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Burrard Inlet in Vancouver (LAURA LEYSHON For The Globe and Mail)
Burrard Inlet in Vancouver (LAURA LEYSHON For The Globe and Mail)

The energy bridge to China Add to ...

They are the scouts of a new frontier, slipping beneath the Lions Gate Bridge. Few notice, and even fewer understand their importance.

But the growing numbers of crude tankers steaming past Vancouver to the Pacific are quietly rewriting the politics and economics of Canadian energy. Their destination: China, land of mounting energy thirst and growing energy might.

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The first vessel, loaded with Alberta crude, set sail roughly half-a-decade ago. Ever since, the numbers have steadily risen. In 2008, about four ships steamed across the Pacific. Last year, China-bound traffic doubled. This year, a vessel a month, each one carrying roughly 600,000 barrels of crude, will head out from Vancouver, en route to Asia.

If this is a trickle - and it is, compared with the 2.8 million barrels of oil Canada extracts every day - consider it the first dribble from a faucet that is set to turn wide open.

Two of Canada's most powerful energy companies, Kinder Morgan and Enbridge are laying competing plans to pipe and ship massive volumes of crude to Asia. Their projects could, for the first time, free the Canadian energy industry from its dependence on the U.S. market while at the same time fattening profit margins.

If the industry realizes its ambitions, a steady stream of tankers will become a floating bridge between British Columbia and Asia, fundamentally altering not only the way Canada's resources are viewed by the world, but the way this country views its own natural treasures. Canada's enormous reserves will become a potential source of energy for the planet rather than just a gas tank for us and our immediate neighbours.

Yet industry support for the proposals is growing at a time when the public is turning against the idea of transporting crude by water. With pictures of the Gulf of Mexico spill fresh in their minds, outraged coastal residents have conjured up images of a similar ecological disaster on B.C. shores if a tanker ran into trouble there. In the interior, some landholders have pledged civil disobedience to block construction of new export pipelines. Federal Liberal Leader Michael Ignatieff has come out against crude tankers in northern B.C. waters, while Vancouver's city council is questioning the impact of more oil vessels in its own inlets.

Despite the opposition, Canadian energy producers are pouring hundreds of millions of dollars to lay the groundwork for projects that would cost billions more to build. Negotiations have already begun between pipeline firms and Chinese entities on how to "repatriate" the barrels of Canadian crude the Chinese have bought by investing in the oil sands.

"We have a world-class resource and we're going to match that resource with the soon-to-be-largest, but also fastest-growing, market in the world," said John Carruthers, the president of Enbridge's Northern Gateway project, one of the two proposals competing to export crude to the Pacific. "It's a huge project for the country."

'More than one customer'

When Enbridge submitted its Northern Gateway application to the National Energy Board this spring, it marked the culmination of a decade of effort and $250-million in development costs. Gateway, a $5.5-billion proposal for a pair of pipelines, is designed to bring 525,000 barrels of crude per day from Edmonton to the northern British Columbia port of Kitimat. There, it would be loaded on to large crude carriers, which would take it across the Pacific two million barrels at a time.

Kinder Morgan has a more modest but still expensive idea. Rather than building a new pipeline, it is laying the groundwork for an expansion of its TransMountain pipeline system, which today brings 300,000 barrels a day into B.C.'s Lower Mainland from Alberta. It is that pipeline that feeds the ships already leaving for China.

The company has spent millions upgrading its ship loading dock in Burnaby, B.C., to handle more traffic.It has studied how to bring larger ships beneath the Lions Gate Bridge and it has quietly worked with the Port of Vancouver to install new navigation aids, while training harbour pilots to guide those larger tankers through the sensitive waters of Burrard Inlet.

"We've done a lot of work at preparing ourselves for the next phase of expansion," said Ian Anderson, president of Kinder Morgan Canada.

For both companies, the draw lies in Asia's fast-growing refining capacity. By Enbridge's count, China, Japan and South Korea have three times more refining capacity for Canadian heavy crudes than does North America.

"They import something in the order of 11 million barrels a day," Mr. Carruthers said. "And we believe we can access 1.5 million barrels of that capacity."

