THE COLD FACIS

SORTING OUT CANADA’S ENERGY EQUATION: A SPECIAL REPORT

JOHN AITKEN February 1 1974

THE COLD FACIS

SORTING OUT CANADA’S ENERGY EQUATION: A SPECIAL REPORT

JOHN AITKEN February 1 1974

THE COLD FACIS

SORTING OUT CANADA’S ENERGY EQUATION: A SPECIAL REPORT

JOHN AITKEN

Canada’s energy crisis has put us through an emotional wringer this winter. We have so far been threatened with some of the most difficult economic problems a nation can face in peacetime: gasoline rationing; regional allocation of home heating oils; shortages of literally thousands of products ranging from home insulation to ball-point pens; massive unemployment and spiraling inflation; even the prospect of shivering in front of living-room fireplaces, for those lucky enough to have them and wood to burn in them (at a cost of $105 a cord in some cities). The stock market has sagged. General Motors temporarily shut down an entire big car production line in its Oshawa plant. We are, along with the United States and Europe, reeling from a series of blows we haven’t fully comprehended. There is talk of economic recession, even — God forbid — depression.

Yet Canada’s so-called energy crisis, despite some very real threats, is in many ways a myth, created by panicky politicians, inept bureaucrats, and a petroleum industry grown complacent in these last several prosperous years. It has become in a few short months the issue which has politicians on all sides of the House of Commons spoiling for a fight.

Confusion. Indignation. How is it — and why is it — that

we have come to this crisis in energy when just a few years ago our main concern was that the Americans might not buy our oil as rapidly as we could pump it out of the ground? If oil is in such short supply, how come we’re still exporting 1.4 million barrels of it per day to the U.S.? Only a few months ago Finance Minister John Turner was boasting that this is a 17% boost over the previous year.

Trying to find the answers to such questions from politicians, bureaucrats, academics and industry executives is like looking up a word in the dictionary and having to look up all the words used in the definition as well. Or calling a store and being shunted through six depart-

ments before you determine they’re out of what you wanted.

Still, after weeks of such interviews I’ve come to these conclusions:

— We have in Canada enough fossil fuels to last us more than 100 years. There is no shortage of fossil fuels here, although there most certainly is a shortage of oil south of the border. Canada’s crisis lies in our failure to develop transmission and refining facilities sufficient to get our vast reserves of oil and natural gas to market, particularly our own market, in usable form. It is the Americans who have the energy crisis, and they are depending on us to help them weather it, and to do so without thought for our own needs.

— We can’t save the Americans from their energy crisis, nor can we even help them very much. We’re just not in the same league. Our entire production of conventional crude oil, including all our known or proven western reserves (which stand at roughly nine billion barrels) would quench the American thirst for oil for 20 months at best.

— Asa result of our failure to build pipelines and refineries to bring oil east to Quebec and the Maritimes, these provinces and to some extent Ontario will have fuel shortages at least until the early 1980s and possibly longer. Professor F. K.

North, a professor of geology on the faculty of Carleton University, describes the situation with devastating clarity. “We may have resources for 100 years,” he says, “but by the late 1970s, and until the late 1980s, we’ll be exceedingly cold.”

Part of our problem can be blamed on the shortsightedness of the last three federal governments, and part on the National Energy Board, whose staff of 250 technocrats and other workers was supposed to prevent exactly such a predicament. But by far the largest portion of blame is rooted in the basic contradiction of Canada’s geography. Canada sprawls from east to west across a continent whose energy

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from page 19

and transportation economics are irrevocably canted from north to south.

When the Leduc oil field was discovered in 1947 by Imperial Oil, establishing Alberta as an oil rich province after many years of frustrations for the exploration teams, there was jubilation. Other fields were discovered and almost immediately the Interprovincial Pipeline was started, to carry the oil to the industrial provinces of the east.

At that time, particularly in 1953 when the pipeline was extended to Sarnia, foreign oil was cheap. Despite the fact it had to be shipped thousands of miles across.the Atlantic Ocean, it was still cheaper than oil put through a pipeline, so the line stopped at Sarnia and later Toronto. Quebec and the Maritimes would buy their oil from the Middle East; Alberta would divide its oil between Ontario and the midwestern United States.

But the Yom Kippur war of 1973 taught the Arab states the political uses of oil, and they cut their production in an attempt to weaken American and other support of Israel. As a result eastern Canada could have been short of its oil needs by some 200,000 barrels a day, with no pipeline to bring Alberta oil east. The problem has apparently been resolved for now with announcement by John Shaheen that he would divert

100.000 barrels a day of his own refinery’s production at Come-By-Chance, Newfoundland, from American markets to Canadian ones.

