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The case for more oil pipelines in Canada — as some analysts see it

The countdown is underway. 

The federal government has less than one month to make a decision on whether to approve Kinder Morgan’s expansion of the Trans Mountain pipeline from Alberta to B.C.’s coast.

Opponents of Trans Mountain say there are many reasons to reject the project. They include the environmental risks of pipeline and tanker spills, opposition from some First Nations, increased greenhouse gas emissions from oilsands growth, and the need to shift away from fossil fuels, to name just a few.

If Ottawa gives Kinder Morgan the green light in December, the federal government must believe the positives outweigh all the negatives.

Is that the case? You be the judge.

Here’s an examination of four reasons that support construction of a new oil export pipeline.

1. Crude by rail

Oil production in Western Canada continues to rise, albeit more slowly than once expected, and there is spare pipeline capacity to haul the crude to refineries. That space, however, is about to run out.

“We think pipe capacity could be maxed out by late next year, maybe the middle of 2018,” said Martin King, a commodities analyst with GMP FirstEnergy, during a presentation last month. Without any more room in the pipes, the oil will have to be shipped by rail.”

GMP FirstEnergy crude by rail October 2016

“There’s close to a million barrels per day of idle capacity in Western Canada [on rail]. Certainly, that will be called upon once things start to get a little bit congested out there.”

Oil producers favour pipelines over trains, because shipping by rail is more expensive. Some companies have referred to crude by rail as an insurance policy in case new export pipelines aren’t constructed.

‘People like me can clean up the Kalamazoo River, but we can’t do anything to restore all those lives lost in ​Lac-Mégantic.
– Blair King, environmental chemist

If more pipelines are built, the volume shipped by rail will decline substantially but not disappear.

“Rail has offered a different alternative to producers, and it serves the markets where pipelines are currently not available,” said Dinara Millington, with the Canadian Energy Research Institute. “It’s here to stay for marginal markets and smaller volumes and shorter distances.”

GMP FirstEnergy oil export pipeline capacity October 2016

Crude by rail is considered more dangerous than oil pipelines especially considering the fatal explosion in Lac-Mégantic. 

“Pipelines have 4.5 times fewer accidents/spills than oil-by-rail, and while every oil spill represents a catastrophe, spills from pipelines do not hold a candle to the apocalyptic aftermath of rail accidents,” said Blair King, an environmental chemist from Langley, B.C., in a submission to the ministerial panel for the Trans Mountain pipeline expansion.

“People like me can clean up the Kalamazoo River, but we can’t do anything to restore all those lives lost in Lac-Mégantic.” 

That train was hauling crude oil from North Dakota. Oilsands bitumen is much thicker than conventional crude. Canada is accelerating the phase-out of older crude railcars because of safety concerns. 

Muse Stancil report on crude by rail

If the Trans Mountain Expansion (TMEP) is constructed, shipping crude by rail is expected to fall initially, but then gradually increase as oil production continues to rise. (Muse Stancil’s 2015 report Market Prospects and Benefits Analysis for the Trans Mountain Expansion)

2. Oilsands growth

Proponents and opponents of pipelines have suggested the more oil export pipes are built, the more oil production will grow. Experts suggest there is a connection between the two, but they don’t operate in lockstep. Just because the Trans Mountain Expansion (TMX) is built, oil production will not increase by the same quantity to fill the pipe. 

“TMX itself will not materially increase production, mainly because it’s likely shippers will take existing product moving by rail and move it by pipeline because it is cheaper,” said Shafak Sajid, a policy analyst with the Canada West Foundation, a Calgary-based think tank. “Given the current investment climate, I don’t see foresee them increasing production.” 

Shafak Sajid explains whether the Trans Mountain Expansion pipeline will lead to more oilsands growth0:40

Sajid points to research by various organizations showing oilsands production is already forecast to grow substantially in the next several years because of projects already under construction.

Alberta oilsands production forecast

While the pipeline wouldn’t have a direct impact on production, it could lead to more production in the future.

“We do expect that the pipeline will lead to an improvement of prices for producers in Alberta,” said Michael Burt with the Conference Board of Canada. “That improvement in prices leads to additional cash flows, which leads to additional investment in production further down the road.”

3. Oil prices

Burt published a report about one year ago looking into the economic impacts of the Trans Mountain Expansion project. He says oil companies will be able to receive a better price for their product, because most Canadian oil is exported to the U.S., while this pipeline would reach world markets. 

‘We do expect that the pipeline will lead to an improvement of prices for producers in Alberta’
– Michael Burt, Conference Board of Canada

“The assumptions we built in were around $5 or $6 per barrel improvement in netbacks to producers in Alberta,” he said.

Netback is a term used in the industry that refers to the revenue generated by a barrel of oil after subtracting production, royalties, and transportation costs.  

Dinara Millington explains whether oil producers will see higher returns with a new oil export pipeline to Asia1:04

Oil prices are obviously quite volatile, as evidenced by the sharp drop in crude two years ago that sent the industry into a downturn. Since commodity prices are tough to predict, several assumptions have to be taken into account when estimating how much the pipeline will improve returns for oil producers.

“It’s hard to say exactly,” said Millington with CERI about higher prices for producers. “It all depends on the transportation costs and what your final destination is. At current price levels today, yes the prices in Asia for crude oil, especially heavier crude like oilsands bitumen, the prices are higher.”

While most Canadians likely don’t care how much profit Big Oil generates, the recent downturn in oil prices and the subsequent job losses in the tens of the thousands, illustrates how people in several provinces, mainly Alberta, Saskatchewan, and Newfoundland and Labrador, heavily rely on the industry to feed their families. 

Muse Stancil on oil company revenue from Trans Mountain Expansion

Oil company revenues could rise by $73.5 billion over the first 20 years of operations of the Trans Mountain Expansion as a result of higher netbacks attributed to improved market access. The report by Muse Stancil was commissioned by Kinder Morgan as part of its NEB application.

4. Tax revenue

Higher prices are just one reason why experts suggest governments will receive more revenue if the pipeline is built. Besides the temporary boost during construction, there are benefits during the lifetime of the project.

Alberta could see an extra billion dollars in revenue from royalties, taxes and higher benefits from the federal government, according to the Conference Board of Canada.

“Alberta actually experiences the largest fiscal benefits from the royalties,” said Burt. “The largest benefits to the federal government come through higher corporate income tax collections.”


So, do the benefits outweigh the concerns? Those in Alberta are more likely to say the project is in the public interest while those in B.C. often disagree. What matters is what the rest of the country thinks.

The ministerial panel said the federal government will have to see if the pipeline is in the national public interest and whether it has broad support despite the stiff opposition in some local communities. 

We will know Ottawa’s answer in less than 30 days. 

Financial benefits of TMX

The financial benefits to governments and the economy of the Trans Mountain Expansion include the development and planning of the project and the anticipated first 20 years of operation from 2018-2038. The figures also include calculations such as the construction and operations of the pipeline, economic benefits of increased tanker activity, and oil company reinvestment.

Article source: http://www.cbc.ca/news/business/tmx-pipelines-kinder-morgan-worth-1.3852162?cmp=rss