Alberta’s Premier Rachel Notley and Prime Minister Justin Trudeau have repeatedly claimed that the controversial Trans Mountain pipeline expansion will secure higher prices for Canada’s heavy crude and therefore is in the national interest.
U.S.-based Kinder Morgan proposes to twin an existing 65-year-old pipeline from Alberta to the coast, tripling the volume of petroleum products it can carry.
Trudeau and Notley argue that a shortage of pipelines means oilsands crude reaches a limited market and that as a result prices are lower than for other oils, costing “Canadian governments and businesses billions of dollars in lost revenue.”
Notley’s government even ran full-page ads in B.C. newspapers saying that “Over the next 20 years, the Trans Mountain expansion is conservatively expected to generate $46.7 billion in government revenue.”
Trudeau has repeated the same claim. “We know that Canadian oil is discounted because we only have access to the U.S. market right now, and creating more access to overseas markets will actually get a better price for jobs, for workers, for the Canadian economy on our resources.”
But are these statements based on real facts? What’s the source for the claims?
A Tyee review found the numbers come from documents commissioned and paid for by Kinder Morgan.
An Alberta government website created to advocate for the pipeline acknowledges the $46.7 billion in government revenue cited by Notley comes from Kinder Morgan’s Trans Mountain’s website.
The Kinder Morgan website claims that “By increasing Canada’s capacity to get resources to market, producers will see $73.5 billion in increased revenues over 20 years.”
“A Conference Board of Canada report has determined the combined government revenue impact for construction and the first 20 years of expanded operations is $46.7 billion, including federal and provincial taxes that can be used for public services such as health care and education,” the company’s website says.
The Conference Board’s estimate of increased government revenues is based on the forecast $73.5 billion in increased industry revenues.
The website doesn’t provide a source for that sum, but it comes from the “Market Prospects and Benefits Analysis of the Trans Mountain Expansion Project for Trans Mountain Pipeline” report prepared by consultants Muse Stancil to support Kinder Morgan’s pipeline application to the National Energy Board.
The Conference Board of Canada used the Muse Stancil numbers as the basis for its forecast of government revenues in reports in 2016. The board did not challenge Muse Stancil’s economic assumptions.
But the numbers cited by Muse Stancil and the Conference Board of Canada — and pro-pipeline politicians — have been widely challenged as out of date or inaccurate.
Muse Stancil, a global energy consultancy, offers “a personalized consultancy service tailored to meet individual client needs solving specific problems,” according to its website. Company president Neil Earnest, who wrote the report, has a degree in chemical engineering and an MBA, but is not an economist.
Earnest’s report, rich in tables and numbers, states that the pipeline will generate $73.5 billion in additional revenues over 20 years by raising the price of western Canadian oil.
The new pipeline will lift oil prices via a 20-fold increase in diluted bitumen transportation from 25,000 barrels a day to 540,000 a day, the report says.
In total the new pipeline could increase the volume of petroleum products available for export via increased tanker traffic in Burrard Inlet from 300,000 barrels a day to 890,000 barrels a day.
The report claims that pipeline will raise the price of oil by an average of $2.50 a barrel by eliminating the need for high cost railway transport and increasing access to “the higher priced Pacific Basin markets.”
The $73.5 billion in increased industry revenue was derived by a proprietary mathematical model, meaning no one but Muse Stancil can check for it accuracy and reliability.
But a variety of economists and interested parties presented briefs to the NEB challenging the Muse Stancil numbers.
The City of Vancouver submission cited numerous “methodological inconsistencies and deficiencies in the Muse Stancil Report that result in erroneous and unreliable conclusions regarding the price lift benefits attributable to the TMEP [Trans Mountain Pipeline Expansion].” The report was “fatally flawed,” said the city’s submission.
“Economists who looked at the Muse Stancil report during the NEB hearing recognized so many failings that the report was without merit,” says economist Robyn Allan, former CEO of the Insurance Corporation of BC.
They were not alone. Minnesota’s Department of Commerce reached similar conclusions about Earnest’s market analysis used to support the building of Enbridge’s Line 3 in that state.
In a report released in February, the state’s department of commerce described Earnest’s testimony as unrealistic and unreliable.
Earnest’s analysis “didn’t allow for the possibility of changes to global refined product demand over time,” according to an independent review ordered by the state regulator. The analysis found the assumption was “unrealistic because it runs counter to a basic principle of crude oil market economics that demand for refined products drives refineries’ demand for crude oil.”