Enbridge estimates that by sending oil to a market with strong demand, rather than one like the U.S. where demand has weakened, it can earn $2 to $3 (U.S.) more on every barrel it sells. At 550,000 barrels per day, that could trigger a huge wash of new cash.

Most important, opening up an Asian market would mean that Canadian oil producers no longer have to passively accept whatever price U.S. refiners are willing to pay. They could play U.S. and Asian customers off against one another in search of the best deal.

"Having more than one customer is always an important issue," said Rick George, chief executive officer of Suncor Energy Inc. "You never want to leave yourself as a supplier with only one customer."

Whose backyard?

Despite the industry's optimism, it is by no means clear that the pipelines will ever be built. A rise in U.S. demand or a plunge in oil prices could undermine the case for going ahead.

In a worrisome sign, Enbridge presented Northern Gateway for regulatory approval without securing any commitment from oil and gas companies to use it - an exceedingly rare move.

And doubters question whether the new lines are needed. So much pipe has been laid to the U.S. in recent years that analysts believe it won't all be filled for years to come.

"There is no question that Canada is long on export pipeline capacity until the end of the decade as a result of what's been built," Mr. Anderson said.

But the industry believes the threat of looming U.S. greenhouse gas legislation, which could make it more difficult to sell gasoline made from carbon-heavy oil sands crude, renders the Asian option worthwhile. "It's not about capacity. It's about providing the option," Mr. Anderson said.

The question, according to Mr. Anderson: "What's the size of project you need to feed that option? And through whose backyard are you building it?"

Both of the competing concepts are well-funded and well-researched. Enbridge's Gateway proposal is bigger and likely more expensive, but it has the advantage of serving large, more efficient tankers with a shorter sailing time between Kitimat and Asia.

In contrast, Kinder Morgan believes that by expanding an existing pipeline, rather than building an entirely new one, it can move crude more cheaply.

It has yet to file a formal application and faces opposition in Vancouver, where its plans would result in doubling the number of crude carriers sailing past the city's downtown. Though that would only bring tanker traffic to just over 5 per cent of all vessels there - a figure Mr. Anderson calls "a drop in the bucket" - it would create much more visibility, and raise the possibility of local protest and punitive legislation.

See a timeline of pipeline resistance in western Canada

Kinder Morgan may want to draw lessons from Enbridge, which has seen Gateway become an environmental flashpoint.

The proposed pipeline would span 1,172 kilometres, crossing the territory of roughly 50 first nations and 773 creeks, streams and rivers. Opponents say Gateway would bring massive volumes of oil into places it does not belong.

That concern is especially loud in Kitimat, where the Haisla First Nation points to sea water so rich it has produced two-to-a-pound prawns. Even Mr. Ignatieff, the Liberal Leader, has said oil tankers should not run there - a direct attack on Gateway.

Feelings run just as strong on the Stuart River in the B.C. interior, a place of lovely stillness where calm waters meander beneath circling bald eagles, and where brothers Blondie and Vince Prince come to touch the divine.

"That's my cathedral. You get some people go to St. Peter's in Rome. They got nothing on down the river, man," said Blondie, the older of the two.

Community members are passionate about the issue: "Any disturbance by Enbridge would mean the total annihilation of our existence," says Peter Erickson, a councillor with the Fort St. James Nak'azdli band. "We've already lost the majority of our salmon. And now they're putting in jeopardy the rest of them, what little we have. It's just atrocious."

Across northern B.C., Gateway has triggered a fiercely emotional response. First nations have banded together in unprecedented ways to oppose the project, and many have pledged blockades and other measures to block the line if Enbridge attempts to build it.

In response, Enbridge has argued that it is a safe operator, moving two million barrels a day and last year spilling just 2,800. It has vowed to build navigation upgrades on the B.C. coast that would make shipping safer for all vessels, not just crude carriers. It has also promised thousands of jobs and millions in annual property tax revenues, and offered first nations a 10-per-cent equity stake - though not one has yet signed up - and says support is building.

