Why did TransCanada cancel $12 billion Energy East pipeline project?

Energy East

Reasons include Canadian regulatory uncertainty, changed economics, opposition in Quebec and from First Nations

Canadians outside the Wildrose Province may be shocked to learn just how angry Albertans are about TransCanada’s decision to cancel the Energy East pipeline project. Our Alberta readers are fuming – and they’re not shy about telling me why on social media or by email. They blame Justin Trudeau and the Liberals or Rachel Notley and the Alberta NDP or Quebec or environmentalists and First Nations – there are plenty of scapegoats to go around. So, why did TransCanada axe Energy East after spending $1 billion to this point?

Energy East
Russ Girling, TransCanada CEO.

The short answer is, we don’t know for certain. TransCanada is keeping mum, citing “changed circumstances,” which most observers interpret to mean the recent decision by the National Energy Board to include assessments of upstream and downstream greenhouse gas emissions in the project’s environmental review, but could mean any number of things.

A great deal has changed since the company formally launched Energy East in 2013:

  • Oil prices plummeted, significantly lowering Alberta oil sands output projections. Alberta oil sands output forecasts by the Canadian Association of Petroleum Producers show that in 2014, Energy East’s 1.1 million b/d of capacity would be needed by 2025. But the much lower 2017 forecast suggests Energy East isn’t required until after 2030. Several economists, including influential Andrew Leach of the University of Alberta, have pointed out that pipeline tolls of $10 to $14 a barrel don’t make sense in a world of $50 oil (West Texas Intermediate was over $100 when Energy East was launched).
  • TransCanada’s own 890,000 b/d Keystone XL project was killed by Barack Obama in 2015, then revived by Donald Trump in 2017. Combined with the 525,000 b/d of Trans Mountain Expansion, that provides a total of 1.4 million b/d. CAPP says Canadian output will rise by 1.3 million b/d by 2030. Does that support the argument that Energy East isn’t required?
  • Trudeau Government launched the “modernization” of the NEB, which started promisingly but has faltered of late. Natural Resources Minister Jim Carr claims including upstream and downstream emissions was included in Ottawa’s Jan. 2016 interim principles, but that is not true, only upstream emissions were. After the Liberals formed government in late 2015, pipeline operators were promised no projects would be required to start over, but a 2016 conflict of interest scandal forced the NEB’s Energy East review panel to resign, sending TransCanada back to square one. Finally, the modernization expert panel reported in the spring with a number of solid recommendations for reform, many of which were ignored in Carr’s subsequent discussion paper, which raised a big red flag for pipeline operators like TransCanada. Industry supporters say the NEB review process lies in utter disarray – and they have a point.
  • Natural gas prices have also risen from the dead, changing the economics of converting the company’s natural gas line to crude oil. Energy economist Kent Fellows argues that keeping the 3,000 kilometres of pipe from Alberta to Ontario for natural gas instead of converting to oil as part of Energy East makes more economic sense now.
  • The policy environment around greenhouse gas emissions has changed significantly in Canada and abroad following the Paris Climate Accord. Could carbon policies in export markets, which would receive about 60 per cent of Energy East’s product, render the project uneconomic? Fellows argues that the NEB had an obligation to consider that scenario under its existing mandate, hence the inclusion of downstream emissions.
  • Canadian attitudes toward the Alberta-based oil industry have become more negative, though there is still plenty of support for new pipelines as long as governments support energy transition policies. This issue is a wildcard. Polling data shows outright opposition to new pipelines remains firm around 21 per cent, but more Canadians are moving from supporters to neutral. Has this eroding support affected how Trudeau and his advisors’ view of the number of pipeline projects they can get away with supporting (Energy East would have been the fourth, assuming Keystone XL is a go)?
  • The election of the Trudeau Liberals in 2015 changed the national political calculations, giving Quebec opposition to Energy East perhaps more influence than it might have had under the former Conservative government. The Quebec government wasn’t hostile to Energy East but many mayors were, and public support for new pipelines is lowest in Quebec. With the next federal election in 2019, might fierce opposition to Energy East similar to that against Trans Mountain Expansion on the West Coast tip the electoral balance? Someone in the Prime Minister’s Office has done that calculation.
  • Finally, under Trudeau, indigenous communities will be given much more say in NEB assessments and First Nations are an big part of the opposition to Energy East. This is no small issue, as even a casual reader of the expert panel’s report and government statements will know.
energy east
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As most of my experts opined during their interviews, this is a very complicated issue. There was no consensus on which factors were most responsible for TransCanada’s decision, which makes it impossible for me to arrive at a conclusion.

Rather than try, below readers will find excerpts from my expert interviews and official statements by industry groups and politicians. Readers are welcome to come to their own conclusions.