A Tyee fact check discovered that interveners in the NEB hearings on Trans Mountain raised similar criticisms of Earnest’s analysis.
1) Earnest’s model assumes that Canada’s low quality heavy crude will be sold for higher prices overseas and that will lead to a reduction in the current gap that sees heavy oil sold for lower prices in North America.
But Earnest grossly overestimates the impact of the light/heavy differential on Canadian heavy oil. He assumed, for example, that all heavy oil would be sold based on spot prices if the pipeline wasn’t built, at much lower value than for light oil.
But that’s not the way the oil market works in North America. Only about 15 per cent of heavy oil produced in Canada is currently subject to spot pricing or volatile differentials.
In addition oil companies protect themselves from heavy and light oil price differences, or what industry calls “the heavy oil discount,” by a variety of means including upgrading and refining bitumen or hedging.
Canadian heavy sour crude has always sold at a discount compared to light oil because of its low quality. As Imperial Oil notes “The market price for western Canadian heavy crude oil is typically lower than light and medium grades of oil principally due to the higher transportation and refining costs.”
It costs more to move by pipeline because it must be diluted with expensive condensate. As a result the discount between light and heavy oil can range between $15 and $25 per barrel. Big refiners of heavy oil, like the Koch Brothers, describe it as a “garbage crude” that serves as cheap feedstock for their refineries.
The light/heavy oil price discount can be volatile. Higher global oil prices can typically widen the price gap. So, too, can pipeline bottlenecks caused by shutdowns due to spills, leaks or regulatory orders.
Most Canadian oil producers plan for the discount. Some upgrade bitumen into synthetic crude, which can fetch premium prices compared to light oil. Others process low-valued bitumen in their own refineries where it is turned into high-value petroleum products such as gasoline. (A barrel of bitumen produces about 15 per cent of the gasoline of a barrel of light oil.)
Suncor, which produces about one-quarter of Canada’s heavy oil (800,000 barrels), says that 80 per cent of its bitumen production is not subject to the light/heavy oil differential because its marketing team “utilizes Suncor’s vast midstream and downstream optionality.” In other words Suncor upgrades bitumen.
Canadian Natural Resources, which also produces light and heavy oil, reduces production of heavy oil when the discount widens. “We look at the differentials all the time and our ability to start and stop our drilling program, based on what’s going on with the commodities,” said president Tim McKay this year.
Yet Earnest’s model assumes that 100 per cent of Canada’s heavy oil is subject to light/heavy oil differentials.
“Muse Stancil concocted a model that doesn’t reflect reality,” said economist Allan. She estimates that only 10 per cent of Canadian oil is subject to spot pricing and the light/heavy oil discount. The revenue gains projected by Muse Stancil aren’t based in reality.
Mexico’s exports of “Maya crude,” similar to Canada’s heavy oil, also contradict claims about potential price gains. Mexico has marketed Maya crude in Asia for several years. But it got lower prices, not higher ones, notes economist Jeff Rubin in a 2017 report. “Comparable grades of heavy oil, such as Mexican Maya crude, typically trade at more than US$8 a barrel less, not more, in Asian markets compared to the prices Gulf Coast refineries pay.”
And producers — including Imperial, Statoil and Suncor — did not tell the NEB that they supported the Trans Mountain pipeline because it would bring higher prices. They simply argued it would give their products access to more diversified markets.
Kinder Morgan did not initially stress Asian markets and higher prices in arguing for the pipeline. It initially hired IHS Global consultant Steven Kelly to prepare its economic benefits case. In 2013, evidence presented by Kelly claimed that California and not Asia would be bitumen’s next big market, and that it would take time to develop a market in Asia. “There is not a pot of gold at the end of this rainbow,” said Kelly then. “It’s not as simple as saying ‘if I bring my crude to Asia I will get this price.’”
After Kelly was named to the NEB in the fall of 2015, the agency ordered the Calgary petroleum consultant’s testimony to be struck from the record because his dual role as a witness and future board member “may raise concerns about the integrity of this hearing process,” said NEB spokesperson Tara O’Donovan.
Shortly afterwards Kinder Morgan hired Earnest. In his analysis California disappeared as market and Asia became the central destination for heavy sour Canadian crude.
