What if Alberta shut down the Trans-Mountain Pipeline?

There are media rumblings that Alberta will be shutting off the flow of oil to British Columbia on the Trans-Mountain Pipeline (TSX: KML) with the enactment of Bill 12. Right now the Bill is sitting on the notice paper of the Alberta legislature so we do not know precisely what the content of the Bill says.

Enactment of Bill 12 (or at least one that would cut off the pipeline) would not happen for a variety of reasons – one is that Kinder Morgan is contractually bound to deliver oil, and an act of the legislature stopping this would mean that Kinder Morgan could make a civil claim for damages. At the very least the Government of Alberta would be civilly liable for such an action. It would also likely be deemed to be against the Canadian Charter.

But let’s run a thought experiment and pretend that for whatever reason it actually happened. The media report states that one of the consequences would be that the price of gasoline would rise above $2/litre.

I would claim that gas prices would go much higher than this – my paper napkin estimate would be a free market price closer to $5 per litre after a month of pipeline shutdown. It is at this price range that there would be a material amount of price elasticity in terms of decreasing gasoline consumption. In addition, it is quite likely that YVR airport would have to significantly curtail a material amount of flight activity as there would be an insufficient supply of aviation fuel. I would view it as probable that a prolonged period that Trans-Mountain was inactive would cause a severe logistical constraint on the cost of transportation and the subsequent cost structure would result in significantly increased costs for transportation services (e.g. bus and cargo logistics).

The rationale for this: The Vancouver, BC area used to have 4 oil refineries but three of them have shut down in the mid 90’s. The sole remaining refinery is the Chevron Burnaby refinery (now owned by Parkland Fuel (TSX: PKI) but will refer to them as Chevron for the remainder of this post), which processes about 55,000 barrels of oil a day. A barrel of crude oil (roughly 159 litres) can be refined into ordinary unleaded gasoline, diesel, kerosene (aviation fuel), paraffins, etc. Very roughly for dilbit (and this depends on what comes in), you can get around 40% to gasoline, 30% goes to diesel/jet fuel, 10% liquid gas, 10% fuel oils, and 10% other.

The Chevon refinery receives most of its crude oil (feedstock) via three routes: tanker (barge), rail, pipeline. By curtailing the pipeline, there would have to be increased traffic on other transportation modes. Chevon has a 3 day supply of feedstock.

Metro Vancouver (Greater Vancouver Regional District – extending from Bowen Island, Lion’s Bay and West Vancouver eastwards to Maple Ridge and Langley) pays 17 cents per litre of gas taxes to Translink on regular gasoline and clear diesel. Translink is on track to earn about $380 million this year from gasoline taxes, which works out to roughly 38,000 barrels of gasoline a day for the region. This does not include gasoline sold in Abbotsford and Chilliwack, which is fed from Metro Vancouver and would contribute another 10% of gasoline consumption (assuming a proportionate consumption to population).

This also does not assume that any “border leakage” of taxation occurs. It is second nature to a lot of people that live close to the border to go down to Blaine, WA or Bellingham, WA to save on gasoline – prices are CAD$0.35-$0.50/litre cheaper. We will assume that this does not occur in a material manner (one estimate is 1-2% of consumption).

Putting aside this assumption, this means roughly 42,000 barrels/day of Chevon capacity is used for gasoline consumption, which would infer that the refining capacity at Chevon is just about at its maximum limit. There is another Chevron terminal which deals strictly with refined product (65% motor fuel and 35% diesel) that imports another 8 million barrels/year of product (22,000 barrels/day). It is not entirely clear to me how much of this is “external” and how much of this is from the Chevron refinery.

We have not included the consumption effects of the YVR airport. The airport consumes approximately 5 million litres of jet fuel each day, which is another 31,000 barrels per day. Its primary source for this fuel is from a Kinder Morgan Pipeline (despite all the attention that Trans-Mountain gets, this Kinder Morgan pipeline extends underneath most of the residential area of Vancouver within incident) – but due to insufficient capacity on this pipeline, YVR has to import approximately 20% of its refined jet fuel product from Cherry Point, WA.

The residual jet fuel from Cherry Point to YVR is carried by tanker truck, approximately 30 each day. This is the most expensive and inefficient form of transportation (in relation to pipeline, tankers and rail).

In Washington State, there are two major crude refining facilities which receive their crude oil feedstock via tankers from Alaska (another irony of Canada’s “tanker-free” Pacific policy) – the closest refineries are at Cherry Point and Ferndale. Cherry Point has a refining capacity of 225,000 barrels/day and the Ferndale refinery is about 100,000 barrels/day.

If the BC Chevon refinery was starved from its crude oil feedstock from pipeline, there would be an immediate shortfall of refined fuel product at current levels of consumption. Needless to say, it would not matter at this point how many tanker trucks you tried to bring over the border or how much you tried to feed the Chevron terminal, it would not come close to the amount of domestic consumption – there would not be enough tanker trucks available, and Cherry Point would not be able to economically supply that amount of refined product on short notice as has other customer commitments in-state.

There is a pipeline that connects Cherry Point to Sumas, but the logistics of converting this into a refined product pipeline is not clear to me. Either way, this would not be easy to pull in on short demand.

At this point there would likely be severe rationing of fuel stocks and I would suspect that in a short period of time (within about a week of being starved from crude from Trans-Mountain) pricing would go much, much higher than the $2/litre estimated by the media report. In addition, YVR airport operations would likely be impacted. Needless to say, the economic disruption would be massive and at this point it should be completely self-evident how important the pipeline and the domestic refinery is for the Metro Vancouver economy.

OPINION: The Metro Vancouver public consciousness of the importance of the crude oil pipeline would likely be extremely amplified by a shutdown of the Trans-Mountain Pipeline. It is probably one reason why the NDP government in Alberta is considering this action, even though they would know it would come with huge future consequences in the form of an adverse court verdict – one that they are happy to deal with after their next election.