But the Prince brothers and many others don't think the reward matches the risk. Water, says Vince, has an incredible power to destroy, whether it's the Exxon Valdez or a pipeline river crossing. He also believes he has a responsibility to stop a project that, he says, will increase global dependence on oil. Most important of all, he doesn't think he should have to sacrifice his land so a Calgary oil company can transport oil sands crude to Asia.

"They don't have to destroy my territory so that they can have more lights and bigger cities and more people," he said. "There's so many pipelines already. Why do they need a new one? Why spoil more land? Greed?"

The China factor

Mr. Carruthers is confident Enbridge can persuade its critics, but across northern B.C., the wall of anti-Gateway criticism is so thick that some observers believe the company may have difficulty breaking through it. "Gateway is going to be facing some incredible opposition," said Vincent Lauerman, president of Calgary-based Geopolitics Central. "The [first nations]aspect of it, especially on the land route, could preclude its construction." He believes the Kinder Morgan option may have an easier path forward.

The politics in other parts of the world are already favourable. Under the Bush administration, some U.S. policy makers saw Gateway as a threat - the U.S. often considers Alberta crude a domestic source of oil and doesn't want to see it go elsewhere. The Obama administration has developed a more-open stance, according to a spokeswoman for the U.S. State Department and Canadian lobbyists in Washington.

An even bigger shift may be the advent of Chinese ownership in Canada's oil sands. In the past few years, Chinese firms, including PetroChina and CNOOC, have poured billions into the oil sands. Chinese executives in Calgary have said their primary ambition is profit, which may mean selling oil to the U.S.

Some, though, ultimately aim to send at least some oil to China, where a network of refineries is waiting to fuel a nation's growing ambitions. CNOOC Canada, for example, has said it hopes Asian export options develop quickly - although it is not interested in investing in the infrastructure.

Analysts say the allure is clear: Overseas companies could increase their profits by extracting Canadian oil sands crude and refining it in China, creating an energy bridge between the two countries that would provide China with a secure supply for decades to come.

In the corporate boardrooms of Calgary, discussions have already begun.

"We're seeing and expecting more Chinese interest," Mr. Anderson said. "Over time we would expect that will underpin more significant repatriation of those barrels back to China."

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THE CONTENDERS

Enbridge Northern Gateway

Cost: $5.5-billion.

Length: 1,172 kilometres.

Details: Two pipelines, a 525,000 barrel-per-day crude pipeline (expandable up to 800,000) and a second 193,000-barrel line to import condensate, which is used to thin oil sands bitumen so it can flow into a pipeline.

Amount already spent: $250-million.

Timeline: Regulatory application filed May, 2010; regulatory approval expected by the end of 2012, with construction beginning early 2013 and oil flowing by 2016.

Proposed benefits: 62,700 person-years of construction employment, 1,150 long-term jobs, $2.6-billion in local, provincial and tax revenues.

Pros: Offers large capacity, access to larger and more efficient crude carriers.

Cons: Must build a new pipeline, at substantial cost, through territory claimed by first nations, many of whom oppose the project.

Kinder Morgan Transmountain

Cost: Undisclosed.

Length: 1,150 km of existing TransMountain system; expansion would affect much of that length.

Details: A staged expansion of TransMountain, starting with an additional 80,000 barrels per day, then a subsequent 320,000 barrels, to bring the system capacity to 700,000 barrels; option for a further 400,000-barrel-per-day expansion with new "Northern Leg" to Kitimat.

Project began: 2004.

Amount already spent: Millions.

Timeline: Depends on demand, but 80,000-barrel expansion could be in service by 2014; the additional 320,000 increment by 2017 or 2018. No date on Kitimat option.

Pros: Uses existing pipeline right-of-way, lessening environmental impact and construction costs. Kinder Morgan believes it can ship a barrel to China from Alberta more cheaply on TransMountain than through Gateway.

Cons: Offers less capacity; brings more crude on to tankers in Vancouver, the heart of Canada's environmental movement.

Nathan VanderKlippe

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Follow on Twitter: @nvanderklippe

 
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