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Kinder Morgan – Economic Boon or Boondoggle?

Gordon Cornwall, Guest Author
Thursday, May 11, 2017

On May 2nd, 2017, a public debate took place at Vancouver Public Library on the question of whether Kinder Morgan’s Trans Mountain Expansion Project (TMEP) would bring a net economic benefit to Canada, or would instead be a boondoggle – a useless waste of money.

The speakers taking on this debate were Markham Hislop, journalist and publisher of North American Energy News, and Gordon Cornwall, an independent researcher and climate activist who was arrested on Burnaby Mountain in 2014.

In support of the ‘boondoggle’ point of view, Cornwall led with an analysis of the Muse Stancil Report on which the National Energy Board (NEB) relied for its approval of the pipeline. Written by a Texas consultant and funded by Trans Mountain, the report concluded that the TMEP would deliver $73.5B in economic benefits to Canada over the first 20 years of the pipeline’s existence. It attributed most of this benefit to the so-called ‘tidewater advantage’ –  higher prices commanded by Canadian bitumen from being transported to tidewater, thence to Asian markets.

The Muse Stancil report cited forecasts from IEA World Energy Outlook 2014, projecting the price of oil to 2040 under various demand scenarios: the business-as-usual scenario which sees oil rising to US$150 per barrel, the IEA’s ‘reference case’ in which international efforts to curb greenhouse gases result in a modest drop in oil use, and the ‘450 scenario’ in which global oil consumption falls enough to keep atmospheric CO2 to 450 ppm, in line with the goal of holding global warming to 2°C above pre-industrial levels. The IEA’s projections peg the price of oil above US$100/barrel even under this low-demand scenario.

Things have changed since the IEA used its crystal ball in mid-2014. Oil fell from $110 a barrel to $50, then to $30, before recovering to the $50 range at which, in 2017, it is stubbornly stuck. Low prices dealt a big hit to Canadian producers, who ran losses of $21B over 2015-2016.

A review of the causes of oil’s plunge in value yields little hope that the downturn will be short-lived. From historical levels in the $20-$30 range, the price of crude rose sharply from 2004-2008, in response to rising global demand, to $145 per barrel. Back then, the phrase “peak oil” was current – a concept that now seems laughable. Next came the birth of the US shale oil industry, which was economically attractive at $100+ prices. Rapid expansion led to a rise in global inventories, and, in mid-2014, a sharp price drop.

OPEC, led by Saudi Arabia, responded by increasing oil supply to world markets, dropping prices further in an effort to squeeze out the US producers, whose costs ran to $79 per barrel in 2014. But the Saudi move backfired. The shale industry, built on the new technology of fracking, found efficiencies which enabled it to achieve impressive cost reductions, going from $79 to $48 per barrel in 2016. When the price hit $30, even OPEC felt the pinch. In Hislop`s words, the Saudis “raised the white flag,” choking back exports to lift prices again – a little. Not enough to prevent the cancellation of 16 major Canadian oil sands projects in 2015-2016.

That`s where the market remains in 2017, caught between opposing forces at prices which are challenging at best for the high-cost Canadian producers. Cornwall argued that Canadian bitumen can only lose money on $50 oil. Drawing on his interviews with industry insiders, Hislop countered that Cornwall`s 2016 cost numbers were out of date and that the Canadians too are finding efficiencies which will make them economically competitive. But he did not deny that the American frackers lead the race.

What about the `tidewater advantage’ which drove the NEB approval? “We are getting a chance to break our land lock,” Rachel Notley said when Trudeau approved the project in November 2016. “We’re getting a chance to sell to China and other new markets at better prices.”

Cornwall pointed out that such claims are denied by economists like Jeff Rubin. Although markets outside North America paid higher prices for crude when the Muse Stancil report was unveiled in 2015, that was due to depressed prices in North America caused by a transitory glut.  After shale production ramped up in 2010, the Americans lacked sufficient pipeline to get their new oil to the Gulf Coast and overseas. They have built more pipe since then, making the ‘tidewater advantage’ for Canadian crude disappear.

