In the last week Jason Kenney was on a West Coast swing as part of his continued attempt to replace Rachel Notley as Premier of Alberta. During the trip Mr. Kenney repeatedly threatened to stop the flow of oil to B.C., in response to the BC government’s use of regulatory processes to delay and possibly convince investors to give up on the construction of the Trans Mountain Pipeline Expansion (TMX). While many have argued that Mr. Kenney might lack the regulatory authority to block the movement of fuels, Mr. Kenney has indicated that he can return control of the authorization of fuel exports to his government and then turn down/off the flow of refined fuels to the West Coast. The environmentalists have argued that this might be a good thing. Much to my surprise, one of the top minds in the field Dr. Andrew Leach of the University of Alberta echoed their argument and this started a rather odd discussion between the two of us. It all centered around this comment:
While we had a somewhat less than cordial discussion, I was left with the need to fill in the gaps left open during the discussion. Specifically, I want to point out some critical facts that individuals like Dr. Leach have overlooked when discussing the potential outcome of a partial shut-down of refined fuel shipments through the Trans Mountain Pipeline system.
Let’s start with the biggest myth being advanced by those who are belittling the risks associated with Mr. Kenney’s threatened shutdown. This with summed up by Dr. Leach’s comment in the National Post: “It’s pretty hard to hold someone hostage … when they have a port”. The problem with that suggestion is that it completely ignores the facilities, layout and limitations of the Port of Vancouver. The loading and unloading of fossil fuels is a dangerous process that requires specialized facilities and when you off-load that fuel you need somewhere to actually put it. The Port of Vancouver lacks any large tank farms for off-loading the fuel needed to keep Southwestern British Columbia supplied with refined fuel. That facility already exists on Burnaby Mountain.
It is not like ships can get the fuel to the current Trans Mountain tank farm which is located on a mountainside (180m – 190m above sea level), 2.5 km east of Burrard Inlet. The pumps at the tank farm are designed to take advantage of that altitude loss, the facilities at Westbridge terminal are not built to fight against that gravity challenge. They can’t pump fuel up that mountain.
Dr. Leach’s reply was you’ve got 400kbbl of storage at Westridge which is 2x interior storage. You’ve got docks. There are tankers. Storage is the easy part. This completely mis-represents the situation. The Westridge marine terminal houses three storage tanks and can handle volumes of approximately 395,000 barrels (63,000 m³) of fuels. Currently those tanks are being used mostly for jet and specialty fuels. To suggest that the terminal would be able to off-load and store all the jet fuel, diesel, gasoline and bunker fuel needed to run Southwestern BC simply ignores the laws of physics. Three tanks simply can’t simultaneously hold four types of fuel and the three tank aren’t nearly big enough to keep us supplied. Not only that, but I remain amazed that the people fighting the facility would expect Kinder Morgan to simply turn over their facility to help the government trying to put them out of business. Mr. Kenney has never suggested that he would block all exports, just refined fuels. Kinder Morgan would likely want to use their facility for export which would be consistent with its existing license and all its existing permits.
Even more challenging would be the supply network in the Okanagan. Virtually all the fuel used in the Interior of BC funnels through Kamloops. Some have argued that this supply can simply be replaced by refined fuel-by-rail. That, of course, ignores the critical shortage of rail cars in Western Canada. Just look what happened during the summer of 2016 when a minor hiccup in oil-by-rail left West Kelowna dry. Shut down the Kamloops terminal and the interior goes dry, and with it goes the tourist industry.
So the question arises, do we have an indication of what to expect if Alberta decided to reduce the movement of refined fuels down the Trans Mountain? This week gives us a pretty good indication of what would happen. As reported in BusinessinVancouver the Parkland refinery processes 55,000 barrels of oil per day to produce gasoline, diesel and jet fuel. The refinery supplies 20% to 25% of B.C.’s gasoline and diesel. As part of an upgrade, the refinery has reduced its throughput and the result has been a spike in gasoline prices with prices already over $1.50/L with the possibility of hitting $1.60/L in the near future.
We are talking about a minor reduction in the operator that produces less than a quarter of the fuel used on the West Coast. As reported by Natural Resources Canada, Edmonton refineries provide about 50%-60% of the petroleum product needs in the Vancouver market. If a minor cut from the producer that supplies 20% to 25% of B.C.’s gasoline and diesel results in gasoline priced at $1.60/L imagine what shutting down 60% of our supply for a week or two would do. As I have pointed out previously, there is simply not an excess of supply in PADD 5 so our trading partners don’t have the excess to sell us. Instead we would be looking at gas in the $2/L – $3/L zone.
Ultimately the challenge faced by British Columbia is that our geography conspires against us in the transportation of fossil fuels. With mountains and water bodies in the way, getting fossil fuels to market is particularly challenging. This is aggravated by the fact that we have allowed ourselves to become completely dependent on outside sources to keep our economy running. When those other constituencies choose to direct their output elsewhere this can leave us in a bind. It can be argued that we have allowed the market to become too tight such that even the smallest fluctuations in supply can result in large price spikes. Expanding the Trans Mountain to provide more space for refined fuels can only help improve the market conditions on the coast. In particular adding capacity to get access to the output from the new Sturgeon refinery would go a long way to reducing our fuel shortages on the coast. Alternatively, we need to accept the risks associated with replacing that supply via rail. Given our anticipated population growth and our still relatively slow transition off fossil fuels for transportation, British Columbia will remain dependent on Alberta for our fuels and will thus remain potentially at risk from unfriendly governments in Edmonton who may choose to rattle their swords in our direction.
An earlier version of this post had a discussion of BC politics that likely represented a bridge too far and given the individuals who have made the suggestion (including Keith Baldrey who knows this stuff) I was probably being a bit too Machiavellian in my thinking. Admittedly, few people have gone wrong guessing that Jason Kenney would take things a step further than the consensus opinion. That being said, my expertise is definitely not provincial politics so I have removed the last paragraph from the main text and left it below for the political plotters.
Dr. Leach has also pointed out the difficulties Jason Kenney would have given that the Trans Mountain is a federally regulated pipeline. This also may be true but for the purposes of this thought experiment I will take Mr. Kenney at his word that he has the power to manipulate what goes down the pipe. Alternatively he could simply act and then use the delays inherent in NEB processes to his advantage.
To conclude I would point out that I have followed the back-and-forths between Dr. Leach and Mr. Kenney and by my count Dr. Leach is ahead by a landslide if not a TKO. Given a discussion between the two I would place my bets on Dr. Leach when it comes to this topic.
Removed paragraph discussed above
Politically, $3/L gasoline could well end the tenure of the BC NDP/Green government. Currently the BC NDP/Green government has a very slim majority in the Legislature. BC has recall legislation that allows recall petitions beginning 18 months after the last election. Several swing ridings in Surrey were won by the NDP, reportedly on the strength of the promise to reduce bridge tolls (making commuting cheaper). Meanwhile Diane Watts, who still has a powerful political machine in Surrey, is sitting on the sidelines biding her time. Consider what would happen if 18 months after the election gasoline was at $3/L based on the new Jason Kenney government being true to his word? Do you not expect 3-4 “spontaneous” recall petitions starting up in key swing ridings in Surrey? That is the political game being played here. Anyone who analyzes Jason Kenney’s plans while ignoring that he is a career politician who thinks this way is completely missing the point. The best way for Jason Kenney to get the pipeline built is to change the government of BC and doing that would simply involve reducing the flow of gasoline to the coast and watching the political dominoes fall.