The west-east pipeline and energy security in Canada

Larry Hughes

One of the arguments for a west-east pipeline from western Canada to refineries in Quebec and Atlantic Canada is that it will improve Canadian energy security. The question is, energy security for whom—the producer or the consumer?

To an energy producer, energy security means a market offering guaranteed, preferably long-term, demand. At present, this is an issue to unconventional oil producers in western Canada, with transportation challenges limiting market access.

On the other hand, to an energy consumer, energy security means, in the words of the International Energy Agency, “the uninterrupted physical availability [of energy] at a price which is affordable, while respecting environment concerns”.

Refineries in both Quebec and Atlantic Canada rely on imported crude oil for over 85% and 80% of crude oil supply, respectively (with the remainder coming from offshore Newfoundland and Labrador). While much of the imported crude oil comes from countries with declining production rates, political instability, or both, the availability of this supply has not been seen as a significant issue in eastern Canada until the past year or so (about the time when the construction of the Keystone XL pipeline was facing opposition in the United States). Moreover, the availability of refined petroleum products (such as gasoline and diesel) was not considered an issue either.

The same cannot be said of affordability.

Per capita, Atlantic Canadians consume about the same volume of gasoline and other transportation fuels as other Canadians; however, since the residential and commercial-institutional sectors in Atlantic Canada meet over half of their space and hot-water heating demand from various grades of fuel oil, the total per-capita consumption of refined petroleum products in Atlantic Canada is about 50% higher than in the rest of Canada.

This reliance on fuel oil for heating, combined with the high cost of electricity and limited natural gas penetration, means that energy is responsible for about 20% to 27% of shelter costs in Atlantic Canada, as compared to 14% nationally. For example, in January 2007, the cost-per-unit-energy of fuel oil in Atlantic Canada was almost three-times higher than that of natural gas in Alberta; by December 2011, the cost of fuel oil had risen by almost 42%, whereas natural gas had fallen by over 55%.

Although western Canadian unconventional oil is, in general, less expensive (i.e., more affordable to the refiner) than internationally-supplied crude, once it reaches the Atlantic “tidewater”, its price will increase. This, coupled with other factors such as refining costs, international trade in refined products, and taxes, will continue to make the affordability of fuel oil a challenge to many Atlantic Canadians.

While a west-east pipeline will undoubtedly improve the energy security of crude oil producers, it will do little to improve the energy security of consumers of refined oil products in Atlantic Canada. If the pipeline’s proponents are as concerned as they claim about energy security in Canada, they should focus on improving the energy security of consumers in Atlantic Canada: changing the building code so that buildings use less energy and finding alternatives to oil products for space and water heating would be good places to start.

Submitted to Globe and Mail 11 July 2013—Unpublished