We are taking other measures to bring domestic oil east. We are shipping oil from the west coast down the Pacific to Panama, through the canal and up to Canada’s east coast. That is bringing about 90,000 barrels a day. We were shipping some through the Seaway until it closed for the winter, and some by train and truck, a total of 40,000 to

60.000 barrels a day. And John Shaheen, proprietor of the huge new refinery at Come-By-Chance, Newfoundland, through a nicely timed manoeuvre with the federal government, has reminded Ottawa that his export license can be revoked, and by using the force majeure clause in his contracts he can divert

100.000 barrels a day to Canada from their intended U.S. markets. Shaheen made a deal with BP Oil Company to buy crude oil from Iran and Kuwait on a 10-year contract, and if the force majeure clause can work against Canada (used to divert oil from Canada to the U.S. by the U.S. dominated companies), then according to Shaheen it can be used the other way too.

And so it looks as if Canada may weather the current shortage more easily than the U.S. But the problem of shifting sources of oil will remain with us for at least a decade to come.

It is Professor North’s contention that

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literally anything we do now is already too late to prevent serious shortages within the next 10 to 15 years. Even with unlimited funds and technology, he says, it takes 10 years to bring Arctic resources to market. It takes time to build a refinery and about a year to bring it to full production. It takes time to build a pipeline, and on top of that, says North, “you have to fight the conservationists through every court in the land.” It is this lead time that will cause some cold winters for the next 10 to 15 years. “Unless we get reliable imports of foreign oil by 1979,” he argues, “we’re going to have a shortage proportionate to that now being faced in the U.S.”

The extension of the Interprovincial Pipeline to Montreal, which is expected to be completed by late 1975 at a cost of some $150 million, could alleviate shortages in Eastern Canada but no more than that: it is not a solution. For example, the oil that is shipped through the pipeline will have to be taken from the Alberta oil fields, meaning cancellation of some contracts with the U.S. This can be politically difficult because there are refineries and even industries in the midwestern United States which were built because of availability of Canadian crude, and are utterly dependent on continued Canadian supplies. Also, the output of Alberta oil fields has already begun to decline. Most of them have been producing for 20 years. When the conventional fields dry up we will turn, theoretically, to the Alberta oil sands, but at the very maximum they will be producing only 280,000 barrels a day by the end of the decade, and possi-

have plenty of oil coming from the sands, but eventually isn’t the problem. Our problem is now.

In all of this — the building of pipelines, the diversion of tankers, the decline of our oil fields — we are faced with American desperation and not our own. Canada produces more than two million barrels of oil each day; of this we export 1.4 million barrels to the U.S. The rest we consume in the west and in Ontario, while Quebec and the Maritimes must import 800,000 barrels. Simple arithmetic shows we don’t lack oil, we lack pipelines. And foresight.

bly much less than that. Eventually we'll

The problem with natural gas is more difficult still, because while we sell half of our oil to the Americans we do so on the basis of 30-day licenses which could be terminated if necessary. We also export half of our natural gas — about 2.8 billion cubic feet per day — but we do so in the form of long-range contracts which extend as far as 1992.

While we must honor our commitments, the United States uses five billion barrels of oil every year. It imports three times as much oil as Canada produces. In fact, the U.S., with 6% of the world’s

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ENERGY continued population, devours more than one third of the earth’s energy output, and practically all of this (96%) is derived from the fossil fuels. The Americans must solve their own problem and they know this. President Nixon’s $10 billion Project Independence is aimed at developing oil shale deposits and constructing nuclear generating plants, with the expressed hope of achieving self sufficiency by 1980. The U.S. has peaked in its oil production and has only about 10 years left in the continental 48 states.

Canada may have peaked as well. We are now entering our fourth year of decline. meaning that we have been using up our reserves without adding to them through substantial new discoveries. It doesn’t mean we have run out of resources. It is, however, a pretty fair indication that we should be conserving what we have.

Instead there is pressure from the Americans for us to let them into our north, and both our politicians and our bureaucrats are finding the temptation almost irresistible. The target in this case is not oil — the Americans have 10 billion barrels of their own in Alaska, most of it at Prudhoe Bay, and they’re building a pipeline across Alaska to get at it — but natural gas. Trillions of cubic feet of natural gas which has been discovered at the Mackenzie River Delta in the Canadian north.

