We need pipelines, not pipe dreams

With all the discussion recently over the lack of so-called value-added jobs, one might wonder why that debate is confined to one sector of the economy.

For example, in 2010-2011, Canada exported more than 12 million tonnes of wheat. Also in 2011, a $100-million bread plant opened in Hamilton, Ont., bringing about 300 new jobs to that city. Presumably, more of that wheat could be “upgraded” here at home, thus creating more of the kinds of jobs that the Hamilton plant is providing.

The same could be true of the billions of dollars worth of lumber exports produced by Canada each year. Surely, we could provide a multitude of jobs in the production of kitchen tables and baseball bats by discouraging the export of such raw materials.

Fortunately, there are no serious calls for such interference in the economy — at least in those sectors. When it comes to the export of raw bitumen, though, there’s no shortage of such calls.

With the price differential for Western Canada Select (as measured against the price for West Texas Intermediate) oil having a significantly negative effect on Alberta’s bottom line, there have been demands for a government strategy to encourage more upgrading and refining in our province.

First of all, it should be noted that there is a great deal of such activity that already occurs. As a report last week from the Canada West Foundation notes, there are eight refineries operating in Western Canada — three of them are in Alberta, representing almost two-thirds of the West’s refining capacity.

Additionally, there are five upgraders in Alberta, and in fact, upgrading capacity in Alberta more than doubled from 2001 to 2011. That doesn’t include the recent expansion of Shell’s Scotford upgrader, and there is also the massive $5.7-billion North West Upgrader, which has just recently been approved.

So when the Alberta New Democrats and the Alberta Federation of Labour seize upon government documents as proving a “strong economic case” for more upgrading capacity, they overlook the fact that some companies have already made that bet.

But the decisions being made in the here and now tell a different tale.

Just last week, we learned that Suncor’s proposed $11-billion Voyageur Upgrader project is in serious jeopardy. The project has already been on hold for the past three years, and Suncor has confirmed that cancellation is now one of the options it is considering.

Suncor’s struggle illustrates the weaknesses and challenges in the economics of upgrading that the Canada West Foundation addresses in its report. There is surplus refining capacity elsewhere. There is falling demand for refined petroleum products. There is also, of course, massive upfront capital costs that are coupled with low returns.

If indeed there is a “strong economic case” for building new upgraders and refineries, then it does not follow that industry would need to be bribed, cajoled, or threatened into acting on it. True evidence for a strong economic case lies not in the analysis contained within some government document, but rather the actual investments being made by the private sector. Like, for example, the investments in new pipelines.

As University of Alberta economist Andrew Leach wrote last year, if we want more refining capacity, it’s likely to come at the government’s expense. He then frames the issue thusly, “should we be willing to subsidize … upgraders and refineries in this country in order to export a higher value end product?”

To look at it that way illustrates for us how this notion of “value-added” is really a reallocation of the value that already exists in the resource.

Why should we value refinery construction jobs over pipeline construction jobs? Why are jobs at new upgraders more important than jobs in existing and new oilsands projects?

Both the Canada West Foundation analysis and a separate study last week from the U of C’s School of Public Policy illustrate the importance of additional pipeline capacity. Delays in proposed new pipeline projects are costing the economy millions of dollars daily.

Even if we were to do more upgrading here, we’d still need pipeline capacity to get that product to market.

The evidence is clear: Alberta needs more pipelines, not more pipe dreams.

The Calgary Herald, Monday, Feb. 11, 2013
Byline: Rob Breakenridge