September 23, 2013
Talking points on Canadian commodity distribution networks (Part 1)
Canada’s economy benefits from resource wealth of a sufficient quantity not only to serve our own domestic needs, but to supply foreign markets as well. But there are interesting wrinkles in terms of getting the product to buyers and they have to do with distribution systems.
Overland, most commodities are easily and cheaply moved by truck or rail. Electric power, oil and natural gas are the exceptions. The former is best sent by cable and the latter by pipelines.
For seagoing transit, the temperature of natural gas is lowered to -160 degrees celsius (-260 degrees Fahrenheit), which turns it into a fluid known as liquefied natural gas (LNG).
Premier Christy Clark of B.C. is hoping to establish a major LNG export-industry in the northwest of her province. The region’s cold climate will significantly lower the cost of gas-to-liquid conversion versus competing proposals in Australia, Qatar and the southern U.S.
As for oil, there are at least five major pipeline proposals under discussion in Canada at this time.
Two are to the West Coast — Enbridge’s Northern Gateway and Kinder Morgan’s TransMountain line; one heads south to the Gulf of Mexico, TransCanada’s Keystone XL extension; and the final two make a bee-line to the East Coast, the reversal of Enbridge’s Line 9 and TransCanada’s Energy East visionary idea.
Why such a flurry? The majority of Canada’s oil reserves are buried in land-locked Alberta. Producers do not have ready access to non-U.S. markets. The province accounts for two-thirds of Canada’s energy exports. Saskatchewan, with 12% of total exports, is similarly handicapped.
Newfoundland’s energy sector, of course, is positioned on the sea, but its size — 10% of the nation’s total energy exports — is far eclipsed by Alberta.
It’s also worth noting that the country’s largest refinery in Saint John, N.B. is currently set up to accept imports rather than to send product outward into the world.
Western Canadian producers are often asked to accept less than the going rate for their crude.
When storage facilities at Cushing, Oklahoma’s transportation hub are full to overflowing, the price offered to Canadian producers is well below the West Texas Intermediate (WTI) benchmark.
Such a scenario is likely to become more frequent in the future as the U.S. increases its reserves by means of hydraulic fracturing (i.e., “fracking”) of shale rock. This is causing an oil and natural gas boom in places such as North Dakota, Texas and many parts of the West.
The new American energy boom suggests a diminishing reliance on outside sources heading towards 2020 and beyond. Analysts suggest this will lead to less involvement in the affairs of the Middle East. While it may seem hard to credit — matters are plenty “up in the air” as they are — there is a good chance this might destabilize the region even further.
Current goings-on in the Arab world that are making nearly everyone uncomfortable include: the brutally vicious civil war in Syria; the behind-the-scenes involvement of al-Qaeda; Iran’s push for nuclear armament; suicide bombings intended to create anarchy in Iraq; and the ongoing Israeli-Palestinian stalemate, with Hezbollah and Hamas role-playing never far away.
The potential for an even more volatile Middle East should be reason enough for Canada to firm up its own domestic energy logistics. As for what it would mean for national unity and pride, any tailor or cobbler knows the value of good stitching.
Historically, the U.S. has become entangled in Middle Eastern affairs due to its vital national interest in maintaining oil supplies from the region.
While a more energy-independent future is in the offing, America is not yet at that stage.
To be continued in Economy at a Glance Part 2.
(as calculated by the Bank of Canada)
Data source: Bank of Canada. Chart: Reed Construction Data - CanaData.