.

Next Moves

I don’t believe in using energy supply as an economic weapon. Energy is a basic human entitlement. Playing with someone’s energy security never ends well. When Gasprom halted gas pipeline supplies to Europe because the transit nation Ukraine withheld payment for its gas purchases, many innocent Europeans froze to death. I consider it immoral to deny energy supplies to a northern climate nation. By politicising and weaponising their energy system, Gasprom, and the Russian state, permanently damaged their brand in the market.

But by blocking Alberta’s pathway to energy markets, BC and the federal government are slowly freezing Alberta’s economy to death, and 100,000 out of work and angry Albertans are reaching for the taps.

It is clearly time for Alberta, BC and the Federal Government to find a compromise to this politically manufactured situation, or risk an escalation in tap warfare.

*****

Check out my new book, ‘Bits, Bytes, and Barrels: The Digital Transformation of Oil and Gas’, available on Amazon and other on-line bookshops.

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