Banner drop, Vancouver April 8, 2021.
Below are excerpts from the executive
summary of "Evaluation of the Trans Mountain Expansion Project"
by Thomas Gunton (PhD), Chris Joseph (PhD), Daniel Dale (MRM) of the
School of Resource and Environmental Management at Simon Fraser
University. The report was published in March 2021.
Purpose
1. The purpose of this report is to provide an independent
evaluation of the Government of Canada's decision to purchase Trans
Mountain (TM) and build the Trans Mountain Expansion Project (TMEP).
[...]
2. In May 2013 TM submitted its application to the National
Energy Board (NEB) seeking approval of TMEP to twin an existing
pipeline running from Edmonton, Alberta to Burnaby, British Columbia,
to increase oil transportation capacity from 300kbpd to 890kbpd, and
construct a marine terminal to load oil tankers to ship oil from
Vancouver to Pacific Rim markets.
3. In May 2016 the NEB issued its report recommending that the
federal government approve TMEP and on November 29, 2016 the federal
government approved TMEP.
4. In May 2018 Kinder Morgan announced that it would halt
construction of TMEP due to increasing project risks. Shortly after
Kinder Morgan's announcement, the federal government announced its
intention to purchase TM and the acquisition was completed in August
2018. [...]
Deficiencies in Government Evaluation of TMEP
7. The NEB's 2016 and 2019 evaluation of TMEP to determine whether
it is justified and in the public interest contains a number of
deficiencies including:
a. failure to provide a comparison
of benefits and burdens in accordance with well-established principles
such as benefit cost analysis that can be used to assess whether TMEP
is in the public interest;
b. omission of significant potential
costs associated with building TMEP (e.g., excess pipeline capacity
costs, mitigation costs such as the Oceans Protection Plan, and various
environmental costs);
c. unjustified conclusion that the risks of oil spills from TMEP are low and that the risk is acceptable;
d. failure to complete a comparative evaluation of alternative pipeline options;
e. failure to complete an overall supply and demand analysis for oil pipelines to determine if TMEP is needed;
f. overestimation of TMEP benefits through the use of gross economic impacts instead of net economic benefits;
g. failure to update the economic
evaluation of TMEP in its 2019 report (NEB, 2019) from its 2016 report
(NEB, 2016) to take into account the significant changes that had
occurred since completion of the 2016 report including weaker oil
markets, rising construction costs of TMEP, and advancement of other
pipeline projects that are
alternatives to TMEP.
8. The Government of Canada has provided no publicly accessible
evaluation of its decision to purchase TM and build TMEP. Given the
magnitude of the public expenditure ($4.4 billion to purchase TM from
Kinder Morgan and the currently estimated $12.6 billion cost to build
TMEP), the failure to provide a public evaluation is contrary to
accepted principles of public accountability.
Evaluation of TMEP
[...] 10. The evaluation assesses recent developments that impact the economic viability of TMEP including:
a. advancement of alternative oil
transportation projects that will add 1,640kbpd of Western Canada
Sedimentary Basin (WCSB) oil export capacity, including: Enbridge Line
3 (370 thousand barrels per day (kbpd)), other Enbridge expansions
(550kbpd), Keystone (50kbpd), TMEP (590), and Rangeland (80kbpd).
b. a more than doubling of the costs of
TMEP from the original estimate of $5.4 billion in 2013 to the current
estimate of $12.6 billion (PBO, 2020);
c. significantly weaker oil markets due
to COVID-19 and new climate change policies announced by Canada in
December 2020 that lower the need for new pipeline capacity; and
d. The cancellation of the Keystone XL pipeline by the Biden administration.