Canadian Artie Gas Study Ltd., a consortium of Canadian and American corporations, wants to build a $5.5 billion pipeline from Prudhoe Bay and the Mackenzie Delta, 100 miles north of the Arctic Circle, to bring Arctic gas south for American and Canadian consumption. The main argument for building the pipeline is that we need the gas and we need the American market to get a sufficiently high volume of gas to make the project economically feasible.

The fortunes of oil and natural gas are intertwined. They are generally found together (although that has not been the case in the Mackenzie Delta where little oil has been found relative to the enormous reserves of natural gas) and they can both be used in the same ways, either as fuel or as feeder stock for the petrochemical industries.

So while there is pressure on us to build or at least agree to the building of the Mackenzie Valley pipeline, there is also pressure from the province of Alberta on the federal government to permit the western province to sell off its remaining seven billion barrels of conventional oil reserves to the Americans. This is the heart of the unresolved battle between Alberta and Ottawa.

Premier Peter Lougheed, who states his own case on page 20, isn’t simply being profligate. Ninety percent of Western Canadian oil comes today from fields which have been producing oil for

more than 20 years. They are declining now, and Lougheed wants to use the remaining time to build up a solid petrochemical industry in his province, and to derive the best price he can for the oil in the ground. He knows that when the oil in conventional fields is gone, the vast Alberta tar sands will be producing, and this will keep Alberta in the fuel and petrochemical business for many years.

Tar sands, oil sands, call them what you will, they represent an area of some 30,000 square miles in the northeastern part of Alberta. The grains of sand are surrounded with an envelope of bitumen, water and clay which can be stripmined. The bitumen is heated and separated from the sand, and upgraded and the result is synthetic crude oil, which can then be refined.

The first mining and extraction facility, Great Canadian Oil Sands, is now producing a total of 55,000 barrels a day. Next will be a one-billion-dollar plant to be built by Syncrude Canada Ltd. of Edmonton (owned by Imperial Oil Ltd., Gulf Oil Canada Ltd., both of Toronto,

Atlantic Richfield Canada Ltd. and Canada-Cities Service Co. both of Calgary. Gulf has 10%, the others 30% each) which planned originally to be producing to capacity by 1977, but which has delayed starting the work pending tax and price rulings from Ottawa. If and when Syncrude gets to capacity it will add 125,000 barrels a day. Recently Shell Oil announced plans for another one-billion-dollar plant which should be producing to capacity by 1980 for another 100,000 barrels.

That is an absolute maximum of 280,000 barrels of synthetic crude per day from the oil sands by the 1980s. But there have been estimates that by 1981 we’ll need an additional million barrels a day for domestic consumption alone. If we maintain our current exports to the United States, with an extra 280,000 barrels a day from the oil sands and with no change in the conventional fields, we’ll still be 720,000 barrels a day short.

Alberta expects that the oil sands will be developed at the rate of one new billion-dollar plant every four years. We haven’t got the manpower or the financial resources to build them any faster.

Energy, Mines and Resources Minister Donald S. Macdonald (who states his case on page 20) raised the export tax on Alberta oil from 40 cents up to $6.50 a barrel, so that the people of Canada, not just Alberta, could benefit from the higher Chicago price.

He has now been persuaded to go ahead with the Montreal link to get western oil east. This would be good for Canada, annoying to the Americans, and infuriating to Premier Lougheed.

The battle between Alberta and Ottawa is unresolved at this writing. The oil producing nations of the Middle East have not lifted their embargo on shipments to the U.S., and both Canada and the U.S. were preparing for shortages though neither President Nixon nor Prime Minister Trudeau had inflicted gasoline rationing on the people of Canada or the U.S. Certainly Energy Minister Macdonald has made no secret of the fact that contingency plans for rationing exist and could be implemented very rapidly. In the U.S., President Nixon’s chief adviser on energy matters, John Love, resigned over Nixon’s refusal to impose gasoline rationing.

The initial reaction of Ottawa to the President’s first statement on the American energy crisis was a curious mixture of pragmatism and irrelevance, with a little confusion thrown in. The federal government ruled that we must turn off our Christmas tree lights, except for a few joyous hours on Christmas Eve. But at the same time, Ontario Hydro officials were telling newspapermen there was plenty of electricity and they hoped that everybody would leave their Christmas tree lights and outdoor decorations on as long as always. And when Ottawa sought to cut down on office lighting in the huge civil service they couldn’t find anyone who knew how to pull the right switches. It was a delightful farce for a day or two.

