A Natural Resources memo extolling the economic benefits of more bitumen pipelines for Canada is “riddled with factual and analytical mistakes” that could “dangerously mislead” elected officials and the public, says an economist who has pored over its claims.
In a detailed 10-page letter, B.C. economist Robyn Allan has warned Jim Carr, minister of Natural Resources, that the memo’s conclusions are “unreliable and yet, based on recent public statements, you have adopted them to conclude new pipelines, such as Trans Mountain’s expansion, are necessary.”
Trans Mountain is one of four proposed pipeline projects, controversial for safety and climate change concerns, currently under consideration.
Allan’s letter documents a series of major errors in the February memo titled “Economic Benefits of Pipelines.” The memo wasn’t released until July due to a Freedom of Information Request. Allan, who served as president and CEO of the Insurance Corporation of British Columbia and as senior economist for B.C. Central Credit Union, analyzed the document in September.
The memo to the minister contends that Canada’s oil pipelines are currently operating at “over potential”; that they need one million barrels of new capacity by 2020; that lack of tidewater access has cost the economy billions and that Asian markets are “fast growing.”
Yet the facts support none of these claims says Allan, who has long questioned the economic argument for expanding bitumen production in an era of low and volatile oil prices.
Allan asserts these errors:
1. Not true that pipelines are operating beyond potential.
The memo states that Canada’s pipelines were operating at fullest potential in 2014. But it omits the ongoing problem of leaking and faulty pipelines and its dramatic impact on pipeline capacity.
After Enbridge’s disastrous billion-dollar Kalamazoo bitumen spill in 2010, the National Energy Board imposed a variety of pressure restrictions on aging export lines that temporarily constrained capacity between 2010 and 2014 until leaky infrastructure such as Line 6B were rebuilt. The majority of these restrictions have now been removed.
The memo, which makes no mention of climate change or its impact on oil pricing and production, also uses “stale-dated projections” about available oil for export from a National Energy Board 2016 report. That report did not take into account delayed or cancelled oil sands projects due to low prices. Nor did it address the impact of climate change policies on the need for more pipelines.
In fact industry has lowered future oil sands projections by 2.7 million barrels a day due to deferred or cancelled projects announced between January 2014 and September 2016.
2. False to inflate future need by nearly a million barrels a day.
The memo forecasts oil production will grow from 3.9 million to 4.9 million by 2020 and that therefore the country needs a pipeline to move an additional million barrels of oil.
The memo, however, confuses total Canadian oil production with bitumen available for export from Alberta and thereby inflates the need for pipelines, writes Allan.
Once you subtract Atlantic oil production and oil used by refineries, argues Allan, “3.0 million barrels a day of Western Canadian oil production was in search of transportation capacity for export in 2014 — 900 thousand barrels a day less than 3.9 million as claimed in your briefing memo.”
As a consequence, “One million barrels a day of additional pipeline capacity is not required by 2020 as asserted in the memo.”
Two recent government assessments support Allan’s conclusion.
A 2016 statistical study by the Alberta Energy Regulator calculated that rail could handle any further oil export needs by 2025.
A Federal Department of Finance memo emphasized that the global “low oil price environment” meant there was sufficient pipeline capacity until 2025.
Energy analyst David Hughes also calculated earlier this year that no new pipelines are actually needed if Alberta keeps its promise to cap oil sand growth and emissions at 100 megatons a year. The energy-intensive mining project, Canada’s largest single source of emissions, now emits 68 million tons a year.
3. Wrong to conclude lack of port outlets suppresses Canadian oil prices.
The memo states that a “lack of infrastructure to access global markets led to a significant differential between North American and global prices from 2011-2013.”
But much of this global market access already exists. Allan notes that “crude oil production in Atlantic Canada has marine access to global markets and that western Canadian crude oil has access to global markets by way of Trans Mountain to the Westridge marine terminal.” That access existed as early as 1956.
Since 2011 the National Energy Board has also given Texas-owned Trans Mountain pipeline a guaranteed 79,000 barrels access a day at the Westridge terminal.
But the industry never fully used it. In fact, bitumen exports to non-U.S. markets declined between 2011 to 2013.
“According to NEB commodity statistics of crude oil exports, an average of 9.5 thousand barrels a day of diluted bitumen was exported to non-U.S. markets in 2012 and an average of 7.5 thousand barrels a day in 2013. In 2010, 9.6 thousand barrels a day of diluted bitumen was exported to non-U.S. markets.”
4. False to say Asian markets for oil sands crude are growing.
There is simply no Asian market for Canada’s carbon-intensive heavy oil at this time, added Allan in an interview.
“We have tidewater access and it is not being used... The world doesn’t want or need Alberta’s dirty oil.”
The memo also makes no mention why bitumen routinely commands lower prices than conventional oil. According to the U.S. Energy Information Administration, Canada’s poor quality bitumen sells at $15 to $20 discount for a reason: it “has to be transported over a longer distance to refineries and — because of its density and quality — it is more difficult to process into petroleum products.”
Building more pipelines or getting bitumen to global markets does not change the poor quality of the resource or move it closer to refineries, explained Allan.
‘Egregiously overstated conclusions’
In conclusion, Allan noted in her letter that “NRCan staff should have been aware of the issues to provide you with a much more sober assessment of the impact of Trans Mountain’s expansion on the Canadian economy. Instead, you were given egregiously overstated conclusions that there is an urgent need for one million barrels a day of new pipeline capacity.”
Allan sent the letter through Carr’s chief of staff on September 14. “I was told they would get back to me and I’m still waiting.”
In an interview Allan noted that neither the federal government nor the NEB in any pipeline hearing have ever fully considered what impact the approval of additional Canadian oil exports might have on global market prices.
“If you increase the supply, the price will fall. That is economics 101.”
Many oil analysts, such as Jeff Rubin and Art Berman, generally agree that increased production from extreme and high cost resources such as fracked oil from North Dakota and steamed bitumen production from the oil sands all played a significant role in the fall of oil prices over the last two years due to overproduction.
Low oil prices mean that many bitumen miners and oil frackers are losing money because current prices do not cover their high costs by as much as $30 a barrel.
After the Fort McMurray catastrophic wildfire took nearly a million barrels of bitumen production off market, the global price of oil rose significantly.
“Yet, the Canadian government wants to pump this crude when it is environmentally, economically and socially unwise to do so,” added Allan.
“How can the Canadian government talk about approving the Trans Mountain pipeline without doing the public review? They promised to redo it but haven’t. They are now relying on facts and projections that don’t exist in reality.”