Supply and Demand for Pipelines
[...] 11. To assess the need and economic viability of TMEP, we
completed a supply and demand analysis for WCSB oil transportation
services ...
a. The 2020 Canada Energy Regulator
(CER) Evolving Scenario forecast assumes that new climate policies will
continue to be implemented at the historic rate. Under the CER Evolving
Scenario forecast neither TMEP nor Keystone XL are required. If TMEP is
built along with the other proposed expansions (excluding Keystone XL),
there
would be just over 900kbpd of excess pipeline capacity in 2030.
b. It is important to note that the CER
Evolving Scenario forecast may overestimate future WCSB oil production
because the climate change measures underlying the Evolving Scenario
will not achieve Canada's climate change targets and are not as
aggressive as the new climate plan announced by Canada in December
2020. The Evolving
Scenario forecast is also higher than other forecasts such as those by
the International Energy Association (IEA, 2020b). Consequently, oil
production may be lower and excess pipeline capacity higher than
forecast under the Evolving Scenario.
c. The second CER forecast (the Reference
Scenario) assumes that no new climate policies are implemented. Given
Canada's announcement of new climate policies in December 2020, the
assumption of no new climate policies in the CER Reference Scenario is
incorrect and the Reference Scenario forecast is therefore no longer
valid.
Nonetheless, we show that even under this overly optimistic forecast,
the Enbridge expansions (Line 3 plus other proposed expansions) and
other proposed pipeline enhancements (Rangeland, Express, and existing
Keystone) will meet Western Canadian transportation needs to 2028
without building TMEP or Keystone XL. In 2028, some additional
capacity may be required under this scenario.
d. Although some excess pipeline capacity
is beneficial, the magnitude of excess capacity resulting from the
construction of TMEP along with other proposed projects (excluding
Keystone XL) will impose a significant cost on Canada's oil sector
through increased tolls to cover the costs of redundant pipeline
capacity and on the Canadian public
through reduced tax revenues due to lower oil sector profits. The NEB
did not include the costs of this excess capacity in its evaluation of
TMEP costs and benefits.
TMEP Financial Risks
12. TMEP is somewhat protected from the risks of weaker oil markets
and excess pipeline capacity because it has long term contracts for 80
per cent of its capacity. Consequently, much of the adverse impacts of
excess pipeline capacity will be borne by other pipeline systems, such
as Enbridge, which will lose oil shipments to meet contractual
commitments on TMEP. However, weaker oil markets and the forecast
excess pipeline capacity increase risks for TMEP in the following ways.
a. Securing spot shipments for the
20 per cent of TMEP capacity not under long-term contracts will be
impaired by excess pipeline capacity. Enbridge is in the process of
converting 90 per cent of its capacity to long-term contracts, which
will remove about 2.7 million bpd of oil from potential spot shipments
(Enbridge, 2020, p. 43). Based on
Enbridge's analysis there will be very little oil that will be
available for spot shipments after Enbridge converts to long-term
contracts.
b. TMEP's ability to secure spot
shipments will be further constrained by the escalating capital costs
that will result in higher tolls that will impair TMEP's ability to
compete with other lower cost pipelines such as Enbridge. The
competitive position of TMEP is also impaired by the fact that oil
producers will prefer to use pipelines such as
Enbridge that ship directly to the U.S. Gulf where heavy oil prices are
currently higher than prices in Asia.
c. Revenue derived from the 80 per cent
contracted space on TMEP is also at risk due to the deteriorating
financial position of oil producers that may impair their ability to
honour their long-term contracts. Further, given the weakening of oil
markets, Enbridge's shift to long-term contracts, and rising TMEP
shipping costs, there is an
increasing risk that shippers will not renew their long-term contracts
on TMEP after they expire, thus increasing the risk of declining
volumes and revenue. [...]
13. [...] The Parliamentary Budget Officer estimated that stronger
climate policies could result in the federal government incurring a net
loss of between $0.1 billion and $3.5 billion on TMEP. [...]
15. The results from the financial impact analysis of the
Government's purchase and construction of TMEP show that TMEP will
result in a net loss to the federal government ranging from $2.1 to $6.9 billion
if the government follows its stated plan to sell the TM assets once
TMEP is operational. There are
also additional costs to government including potential corporate
income tax losses due to higher depreciation charges associated with
the incremental capital costs of TMEP plus an increase in government
expenses generated by the Oceans Protection Plan to mitigate TMEP
risks. [...]
