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Oil export markets crisis has been years in the making

Imagine if the Voisey's Bay nickel mine in Labrador had gone ahead without a deep water port to ship the ore to smelters.

Or if Hydro-Quebec had opened the floodgates on its massive James Bay project before installing transmission lines and lining up U.S. customers.

By the same token, you likely wouldn't buy a car if you lived in a roadless Newfoundland outport.

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Sinking billions into extraction projects without lining up a dependable way to get the resource out is reckless, if not downright stupid.

Oh, wait. Isn't that the awkward spot Canada's oil patch has put itself in?

"Access to tidewater" is the new and increasingly forlorn mantra of oil executives and their political backers in Ottawa and the Western provinces.

There's a sudden panic about the dearth of options to get that heavy crude to refiners, and ultimately to customers. Those concerns, at least according to Alberta, are in part driven by an unexpected surge in U.S. domestic energy production, with new technologies allowing for the exploitation of oil and natural gas trapped in shale formations.

Alberta Energy Minister Ken Hughes declared recently that securing market access for the province's oil is his government's "single most important imperative."

There are now proposals for at least three different pipelines – to Atlantic Canada, to British Columbia, and of course, the stalled Keystone XL that would carry the heavy crude south to refineries on the U.S. Gulf Coast.

But none of these pipelines offers relief in the medium and short-term. Even if approved, the pipelines will take years to complete. With options limited, producers are frantically talking of loading the stuff onto rail cars and barges. Pack mules and canoes may be next.

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Producers are busily scaling back or cancelling oil sands projects, and if foreign buyers insist on a carbon tax, Alberta's so-called "bitumen bubble" could grow much larger.

Where was the sense of urgency about pipelines when investors committed billions of dollars over the past decade to double the output of the oil sands?

All this new crude didn't come on stream overnight. This crisis has been years in the making. So it should not come as a huge surprise to anyone paying attention that access to markets might be a problem in 2013.

Oil sands production reached 1.6-million barrels per day in 2011. Another 400,000 barrels per day will come on line by 2016, and by 2020, oil sands production is expected to double to 3.2-million barrels per day, according to the Canadian Association of Petroleum Producers.

The industry's inability to see the future is costing us now. The combination of an oil glut, limited pipeline capacity and dependence on a single customer – the U.S. – has opened up a 30-per-cent discount for oil sands crude that's costing the industry as much as $18-billion a year. It's also pushed Alberta, the former money-bags of Canada, into deficit and knocked the entire country's economy off kilter.

To be fair, many people did not anticipate how fast shale oil extraction methods would come along, unexpectedly boosting U.S. domestic production and depressing demand for Canadian crude.

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But other risks were well known in the industry, or should have been.

Cenovus Energy Inc., like most publicly traded oil sands producers, highlighted the inherent risks of bitumen in its 2010 annual shareholder information circular. Among the perils, the company cited "the availability and cost of export pipeline capacity" and the limited markets for bitumen, which is "more susceptible to supply and demand changes."

As it set a course to double output, the industry knew full well it was tied to one customer – the U.S. – and was highly dependent on limited pipeline capacity.

The tragedy is not today's bitumen bubble, but the failure to get out ahead of the oil sands' problems five years ago.

The industry should have been looking at pipelines to move oil to refineries on the East and West coasts well before now. Diversification of markets is a discussion that should have taken place in 2008, not 2013.

Now Canada looks like the hapless guy with the shiny new car in a town without roads. All that money invested and no way out.

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About the Author
National Business Correspondent

Barrie McKenna is correspondent and columnist in The Globe and Mail's Ottawa bureau. From 1997 until 2010, he covered Washington from The Globe's bureau in the U.S. capital. During his U.S. posting, he traveled widely, filing stories from more than 30 states. Mr. McKenna has also been a frequent visitor to Japan and South Korea on reporting assignments. More


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