The Canadian pipeline company Enbridge Energy plans to spend a $500 million building a 4-mile-long tunnel to encase the part of Line 5 that runs under the Straits of Mackinac. But how much financial sense does that make?
As more businesses, governments and homeowners look to renewable energy, automakers plan to stop making gasoline-powered cars.
“The largest investors on Wall Street are moving away from fossil fuels.” –Kate Madigan, Michigan Climate Action Network
Kate Madigan at Michigan Climate Action Network says that some of the big money people are simply getting out of fossil fuels.
“The largest investors on Wall Street are moving away from fossil fuels. BlackRock, which is the biggest investor in the world, announced that they are going to be moving away from risky fossil fuel projects,” she says.
But Enbridge Energy sees things from a completely different perspective.
“They showed demand continuing for fossil fuels, even as we see more and more renewables coming on board,” says Mike Fernandez, a Senior VP with the pipeline company. He says studies suggest the demand for fossil fuels is not going away any time soon.
Fernandez says most of the cars and trucks on the road today still need gas or diesel. Airlines still need jet fuel. And 90% of all plastics come from oil and natural gas.
Gov. Gretchen Whitmer and President Biden want to be carbon neutral by 2050. Even if the U.S. and Canada got serious about reducing oil consumption, energy analysts say it will take decades.
Enbridge — which is one of Michigan Radio’s corporate sponsors — is a huge company. It’s expected to take a half-billion or even a billion dollars to build a tunnel under the straits. But, that’s a small fraction of the money it’s set aside for construction projects.
And refiners in the Midwest and in Ontario and Quebec want that cheaper western Canada oil that Line 5 carries.
“So the large majority of the sort of real-world profits that they would hope to gain would be mostly in the first 10 or 20 years and anything after that is gravy,” says Daniel Raimi, a Fellow at Resources for the Future and an expert on oil and gas markets and climate change. He says Enbridge would recoup its investment pretty quickly.
One of the first things President Biden did after his inauguration was to cancel the Keystone XL pipeline. People wonder what that means for federal approval of Enbridge’s tunnel. Raimi says that actually makes Enbridge’s Line 5 even more valuable.
“The fewer pipelines that are available to take oil away from Alberta keeps those Alberta oil prices low, which benefits existing pipeline operators,” he says.
And that makes investment analysts like Enbridge even more. Andy Pusateri, an analyst at the brokerage firm Edward Jones, says Enbridge gets high marks because it’s not as vulnerable to the ups and downs of crude oil prices. For the most part, Enbridge is not buying and selling.
They get paid just to pipe the oil from one end of Canada to the other — with some stops in the U.S. along the way.
“So they’re earning a fee on having available capacity for people to send products through those lines,” Pusateri says, adding Enbridge has long-term contracts for Line 5.
“So they’re ensuring that not only are they recouping the money they’re paying for it. I think what they’re more interested in is earning a return on that investment for years to come. That’s far above what they’re paying for that line.”
So, at least for now, the economics work for Enbridge.
But renewable energy technology is getting better and cheaper. Public opinion about climate change is evolving. Governments and businesses seem to make new climate commitments every day.
And all of those changes might make the political odds more complicated. But, that’s a whole other story.