It’s an absurd story.
During the 1973 OPEC embargo and price shock, oil from Alberta was transported west to Vancouver via the TransMountain pipeline, whereupon it was loaded on to tankers. Captains navigated their valuable maritime cargo south, then east through the Panama Canal. Exiting the Caribbean Sea, the ships headed north along the U.S. East Coast. After almost 15,000 kilometres in transit, they docked at their final destination: The port of Montreal.
Surely there were better ways of delivering vital energy resources from Alberta to Quebec, a 3,600-km journey by pipeline. Any foreign, oil-starved observer looking at the situation at the time would have surely scratched a welt into their scalp and asked: “How can a nation that has been producing oil for over 120 years, has access to the best pipeline-welding technology, not have installed the capability to serve itself and shield its economic interests during time of crisis?”
The roots of this question go back to 1957, when prime minister John Diefenbaker established a Royal Commission on Energy in order to investigate “a number of questions relating to sources of energy.” At the top of the commission’s agenda was addressing the viability of an oil pipeline from Edmonton to Montreal. Western producers encouraged the market access, but eastern oil refiners were critical of the expensive proposal as they were already receiving cheap supplies from abroad, notably from the Middle East. This rift led the commission to establish the National Energy Board (NEB), which started operations in the summer of 1959. Mr. Diefenbaker noted that the NEB was needed to ensure that “Canada’s energy resources are used effectively and prudently, to the best advantage of Canadians.”
Walter J. Levy, an oil consultant from New York, was an adviser to the NEB at the time. Mr. Levy proposed that the Edmonton-to-Montreal pipeline not be built. The economics of the day suggested that Alberta oil should go to U.S. markets while Montreal was best positioned to keep getting cheaper oil from overseas. The NEB accepted Mr. Levy’s recommendation, which was adopted in the National Oil Policy of 1961. And that is why for five subsequent decades, Western Canadian oil producers have never had meaningful access to domestic markets. And today it’s why the bulk of Canada’s population is still vulnerable to the vagaries of international oil geopolitics and continental energy economics.
It’s naive to think that global oil disruption can’t happen again. Eastern Canadian refineries are reliant on foreign suppliers like Algeria, West Africa, the Middle East and the North Sea to the tune of 725,000 barrels a day. In the event of a crisis, it’s not certain where all of Canada will get its oil. Meanwhile, U.S. refineries will continue taking delivery of over three million barrels a day of convenient Western Canadian oil. No doubt the Panamanians will be happy to take reservations for tankers to transit through their locks again – assuming there is enough capacity for Alberta oil to get to a B.C. port.
Maybe the probability of a global oil crisis like 1973 is low. But the chance of economic disruption – losing billions of dollars in royalties and taxes due to oil price discounts (as recently experienced) – is not small. It’s counterintuitive that one end of Canada imports their oil at full global price while the other end exports their excess capacity at a hefty discount. Canada is the sixth-largest producer in the world and third-biggest exporter; that it can fall into a multibillion-dollar oil trade deficit is absurd.
At least there was some “nation building” on the natural gas side with the construction of a pipeline across the country in 1957. Yet that almost didn’t happen either. Prime minister Louis St. Laurent insisted that it be built on Canadian territory, through Ontario, and not through the United States. Then minister of trade and transport, C.D. Howe, stated his belief: “I am convinced after thorough study of the matter that the only reliable supply of natural gas for the provinces of Ontario and Quebec must be from Western Canada by means of an all-Canadian pipeline.”
Government loans, a raucous debate in the House of Commons and hard-nosed negotiating with U.S. corporate interests eventually seeded Trans-Canada Pipe Lines Limited, which put the steel arteries in the ground. But the cross-country Mainline took prisoners. In the forthcoming election, Mr. Diefenbaker defeated Mr. St. Laurent, in large part due to the contentious pipeline saga (a footnote not likely lost on politicians today).
The bitterly cold winter of 1977 was a good test of the Mainline. Western natural gas flowed across the land to heat homes and light the lights in the east. Nobody remembers that story, because the national interest was so well served in a business-as-usual manner, as it should have been. Memories are also short to also recall that our U.S. customers made a plea to Canada for extra natural gas to fend off Jack Frost’s 1977 heat embargo. Canada, having served itself, obliged by sending extra production to its cold American friends, as good neighbours should.
Today, the Mainline is mostly empty, as ballooning U.S. shale gas production pushes Western Canadian supplies out of the competitive eastern market. New pipelines from Pennsylvania are increasingly serving Ontario and Quebec, diminishing Canada’s 55-year self-reliance on natural gas.
Last week, TransCanada Corp. gave the green light for “Energy East,” their $12-billion project that will convert a significant portion of its Mainline to oil. It was a welcome and necessary announcement. Finally after almost six decades of numbing debate and muddling through crises, meaningful quantities of Western Canadian oil from Edmonton might actually flow east to Montreal, and then onto New Brunswick.
Yet it’s a complex irony – on the verge of being absurd – to think that it has taken the demise of a natural gas pipeline that has served the national interest for over half a century to finally address issues of sovereignty, prosperity and energy security for Canadian oil.
Peter Tertzakian is chief energy economist at ARC Financial Corp. in Calgary and the author of two best-selling books, A Thousand Barrels a Second and The End of Energy Obesity.