Tim McMillan, president and CEO of the Canadian Association of Petroleum Producers (interview): I talk to investors when travelling overseas and when they’re here in Canada. I hear a fairly consistent message from them that Canada had a strong reputation of a country with rule of law, where there is transparency of the regulatory system. When they invested here, that was their understanding. And they have been challenged that our regulatory system isn’t as neighbourly as maybe we would like to think. The goal posts seem to move on a fairly regular basis, as opposed to being a process everyone recognizes and understands. And that that is very difficult for getting a project to a successful outcome.

energy east
Tim McMillan, CAPP president.

Canadian Energy Pipeline Association (statement): CEPA is extremely disappointed that the Energy East Pipeline and Eastern Mainline Project will not be moving forward. TransCanada was forced to make the difficult decision to abandon its project, following years of hard work and millions of dollars in investment. The loss of this major project means the loss of thousands of jobs and billions of dollars for Canada, and will significantly impact our country’s ability to access markets for our oil and gas.

TransCanada’s announcement follows the NEB Energy East Panel’s decision to consider upstream and downstream greenhouse gas (GHG) emissions for the projects. This is evidence of how a lack of clarity and an unclear decision-making process regarding pipeline projects in Canada are challenging the energy sector’s ability to be competitive in the world market.

Dennis McConaghy, former TransCanada VP and author of Dysfunction — Canada after Keystone XL (emailed response to questions):  The real question for Canada and especially its federal government is what lessons does it learn from this decision taken by TransCanada to end the Energy East project and absorb a billion dollar writedown. Regardless of “changed circusmstances” related to when an Energy East project might optimally be required next decade given the likely construction and operation of KXL, TMX expansion and Enbridge Line 3 expansion, none of that detracts from how dysfunctional the regulatory process applied to this project was , and the apparent indifference of the Trudeau government to that dysfunction.

Any project that has spent  $1 billion dollars in pursuit of regulatory approval of  a project that has yet even have hearings commence is stuck with an utterly dysfunctional regulatory system.  The recent re-scoping of the issues list to include upstream and downstream emissions attributable to the pipeline was just the last straw.

energy east
Dr. Kent Fellows, economist, School of Public Policy, Univ. of Calgary.

Kent Fellows, University of Calgary (interview): When you look at the NEB’s mandate to regulate, they have a responsibility to make sure that the pipeline network as system is operating efficiently. If you add a whole bunch more capacity, if you are diverting some of that flow off existing lines, you worsen the economics for incumbents by approving the new entrant.

Last month when the NEB released its increased scope for dealing with greenhouse gas emissions, one of the clauses of theirs was they were going to take seriously policies to reduce greenhouse gas emissions in Canada and expected policies abroad. This doesn’t necessarily mean rejecting the pipeline because it’s going to increase emissions. What this means is looking at what other regions and other jurisdictions within Canada are doing to decrease emissions and figuring out whether there’s still going to be a market for the crude oil. if there isn’t, or if the market’s not going to be big enough, they would have the responsibility to deny the application. This may just be TransCanada jumping the gun faster than the NEB.

Robert Mansell, academic director, School of Public Policy at the University of Calgary (interview): Look at the number of projects now where it’s gone five or six or seven or eight years, still never a decision. If you want to kill projects, have long delays, they get very costly. Continually change the rules and they will be uneconomic.

energy east
Robert Mansell, School of Public Policy.

[With an NEB review of a pipeline project] you didn’t get the decisions that pleased everybody but you never do in a regulatory system. It was one of the best regulatory systems. Yeah, there could have been improvements, but do you have to restructure it that way and bring politics to the fore in the process? Essentially, you undermine the strength of these regulatory systems based on the rule of law. And every time you do that, you add more complexity, you tend to ask a regulator to become a policy-maker, which they should never be.

You can always find a point in time where the conditions are such that if you start the project that day, it wouldn’t be economic. But that’s not the way you design these projects. You look at the economics over a long period of time, through the ups and downs of high prices, and changes in competition. Most importantly, once you’ve actually built it, you’ve got an advantage in that you only have to cover your operating cost to keep it running and wait for those periods where you actually are making a lot of money to recover your fixed investment.

Alberta Premier Rachel Notley (statement): Our government has supported Energy East since the project was proposed. We believe this nation-building project would have benefited all of Canada through new jobs, investment, energy security and the ability to displace oil being imported into Canada from overseas and the United States.

The National Energy Board needs to send a clear message on what the future of project reviews look like in Canada. Our government understands that deliberation on upstream emissions and land-use integrity is important and must continue. Investors need confidence and we look forward to seeing that certainty in place soon.

This decision highlights the importance of diversifying market access and the subsequent national priority that must be placed on the Trans Mountain expansion project.

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  1. I would really like to know the opinion and financial contribution from Suncor and Irving as they would be two extremely vital components of this pipeline along with any hydro or gas facilities that would have sold power to the 50 plus generating stations associated with this project.

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