Thomas Gunton, director of the resource and environmental planning program at Simon Fraser University, notes “The NEB panel did not really assess the report or accept its conclusions that KM pipeline would lead to higher prices for Canadian oil — they simply stated that diversifying markets would be beneficial.”
Gunton found that almost all the research “shows that oil prices are the same in tidewater locations and there is no advantage to shipping to the west coast or Asia.”
Interveners at the Trans Mountain hearing asked the NEB another pertinent question: if Trans Mountain did raise all Canadian oil prices, how would that be a good thing for Canadian consumers and refineries? Earnest’s model did not consider cost of higher crude oil prices to the Canadian economy. Nor did the NEB.
2) The higher prices under Earnest’s model are based on the assumption no other bitumen pipelines will built in the next 20 years.
But other pipelines are being built. They include the $7-billion Line 3 project from Alberta to Wisconsin and the Keystone XL from Alberta to the Gulf Coast. The two pipelines will add more than a million barrels of capacity. During the TransMountain hearings even the NEB recognized that increased transportation capacity will become available because oil will travel to where the demand is whether TMEP is built or not.
In a written argument the City of Vancouver said that “Mr. Earnest’s decision to exclude all other transportation capacity but the TMEP from his analysis raises serious doubt about the reliability of the other opinions and conclusions expressed in the Muse Stancil Report.”
Earnest’s analysis in support of the need for the Line 3 pipeline made the same assumption and argued that there would be no future pipeline expansions for 14 years. The Minnesota Department of Commerce found the assumption contrary to the historical record and “unrealistic.”
3) Earnest’s modelling on the economic benefits of the pipeline also contradicted itself on rail transport.
The consultant claimed that “in the initial years of TMEP’s operation, the need for more expensive rail transportation is largely eliminated, and the transportation savings flow back to the Canadian crude oil producers in the form of higher prices.”
But his report shows rail transportation dramatically increasing between 2020 and 2030 from 22,000 barrels a day to 480,000 barrels a day. There would be few if any transportation savings.
4) The Earnest model also assumed that Canadian dollar would be on par with the U.S. dollar from 2015 to 2038. (The dollar now trades at 78 cents U.S.).
That faulty assumption allowed the report to underestimate the costs of shipping bitumen from Canada by tanker. Those costs are set in U.S. dollars; a lower Canadian dollar means companies face bigger expenses for shipping. Canadian bitumen producers actually depend on a lower Canadian dollar as a buffer against low oil prices.
5) Earnest’s revenue benefits were predicated on oil prices of around $100 a barrel. But the price now hovers around $60.
During NEB hearings on Enbridge’s now cancelled Northern Gateway pipeline, Earnest acknowledged the challenge in forecasting future prices. “If I could predict with confidence future oil prices, I wouldn't be sitting here today, I'd be floating around in my yacht on the Riviera, I assure you.”
6) The Muse Stancil report also assumed the increased supply of bitumen in Asian markets will not result in lower prices.
Economics 101 says that when you increase supply of a low quality product, the price will drop. The Muse Stancil report assumes that bitumen sales in Asia will defy this principle.
Allan also notes the report doesn’t consider the effect of rising prices, if they occur, in prompting companies to invest in increased production, which would result in lower prices. “Mr. Earnest predicts that crude oil prices will increase for all producers in western Canada because of the project, but stops his assessment there giving a false picture of how the market works,” Allan notes. “Reinvestment increases supply and puts downward pressure on prices. It’s a pretty obvious, and expected, market adjustment.”
The Muse Stancil report makes no mention of China’s huge oilsands deposits or how they might impact Canadian exports.
In 2017 energy expert David Hughes, a geologist who worked for the federal government for 32 years, revisited the Muse Stancil report and found that it was inaccurate and out of date.
“The U.S. is not unfairly discounting Canada’s oil and no Asia price premium exists,” Hughes wrote. “The construction of the Line 3 expansion and Keystone XL pipelines with the Trump administration’s support will allow access to the highest prices available and provide surplus export pipeline capacity. Politicians knew this information, or should have known it, when Trans Mountain was approved in November 2016.”
Yet Notley and federal Environment Minister Catherine McKenna are still quoting flawed documents to justify the pipeline.
Allan said there are only two explanations.
“Either they haven’t read the original report or they do understand and are being wilfully deceptive.”
This article was supported by those who generously contributed to the Rafe Mair Memorial Fund for Environmental Reporting on The Tyee. To find out more or contribute, click here.
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