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Opinion ~ There are many reasons not to build Energy East, but which are more important?
WARNING: LONG BLOG: Summary: Energy East Pipeline isn't a smart investment for Canada.
The Energy East Pipeline is in media-frenzy, it's been discussed a lot in the Canadian media — but when are the real discussions going to talk about the complexity involved in determining if this project is a net benefit for Canada? Is The Energy East Pipeline a good investment for Canada? The war chest for big oil is leaking more and more for this project to be rubber stamped. Is Energy East Pipeline the smartest investment?
It seems that journalism, and media, in Canada avoids a complete analysis of the bigger issues when it comes to informing the public on these large projects. As usual, industry-funded advertising-journalism focuses on the emotional and nationalistic arguments, but media in Canada has failed to deliver what we need — valued analysis. Repeating what is written isn't journalism.
When I wanted answers, I always liked to know that I could trust CBC's The Fifth Estate. Another other favorite is The Agenda on TVO. When considering scientific analysis, one understands the value of the content but also understands the assumptions made. Is Canadian journalism giving Canada quality analysis?
As a green designer, choosing which final design to select, and then propose, has a few simple rules to follow — make it safe, make it cheap, make it better, make it valuable. Safety is paramount. Cost is important to remain competitive. Quality is important for lifecycle and performance. The last simple rule — make it valuable — is something that society has to also consider. A design that's valued can become a product that sells and, with a smart business model, becomes profitable.
There are many variables in design, choosing the best design can sometimes be an easy choice, or can take more time to evaluate and discover a new "winner". I can write about a broken pipeline gushing dilbit that eventually flows into Lake Superior. I can write about the toxic COREXIT "cleaning" chemical that's worse than the dilbit, or how many generations local ecosystems will be toxic. I can write about the citizens, in Kalamazoo, that experienced seizures from inhaling harmful off-gassing, the dead streams, or the rare cancers. For the purposes of my analysis, I will assume The Energy East Pipeline is safe.
The safety issues concerning The Energy East Pipeline are real, but as a designer, I can make assumptions during my selection process. I have been discussing pipeline safety for years, but for the purposes of this analysis, I am going to present a few assumptions to help you focus on a bigger risk of investing in EEP.
Is a safe pipeline possible? Yes, a safe pipeline is very possible. I have used one of the world's most advanced piping software systems. I never had any non-compliance failures on my design projects. My piping design wasn't as complex as Energy East Pipeline, but in 6 Sigma Design, size doesn't matter. For the purposes of this blog, let's assume the Energy East Pipeline is safe. Poof — assumption number one — The Energy East Pipeline is 99.997% safe! Isn't design fun? Safety is an issue, but let's pretend we have a pipeline that never leaks. There, don't you feel a little better?
My second critical assumption for this analysis is a very unrealistic assumption. Making this assumption makes me feel ill, but in design, we must do these things. The second assumption is that the cost of oil fluctuates gleefully between $85 to $155 per barrel for the next 20 years.
The Energy East Pipeline can deliver ~1,100,000 barrels of dilbit per day. Considering our current market, this volume of delivery is subsidized ~$75,000,000 / day by taxpayers to be sold for $10,000,000**, but I am not going to let that cloud my assumptions in my analysis. Let's not worry about market stability! I never do!
We have a safe pipeline that is pumping profitable* product, do my assumptions sound unrealistic? They do, but, I am making them so we can focus on what's "outside" of The Energy East Pipeline. If we can think outside the pipeline, some statistical noise disappears, leaving our bigger issue. So, when we think outside the pipeline, what do we see? We see a competitive energy market. If a company can't compete in its market, or loses market share, it will struggle financially. In order for this company to survive it must innovate, sell, diversify or proxy takeover***.
Now, for my third critical assumption — oilsands will innovate to reduce it's cost from the present $82.50/barrel to $70/barrel in 5 years — that is a 12.5% improvement, wow, I am very kind! So, now, we have a ~100% safe, always profitable* product that has a robust innovation program in place. My fourth, and last pipeline assumption, is some cute deer & happy bunnies to place around The Energy East Pipeline for an amazing photo-op! Smile!
Assumption summary: Our pipeline won't pollute The Great Lakes Basin, The St. Lawrence Seaway, or The Bay of Fundy. It always makes money, enough to innovate at a healthy rate. Now we can ask, is this a good investment for the Canadian taxpayer, banks, local businesses that provide excellent and amazing pipeline work and pipeline support?
In order to evaluate an investment, we must compare The Energy East Pipeline investment against other classes of investments available in the market — infrastructure, education, childcare, healthcare, mental health, pollution remediation, green energy, science, agriculture, manufacturing, energy conservation, genetics, bunnies, water, nuclear energy, etc. Not all return on investments are the same, that's a fact!
Each investment type has its risks and rewards — investments can be measured, or gauged, using Return on Investment, but it should also be compared to other investments. What makes The Energy East Pipeline a questionable investment is its low rate of innovation. Rate of innovation is important to consider. If another investment can innovate 10 times faster, your investment must compete with a higher innovation rate at a future date. Not being able to keep up with the pack is deadly during our green energy evolution. Ignoring this reality is deadly in a competitive green energy market.
Innovation rates aren't discussed because fossil fuels have never been faced with our current "Third Industrial Revolution". How the new green economy will mix with the old dirty energy economy isn't well understood — it's just starting to happen. That's why it's important for Canada to back the winners, not the losers. Right, Donald Trump?
