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The new premier needs pipelines

From the Top of the Pile
Brian Zinchuk

I was talking to Ray Frehlick on Jan. 29 about Scott Moe, the new premier. Those in the Saskatchewan oilpatch, and those around Estevan, know Frehlick as something of a living legend in the patch, having built several companies and being one of the most community-minded people I know.

He’s also a strong Saskatchewan Party supporter, and took part in the leadership convention on Jan. 27 in Saskatoon.

I asked him what the Saskatchewan oilpatch needs from the new premier. His answer took me a little off guard.

That’s because it’s not something a new premier can deliver, but rather something a sitting prime minister can. Frehlick said, “The country needs something. It needs pipelines, a federal jurisdiction. That’s the biggest issue.”

As an example, he said the previous week he had inquired what the differential was on medium oil flowing through the Enbridge pipeline system, and found it was US$13 per barrel.

Curiously, I got an email the same weekend from someone who goes by the handle “Gerald in Fort Mac.”

He wrote, “Is shipping oil out of Churchill a dead issue? Because it seems to me to be a win-win-win for everybody: Churchill, the railroad, the port and Canadian oil.Tankers can be built double hull for the ice bergs. Western oil is tied up in the west for various reasons. The distance between Churchill and Fort McMurray is only one thousand kilometres. Is there any group or consortium pushing for this to work?”

I replied that I had spoken a while back to an organization that had looked at it, in depth, but they found the idea untenable.

My own response, having considered the Churchill option for several years, is that it is indeed untenable for several reasons. First, Gerald’s idea of building a pipeline straight from Fort McMurray wouldn’t seem like a bad idea, until you realize almost that entire distance is Canadian Shield, with only a handful of roads. This is not easy terrain in which to build a pipeline, by any stretch. I’m not sure if it’s easier in the mountains of British Columbia, but at least there are more roads to access the right-of-way out west.

Churchill is only open in the latter part of the year. For most of the year, it’s frozen. That’s the hard reality of why it has never gained traction as a major port for any serious purpose, despite many people’s best intentions. And for a commodity that is measured in production by the day, not the month or year, that simply won’t do.

I don’t even want to get into the possibility of an oil spill on a body of water the size of the Gulf of Mexico, but with effectively zero capability to respond to one.

Last week Canadian Pacific made the remarkable point that it doesn’t want to be oil’s swing shipper. Well that’s great, especially if your company might rely on a crude-by-rail facility on a CP line. So no pipeline, and no enthusiasm from one of two Class 1 railroads?

The differential on Western Canadian Select, the price for our heavy oil (in other words, most of our oil) is at a huge discount. As I type this, there’s a US$27.70 per barrel differential between West Texas Intermediate (WTI) and Western Canadian Select (WCS). Now, truth be told, there will always be a differential, because WCS is poorer quality than WTI. But that differential has widened considerably in recent months as pipeline capacity became constrained.

A few years ago, I asked the provincial government just how much money Saskatchewan was giving up due to this differential. It took the Ministry of Economy a little while to get back to me, but at that time, the answer was $300 million per year. Shortly thereafter, that little factoid found its way into speeches by then-premier Brad Wall and his ministers. With the differential in the same range, or higher, now, that figure can’t be too far off.

We, as a province, are losing hundreds of millions of dollars, per year, due to the lack new pipelines for export, in particular, to tidewater. If you look at the Brent oil benchmark, (which would generally apply to oil reaching tidewater), the differential to WCS is US$32.08 per barrel. That’s a lot of money we’re leaving on the table.

That’s money that would pay for libraries, schools, hospitals and roads.

Ray Frehlick is right. The new premier needs pipelines.