But beneath all of this lay the inescapable permanence of the problem, for the fossil fuels are finite. Non-renewable. If you burn down a forest you can grow another in 30 years, but when you burn a barrel of oil that’s one less barrel of oil in the world for about a billion years. Just as we passed from the age of coal and steam to an age of oil and electricity, so we are inevitably going to pass into a nuclear age. In fact we’ve already started: the nuclear generating station at Pickering, Ontario, is the most advanced and problem free in the world today. But the transition will take a long, long time and will never be complete. Oil is used for more than burning. Oil is lubrication, gasoline, insulation material, anything that’s made of plastic or polyethylene. There are literally thousands of different substances that come from the petrochemical industry.

Meanwhile the long-term prospects

for Canada — after the early 1980s — are bright. In Alberta alone we have about seven billion barrels of oil left, and some 65 billion barrels recoverable from the oil sands, and 53 trillion cubic feet of natural gas. The Department of Energy, Mines and Resources estimates Canada’s Ultimate Recoverable Potential at 99.2 billion barrels of oil and 783 trillion cubic feet of natural gas.

But practically all of that is in the ground, and moreover in ground that is thousands of miles away from where it’s needed. It has long been both blessing and curse that Canada is rich in resources but rarely can find the money to exploit them. Or, more accurately, we can always find the money next door, but there are always strings attached. For example, with American money behind the Mackenzie pipeline, there must be assurances that the lion’s share of the natural gas that flows through it will be American. This is true of the Mackenzie Valley pipeline which the government plans to approve. While the Americans will get the major portion, however, there will be an added capacity which will serve the Canadian market for natural gas. Without this American participation, according to both government and industry, we couldn’t have afforded the pipeline at this time.

The Americans wouid like us to sell them the gas from Mackenzie Delta. It puts us in a strong bargaining position at a time when we just aren’t certain we want to bargain at all. To sell that natural gas would require building the 2,600 mile, five-billion-dollar Mackenzie Valley pipeline and there are several opinions on the impact that kind of expenditure would have on the Canadian economy. Eric Kierans, former cabinet minister with the Trudeau government and now professor of economics at McGill University, argues on page 21 that building the pipeline now is bad for Canada. Kierans has often said he believes that Canada cannot afford to build the pipeline now (the money would nearly bankrupt us and would cause inflation, and the dislocation of thousands of workers for a few years would disrupt the economy even further) and that he doesn’t believe we need to develop the Mackenzie Delta yet anyway. Save it for the future.

William P. Wilder, chairman of the Canadian Arctic Gas Study Ltd., the consortium that is planning to build the pipeline, states the case for the pipeline on page 21. He believes that Canada needs access to the Arctic natural gas and that the pipeline is the most economical means of getting it.

Beyond the financial problems of a project this massive are the ecological and sociological problems. The Arctic is a fragile land. The 22,000 Eskimo and Indians who live north of the 60th paral-

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ENERGY continued lel have coped with the advance of white culture and subsist in a pragmatic mixture of old and new ways. The snowmobile replaces the dog team. Practically everything the white man does in the north destroys something the indigenous people had depended on for their livelihood.

Professor Robert Page of Trent University, Peterborough, described a classic example of northern fragility in a paper he wrote on the impact of the Mackenzie Valley pipeline on the Canadian north: “The permafrost is covered by a very thin layer of tundra vegetation; any disruption of this shallow protective layer exposes the permafrost to summer melting and erosion. For instance, a one-foot-deep trench dug in the late 1960s to protect Inuvik from a forest fire had by 1972 become 12 feet deep and 50 feet wide and continues to grow each year.”

It is through such land that we are planning to build a pipeline. William Wilder contends that this can be done without damaging the environment. Indeed, he has spent more than $7.5 million on three experimental pipeline facilities in the north to demonstrate that a fully buried pipeline carrying gas that has been refrigerated to below 32 degrees Fahrenheit need cause no damage at all to the permafrost. In addition, his Canadian Arctic Gas Study group has spent more than nine million dollars on detailed environmental impact studies.

Soon Wilder’s group will — if they have not already done so since this is being written — make application to the National Energy Board to build the pipeline, and at this point it seems likely to go ahead. Hearings will be held, of course, by the National Energy Board, which will be primarily concerned with technology, and by the Department of Indian Affairs and Northern Development, to see that native rights are not ignored. No one wants to see their rights trampled on, and of course no one wants to see the project stalled by litigation as happened to the multi-billion dollar James Bay project in northern Quebec. It would be a fine thing if Canada could for once deal openly and wisely with one of its minority groups.

