Faulty assumptions, including tidewater price premiums, basis for Kinder Morgan’s Trans Mountain pipeline approval

June 14, 2017

Once the political reality of British Columbia is determined, next steps on energy projects like Kinder Morgan’s Trans Mountain pipeline expansion and the Site C dam will follow.

And while the federal government has approved the pipeline expansion, the BC NDP and Green parties – which have signed a power-sharing agreement following the provincial election – say they will use every tool at their disposal to scuttle the project.

When determining whether or not the pipeline expansion from Edmonton to Burnaby will proceed, a major consideration should be that approval for the project was based on a number of faulty assumptions as documented in my recent report for the Corporate Mapping Project.

One of the key assumptions made in approving the project was that Alberta’s bitumen is being unfairly discounted by U.S. buyers and that its price can be maximized by getting it to tidewater and then to Asian markets.

The federal and Alberta governments and the oil industry have argued that expanding the Trans Mountain pipeline would unlock Asian markets and result in a revenue windfall. Kinder Morgan estimated this windfall at US$73 billion over the first 20 years of the project.

A review of international and North American oil prices reveals, however, that a significant ‘tidewater price premium’ does not exist.

Government and industry enthusiasm for tidewater pipeline access arose from a large premium that existed between international and North American oil prices between 2011 and 2014 due to a pipeline bottleneck in the US caused by a rapid increase in US oil production. This bottleneck has since been eliminated and the price differential has retreated to just US$.82 per barrel in 2016. Given the higher transportation costs of exporting oil to Asia compared to the US, Canadian producers are likely to receive less from oil sold in Asia than if the oil was sold to US refineries.

A review of the documentation submitted to the National Energy Board (NEB) by Kinder Morgan reveals that other assumptions which led to the pipeline’s approval are also questionable. These include:

  • Overly optimistic projections of future oil supply, which are much higher than the latest NEB projections and don’t consider the Alberta government’s cap on oil sands emissions imposed by its Climate Leadership Plan. Considering both the most recent NEB projections and the Alberta emissions cap, Kinder Morgan overestimated oil supply by 43 per cent in 2038.
  • Kinder Morgan’s expectation that no other export pipelines would be built. The federal government has approved Enbridge’s Line 3 and TransCanada’s Keystone XL pipelines, and President Trump has approved both pipelines south of the border. It is likely these projects will be built, and with them there will be a 13 per cent surplus of export pipeline capacity, without the Trans Mountain project, when western Canadian oil production peaks in the 2025 timeframe.

Of the three approved export pipelines, the Trans Mountain expansion project is the least desirable given that it must cross rugged, environmentally sensitive terrain, and a seven-fold increase in tanker traffic to BC’s Lower Mainland would impose unnecessary risks on sensitive marine environments.

Increasing oil and gas production while at the same time trying to reduce carbon emissions are conflicting priorities. Under the Alberta emissions cap, oil sands production will be allowed to grow by 53 per cent and emissions by 47 per cent above 2014 levels. This will require the rest of the Canadian economy to reduce emissions by 47 per cent by 2030 to meet Canada’s Paris Agreement commitments, which will be virtually impossible in the time remaining barring an economic collapse. Any reduction in oil sands output from the levels imposed by the emissions cap will create even more surplus pipeline export capacity without the Trans Mountain project.

These conflicting priorities stem from the fact that Canada has no energy strategy when it comes to oil and gas production beyond liquidating its resources as fast as possible in the name of short-term economic growth. Canada needs a comprehensive energy plan that addresses both its future energy security and its commitments on climate change.

David Hughes is an earth scientist whose most recent report published by the Canadian Centre for Policy Alternatives and the Corporate Mapping Project is:Will the Trans Mountain Pipeline and Tidewater Access Boost Prices and Save Canada’s Oil Industry?”.