Cornwall claimed the evidence shows that Canadian bitumen production is at best marginally profitable, with many operations unable to compete. Hislop expressed industry optimism that oil prices will rebound, and producers will find enough cost savings to make a go of it. He mentioned recent improvements and emission reductions in steam assisted gravity drainage extraction (SAGD), and the use of solvents instead of steam to liquefy the bitumen.

Cornwall presented research by economist Robyn Allan, further undercutting the view that Asian markets are hungry for Canadian heavy crude. The research points out that NEB statistics showing Trans Mountain’s claims about the oil tankers currently leaving Vancouver are inflated. The claim of five tankers per month was only achieved (almost) in one year, 2010,when 71 tankers were filled at the Westridge dock. Traffic has declined ever since, to just over one per month in 2016.

Ms. Allan also showed that the number of tankers headed for non-US ports was even smaller, peaking at six per year in 2010 and 2012, dropping to one in 2016. The pattern suggests that the Canadian industry tried to develop an overseas market for bitumen, and failed.

With the ‘tidewater advantage’ exposed as a myth, the economic case for TMEP falls flat. There would, of course, be construction jobs for two years, mostly in BC where unemployment among skilled tradespeople is low. The operations phase of the pipeline would only create 90 full-time jobs, according to Trans Mountain’s evidence to the NEB. Trans Mountain profits (guaranteed by take-or-pay contracts with Canadian producers for 80% of the pipeline’s capacity over the first 20 years of operations) should generate $100M annually in corporate taxes - but don’t hold your breath. Robyn Allan reported that Kinder Morgan told its US shareholders that it paid just $1.5M on profits of $172M per year, less than 1%.

Round 2 of the May 2nd debate focussed on government claims that expansion of Canadian production is compatible with our Paris commitments to reduce greenhouse gas emissions to 30% below 2005 levels by 2030. Can Trudeau’s Paris promise, “Canada is back, and here to help,” be reconciled with his March 10th, 2017 address to a petroleum industry group in Houston, in which he said, “No country would find 173 billion barrels of oil in the ground and just leave them there”?

Cornwall cited David Hughes, an earth scientist with four decades of unconventional fossil fuel experience, whose 2016 report, “Can Canada Expand Oil and Gas Production?” showed that, even if Canadian production is allowed to rise to meet the 100 Mt/year cap on GHG emissions announced by Rachel Notley, Canada’s existing pipeline capacity (supplemented by rail only to compensate for pipeline capacity lost to maintenance) is adequate to transport it to markets. If one pipeline, such as Keystone XL or Enbridge Line 3, is built, there will be surplus capacity. Without the prospect of tidewater price lifts, the TMEP is a redundant boondoggle.

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But if we take Paris seriously, raising Canada’s bitumen production to Notley’s cap is not an option. Hughes examines various scenarios for Canadian fossil fuel production. Under the lowest-carbon scenario, in which Alberta keeps its 100 Mt/year promise and BC curbs its LNG ambitions to a single plant, GHG emissions from Canada’s fossil fuel industry will grow by 45% over 2014 levels. To compensate, the rest of the Canadian economy will have to reduce its emissions by 47% by 2030 - just 13 years away. To assess how realistic that is, ask yourself which sectors of the economy could give up 235 Mt of emissions in that time. Home heating? Heavy industry? Reductions will be made, but not that quickly.

If, instead, Canada stops doubling down on this marginal, damaging sunset industry, and bets instead on the green energy economy that is springing up around the world, we have a fighting chance of keeping or improving on the promise we made in Paris.

Hislop took the view that the world will get to a green energy economy, but probably not before 2100. Canadians aren’t willing, he said, to pay the price of moving faster, and if they were, it would be risky. He pointed to Ontario as an example of the dangers of trying to move too fast. In light of today’s alarming evidence of climate disruption, Cornwall replied that to wait 83 years would be a greater risk.