The Mackenzie pipeline must eventually be built, and whether we can afford to build it ourselves or not our industrial south must eventually have access to the natural gas which is trapped beneath the Arctic surface.

Rowland C. Frazee, executive vicepresident and chief general manager of the Royal Bank, estimates that we must spend on energy development between 1971 and 1985 a total of $95 billion. About $31 billion of this will be spent on the oil industry alone, and another $60 billion will be spent by the public utilities on such projects as developing nu-

clear generating stations and coal gasification. In the immediate future he sees six billion dollars spent on the Mackenzie pipeline, another nearly five billion dollars for the James Bay hydroelectric project which is crucial to Quebec’s energy plans, and perhaps nine billion dollars invested in the Athabasca tar sands within the next 10 years. While he admits that “if all of these projects ‘hit the street’ for financing all at once we shall have a difficult time indeed,” he sees this, as well as upward pressure on the Canadian dollar, as problems to be solved by the financial industry, and not as grounds for hesitation. “Given a coordinated effort by the financial community,” he says, “I am confident that having recognized the financial hazards we are capable of coping with them.” What of alternative sources of energy? While there are many, they are mostly relevant to the long-range future and won’t help us now. Solar energy is for the next century and only for countries farther south. Nuclear power is here already, and the Pickering experience has

been good. The Pickering generating station was built for $750 million and now produces more than 2,000 megawatts, or roughly 5% of Canada’s total generating capacity. It has proven to be virtually trouble free. The problem is that it would not be economically feasible to install a comparable generating station in the Maritimes because the total Maritimes appetite for electrical power would be insufficient to pay for the station. Another plant is planned for Metro Toronto but it depends on a steady and highly concentrated demand.

Gasification and liquefaction of coal are being explored in the U.S. Exxon has, since 1966, invested $20 million in research but the results cannot be used commercially before the late 1970s. Coal is abundant in both the U.S. and Canada — there are 118 billion tons of coal in the three western provinces. Alberta has 47 billion, Saskatchewan 12 billion and British Columbia 59 billion tons according to the Department of Energy, Mines and Resources. But it is costly to bring the coal into the industrial area and it is a pollutant.

However, coal is chemically related to

oil and natural gas and can theoretically be changed into synthetic gas or oil. Again the problem is that coal composition varies widely, and the technology that is sufficient for one type won’t work with another.

Alvin Hamilton, former minister with the Diefenbaker government, and now the opposition critic on government energy policy, speaks of the vast potential in converting garbage, as well as wastes from agriculture and forest industries, into oil or gas. Metro Toronto recently adopted a study along these lines and something may come of it. But the experience of St. Louis, Missouri, in converting waste to gas, has been economically unconvincing.

Alvin Hamilton is feeling somewhat prophetic these days. He blames the current crisis largely on the National Energy Board’s decision to abdicate its role as an advisory body. This, he says, is what was intended, that the NEB serve as administrative body in charge of licensing, and also as independent advisers to the government. Then the Conservatives lost power, and in 1968 he lost his seat, and under the Liberals the NEB decided it would be a conflict of interest if they were to act as advisers and administrators simultaneously.

“There was a complete failure,” Hamilton says. “When I questioned the NEB on my return to Ottawa in 1972, they said they felt that if they knew too much about the industry it might prejudice their licensing, so they dropped out of the advisory function.”

Whether the Tories could have prevented the crisis or not is something we can never know. Somehow it seems doubtful because no one really believed the shortage would come as quickly as it did. Many people didn’t really believe it would come at all.

What next? How bad will things get?

If John Shaheen’s scheme to divert oil from Iran and Kuwait to Canadian use succeeds, probably the shortages will not be serious this year. But the basic problems will continue into the early 1980s and such measures as gasoline rationing and compulsory allocation of heating fuels seem inevitable, if not this year then next.

Canadians have proved that they are taking the energy crisis sufficiently seriously to put Richard Rohmer’s book Ultimatum at the top of the best-seller list for fiction. Rohmer has made a virtual career out of lobbying for sensible approaches to Arctic resource development. In Ultimatum he carries his fears to an extreme: the book, in scenario form, deals with nothing less than the annexation of Canada by the United States to get at energy resources denied them in negotiations. It’s a chilling thought, but then the book is fiction, isn’t it? ■