One more study designed to feed local media, citizens an anti-Trans Mountain Expansion story
The British Columbia debate over the Alberta oil sands and pipelines has a curious twist: non-energy professionals who think because they can operate a spreadsheet, they know better than real energy economists and industry analysts. Exhibit A is David Hughes, a distinguished earth scientist, who released a deeply flawed report on the need for new Canadian pipelines.
The study gained immediate media attention (Vancouver talk radio stations were discussing it at length) and will no doubt influence the political narrative as tensions rise over the Trans Mountain Expansion pipeline.
I asked energy economist Michal C. Moore, currently teaching at Cornel University, about Hughes’ argument that “Canadian crude producers are likely to receive lower prices overseas than in the US because of the higher transportation costs involved in transporting bitumen by pipeline to BC’s coast and then exporting it by tanker. A ‘tidewater premium’ does not exist.”
Moore says that if Kinder Morgan and Alberta oil sands producers only consider current low prices, hovering around $50USD/b for WTI, then Hughes would be correct.
Of course, they don’t.
“I would not stop building a pipeline on the basis of current pricing,” said Moore in an interview. “As far as pipeline approvals and strategies go, we’re likely to need some sort of port access in the future. We’re not going to shut off shipping oil sands crude oil tomorrow.”
Moore says future oil markets are likely to be strong and consistent: “To say that current prices ought to dictate what we should do as far as pipeline expansion, is pretty short-term thinking.”
The International Energy Agency estimates that global oil consumption could rise from its current level of 95 million b/d to as high as 113 million b/d by 2040 (determined to some extent by the adoption of electric vehicles, which would reduce demand for gasoline) because the global auto fleet is expected to double to 2.4 billion, driven by Asian demand.
And many analysts, including the respected Goldman Sachs energy department, argue that a $400 billion drop in exploration budgets during 2015 and 2016 could lead to an oil shortfall and much higher prices over the next few years.
The takeaway from this discussion, as Reuters energy analyst John Kemp notes in this persuasive column, is that oil markets are inherently volatile and no company can forecast with accuracy what will happen 10 or 20 or 50 years in the future.
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Which, says Moore, means the decision to risk capital on the Trans Mountain Expansion pipeline should be up to the companies.
“Producers are going to take a discount to get into those [offshore] markets no matter what they do, so it becomes a private industry decision whether they can support a lower, discounted price,” he said.
Bottom line, the company investing in the $7.4 billion pipeline think the risk is justified and that is Kinder Morgan’s decision to make.
Hughes also takes issue with Kinder Morgan’s “overly optimistic projections of future oil supply,” which he claims are over-estimated by 43 per cent in 2038, partly because they don’t take into account the Alberta government’s cap on oil sands emissions.
The problem with that argument is Hughes assumes oil sands producers will soon reach the 100 megatonnes/years emissions cap (the oil sands currently pumps out 70 megatonnes/year), forcing them to curtail expansion.
Shannon Phillips, Alberta environment minister, explained in an interview earlier this year that the scenario envisioned by Hughes is not the Alberta government’s intention nor is it likely to happen.
She says that the Rachel Notley NDP government worked with producers to design an “output-based allocation” system that uses carbon levy funds to subsidize innovate producers who use new technology lower greenhouse gas emissions and penalizes those who don’t.
And a study by the Canadian Energy Research Institute about steam-replacement technologies for in situ oil sands production noted that of the six “pathways” available, if producers chose just one, oil sands emissions in the 2030s would still be at current levels, even assuming expansion.
The emissions cap is “a big, significant factor in driving adoption of the next suite of technologies that will significantly reduce the environmental footprint of the oil sands,” Dinara Millington, CERI VP of research told me.
“How quickly they will reach that emissions cap if nothing else is done has created urgency among the producers.”
While it’s true the Canadian Assoc. of Petroleum Producers reduced its oil sands output forecast by 400,000 b/d based upon lower price expectations, the forecast out to 2030 is still 4.9 million b/d, an increase of about 1 million b/d.
“The need for new pipelines departing Western Canada has not diminished with lower oil prices, quite the opposite,” said Kevin Birn, energy director for IHS Markit, who leads the Oil Sands Dialogue.
“Canada remains a growth story with production volumes increasing since the oil price collapse. And with continued growth it appears inevitable that volumes will overtake an already-constrained system and create a resurgence of crude-by-rail.”
Birn adds that lessons from the timing of Keystone XL and concerns over a possible resurgence of American protectionism under President Donald Trump have highlighted the importance of market diversification.
And future market diversification means Asia.
“If you look at the global picture, forecasts are showing that growth in the world isn’t necessarily coming from our traditional customer in the U.S. It’s going to be India and China,” says Tim McMillan, CAPP president.
If respected analysts and industry representatives say the data and circumstances argue against Hughe’s study, then what is really going on?
Political scientist Keith Brownsey said in an interview that Hughes is a renowned scientist and well-respected in his field, but he takes a very “narrow view of what the Canadian oil and gas industry needs to do to survive.”
He notes the irony of environmentalists like Hughes opposing a pipeline to access Asian markets, without which Canadian producers would be forced to continue relying on the United States in the era of Donald Trump.
There is also an irony that the economic arguments most commonly made against Trans Mountain Expansion are made by retired professionals who are not experts in oil markets or the pipeline industry. People like Hughes and former ICBC chair Robyn Allan, who is an economist but not an energy economist.
The only reasonable conclusion os that the Hughes report is really about politics, as he makes clear in his press release.
“The pipeline isn’t needed given recently approved pipelines, it will not mean a higher price for oil, and increased tanker traffic would place unnecessary risks on BC’s Lower Mainland and sensitive marine environments,” Hughes said.
“The new BC government would be wise to withdraw the Province’s approval for this project.”
BC NDP leader John Horgan and Green Party leader Andrew Weaver have already indicated that if the NDP form a minority government they will oppose Kinder Morgan with every “tool” available to the BC government, including a legal challenge.
Hughes is merely feeding the anti-Kinder Morgan narrative in Metro Vancouver. And why wouldn’t he? There are no pro-Kinder Morgan voices willing to talk to local media. The company itself is almost invisible, preferring to avoid controversy at all costs, and industry associations like CAPP don’t bother to head west over the Rockies unless they’re meeting with other industry types.
Voices like Hughes dominate the local debate. Like the Trump White House with its “alternate facts” and “fake news” the goal is to control the narrative, not provide factual analysis that voters can depend upon to arrive at informed opinions.