New Energy East memo reveals conflicting government views on pipeline's value

Originally published July14.

Canada'soil pipelines are alreadyoperating to their full potentialand the Energy East project is well-positioned to meet the country's projected need in increased capacity by 2020,according to abriefingmemo to Natural Resources Minister Jim Carr obtained by CBC News.

"Absent this capacity, more oil will be shipped by rail, and some production will be restricted," reads the document, dated Feb. 15, 2016.

• Read the full memo: It's embedded at the bottom of this story

The memo was released underan access to information request andlargely contradicts an earlier finance department memo,obtained in the same way, which suggested Canada already has sufficient capacity between rail and pipelines "until at least 2025."

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Andrew Leach, an energy and environmenteconomist at the University of Alberta's school of business, said he's more inclined to trust the analysis in the memo sent to Carr.

"[Natural Resources]Canada is traditionally the department where you have the most expertise in studying the ins and outs or nuts and bolts of crude oil markets," he said.

"So it wouldn't be surprising for them to have more detail on the specific attributes of the market."

Implications forEnergy East

Canada's total oil production is expected to reach 4.9 million barrels per day by 2020, according to the memo, up from 3.9 million in 2014.

The document highlights the Energy East pipeline as being well-suited to meet those future capacity needs, given its projected capacity of 1.1 million barrels per day and potentialin-service date of 2020 to 2021.

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The $15.7-billion pipeline would carry western crude as far east as Saint John to serve domestic refineries and international customers, using existing TransCanada pipeline as far east as Montreal and requiring the construction of 1,600 kilometres of new pipeline through Quebec to the south coast of New Brunswick.

"TransCanada'sproposed Energy East project wouldprovideaccess to newmarketsin Europe andIndia, but would also strengthen Canada's long-term energy security by providingeasternCanadian refiners with reliable access to domestic crude supplies," the memo reads.

No other single pipeline project currentlyundergoing a regulatory review could meet the 2020 need, the memo notes, although some combination of projects could.

Infrastructure gapcosts $7.3B a year

The memo also says Canada's lack of existing infrastructureto get oil to globalmarkets is estimated to have cost domestic producersan average of $7.3billion annually from 2011 to 2013.

"This represented a cumulative loss of $21.9 billion, or one per cent of nominal GDP," the document reads.

It goes on to say that new pipeline capacity will still be important to the industry in the wake of the oilprice crash.

"In the current low oil price environment, the difference between sending oil by rail or by pipeline significantly impacts netbacks for producers (e.g., it costs $5 per barrel more for rail than pipe when shipping from Alberta to the Canadian West Coast, $6 per barrel more to Canada's East Coast, and upto $10 per barrel more to the U.S. Gulf Coast)," the memo states.

"Building new pipeline capacity would reduce transportation costs and assist companies in advancing production projects underdevelopment."

Leach agreed with that assessment.

"The pipeline system, as a whole, is at a fairly high rate of utilization. Put forward some of the new projects that are still in construction in the oilsands, you're going to meet or exceed that total system capacity within the next year or so," he said.

"That future growth would be of higher value if it were served by pipelines than if it were served by rail."

Energy East is currently the subject of what the National Energy Board has deemed "innovative" regulatory hearings that will include an unprecedented level of public input from communities along the proposed route.

The regulatory bodyhas been given 21 months to carry out its review, with its final report due no later than March 16, 2018.

Carr announced changes to the regulatory review process last January, but has also noted that the ultimatedecision on pipeline approvals rests with the federal cabinet.