Terry Mathews is a big fan of innovation rates, for some reason — yet Terry probably doesn't talk about rates of innovation. Am I right, Terry? Terry understood very well that products that could innovate faster, but also consistently, had a market advantage and survivability. Evolution is natural and pays to be on the "good side" of it. In the knowledge economy having new tricks to be doing in 5 to 10 years was important, or else you go out of business. Terry is really rich but also smart. Hey, Terry, can you lend me $50,000,000,000?
When we think of The Energy East Pipeline, we are looking at the old paradigm versus our innovating energy market. The markets that fossil fuels are serving are being replaced with green technology in parallel. Demand for dirty energy isn't growing, it's shrinking. The biggest competition for the dirty energy market. now, is SMR — small modular nuclear reactors. Each market we look at, we see that dirty energy is being avoided. Why? Because better, cheaper and greener makes economic sense. Design has always tried to improve things, green design improves more than just the design.
The reality of the fossil fuel market is it is unstable — it fluctuates, it oscillates. Natural gas, etc., prices fluctuate. By adapting operations to clean, emissions-free strategy, operations can remain confident that their cost of energy will remain stable. For example, a company that installs solar, etc., to replace propane or natural gas, can expect a stable and predictable cost structure. When the price of energy spikes and you are "green", your competition is also getting zapped on higher costs and carbon taxes. It pays to innovate in green!
Large facilities that adapt manufacturing processes to cleaner and cheaper green energy systems aren't only paying less for cleaner green energy, but the manufacturing systems used to manage toxic fossil fuels byproducts now become a parasitic loads and capital equipment disadvantage versus the competition. Green is simple and an advantage. Evolution favours intelligence in our global market.
Rates of innovation are important, in this analysis, because the rates of innovation of many green technologies are much higher than the generous 12.5% that assumed with The Energy East Pipeline. What most don't understand is the new technology, now, that will be working by 2025. There is a clock somewhere, and it's ticking.
With new nanotechnology, the price of green energy will be falling by another potential factor of 10, in some cases. The old resource heavy products use much more materials and energy. This is what I call "The Old Double-Double" — no matter what a technology does it just can't compete with new, and very different, classes of green technology innovation.
Green energy innovation will happen with wind, geothermal, tidal, thermoelectric, fuel cells, electric motors and generators, concentrated solar, etc. Nanotechnology will also make a lot of our energy needs fall, dramatically. If we add in quantum computing controls systems on mechatronics, I can see another order of magnitude in energy conservation happening. Science never sleeps, nor shall it.
Currently, the process for oil sands doesn't look like a survivor come 2025. With the current massive subsidies for this dying industry, how can The Energy East Pipeline ever make money in 2025? In 2025, the oilsands product is obsolete energy, the World Bank calls them stranded assets — not worth the energy to extract — like placer gold that's too deep, you can't make money mining it, the cost of gas should kill you first.
The total energy analysis makes oilsands worthless to process in 2025. So, will The Energy East Pipeline run on magic? If oilsands operations can remain solvent, what will the pipeline transport? Cauliflowers from Alberta?
It's lights out for starting in 2025 and it's 2016 without an approved plan. This idea has 9 years before its a complete welfare operation. The current ballpark cost for the pipeline is around $15,000,000,000. As a designer, I will quietly say $21,000,000,000. Thus, with my magic wand, let's have this built by next year ( magic )! Bam! Done!
So, we have 8 years to do an ROI of $21B, with a downtime of Zero Hours for 8 years ( I am so nice! ). Assuming an average oil price profit of $35 per barrel ( magic wand getting very hot ), The Energy East Pipeline can transport $112,420,000,000 worth of dilbit by 2025.
To break even, The Energy East Pipeline will have to charge $6.54 / barrel transported, or make $7,191,780.82 per day. Of course, these figures don't include all the corporate stuff — people, insurance and stuff like the bunnies, deer, pipeline leaks of fluctuating carbon energy markets — and overhead, don't ever forget overheard. Poof! It's magic!
When we look at the competition, we can see things start to get bad in 2019 and things will only get worse. How can The Energy East Pipeline compete in a green energy market in 2025?
Typically, when companies build pipelines, they are looking to use it for 50 - 75 years. This allows them to get a better ROI. The longer you can make the same profit on capital equipment, the lower the ROI. How many years can The Energy East pipeline compete in the free market? Can it even complete without subsidies?
There is no doubt that I could design and build a train to run that uses steam engine technology, but could my design compete with the latest high-speed train? No. It's like comparing apples and oranges. The Energy East Pipeline isn't being compared to what's around the corner. The media is making this analysis a "Us" and "Them", but they should be showing how much taxpayers will have to pay to bail this project out. Business losses are not magic, we pay for them. Maybe I should design magic wands for when these projects die?
Being presented with a pipeline that won't make money isn't a smart investment for Canada. There are many investments that Canada can make that will provide better ROI, greener jobs and deliver to a larger, and growing, global market. The media has failed to provide an informed analysis on many fronts. Add in the reality that oil spills happen and $20 oil and you pay the difference between the current reality and my delusional & dangerous assumptions!
As a designer, I wouldn't choose The Energy East Pipeline as a smart investment for Canada, I would go back to my simulated physics-based universe and come up with a winner for the investors*****.
* - what's the total vertical unsubsidized cost to produce one barrel of oil sands? The subsidized cost is about $80-85 / barrel.
** - one risk of The Energy East Pipeline is the market price of oil. In competitive energy markets, innovation is moving away from dirty energy. Added carbon considerations also add risk profitability in many global markets.
*** - why even worry about anything when you can just buy the whole "other thing" then attack your competition with all your new things! Ask Kevin O'Leary, he did a good job of buying up companies, or his banker was good at it — maybe I should ask Kevin O'Leary first?
**** - operationally stable and predictable.
***** - hey, that's you!