Benefit Cost Analysis
16. [The full report includes two benefit cost analyses (BCAs).]
a. The full project BCA results show that the decision to approve and build TMEP will result in a net cost to Canada of $11.9 billion
under base case assumptions. The net costs could range between $8.3
billion and $18.5 billion under alternative scenarios and there is no
likely scenario under which TMEP would generate a net
benefit for Canada even when option value benefits of access to new
markets are included.
b. The project completion BCA results are
relevant for determining whether there is a net benefit to Canada of
completing TMEP now that it is partially constructed. The results show
that continuing construction and completing TMEP will result in a net cost to Canada of $6.8 billion under base case assumptions and net costs
could range from $3.2 billion to $13.3 billion under alternative scenarios.
c. The project completion BCA results
show that Canada would be better off terminating construction of TMEP.
The principal reason for this is that the oil that will be transported
on TMEP could be transported on other pipelines without incurring the
remaining costs of constructing TMEP. Consequently, additional spending
on TMEP will not
generate any incremental benefits.
d. Shelving TMEP has minimal downside
risk because if demand for new transportation projects is significantly
higher than forecast or other proposed pipeline expansions do not
proceed, there would be sufficient lead time to restart TMEP or build
other projects to accommodate increased demand. Proceeding with
construction of TMEP under
current market conditions is high risk because once the investment is
made it is a sunk cost that cannot be recovered.
17. One of the primary reasons that TMEP would result in a large net
cost to Canada is because building TMEP would create excess pipeline
capacity. The costs of this excess capacity will be borne by other
pipeline operators whose revenues will be reduced by the reallocation
of oil shipments from existing pipelines to TMEP to fulfill
shipping contracts signed before the downturn in oil markets. Oil
producers will also incur higher costs to cover toll increases required
to finance excess capacity and governments will lose tax revenue due to
lower oil company profits.
18. A second key reason that the Trans Mountain Expansion Project
will result in a net cost to Canada is that the construction costs have
more than doubled from $5.4 billion in 2013 to the current estimate of
$12.6 billion, and costs could increase further. The tolls approved in
the final cost review in 2017 were set to cover capital costs of only
$7.4 billion. Therefore, the toll revenue will not be sufficient to
cover the estimated $12.6 billion capital cost.
19. A further reason that TMEP will result in a net cost to Canada
is due to the environmental risks it entails, including the risk of
marine oil spills in British Columbia and greenhouse gas emissions. The
probability of a marine tanker spill over a 50-year operating period
for TMEP is estimated to be between 43 per cent and 75 per cent. The
costs of a tanker spill including passive use values are estimated at
$2.6 billion. The risks of a marine tanker spill would be avoided if
other transportation options such as Enbridge pipeline expansions are
used that do not require tanker transportation.
20. It is important to note that many environmental impacts of TMEP
are not included in the quantitative benefit cost estimates because
they are difficult to estimate in dollar terms. Inclusion of these
environmental impacts would increase environmental cost estimates. To
be consistent with the NEB's terms of reference, we have also omitted
all environmental costs associated with the upstream production of oil
and downstream consumption. These costs are significant and should be
assessed as part of a comprehensive energy and climate change policy.
21. An alleged benefit of TMEP is that it will increase prices
received by Canadian oil producers and reduce "discounting" of Canadian
oil exports to the U.S. We evaluated this potential benefit and
conclude that the analysis used by consultants (Muse Stancil) to TM to
generate this benefit estimate is flawed and that it is highly unlikely
that
TMEP will generate a price benefit. Flaws in the analysis used by TM to
forecast a price benefit are as follows:
a. The analysis relies on outdated oil
production and pipeline capacity forecasts that assume that if TMEP is
not built, WCSB oil would have to be shipped by higher cost rail to the
U.S. Gulf. As the supply and demand analysis provided in this report
shows, this assumption is incorrect.
b. The TM analysis uses a static model
that does not take into account changes in refinery configurations and
changes in the market destinations of oil shipments that would result
from building TMEP. For example, the model incorrectly assumes that a
reduction in WCSB shipments to the U.S. market will result in a net
reduction in U.S. oil
supply and an increase in oil prices received by Canadian producers.
This fails to account for the fact that other oil producers would
increase shipments to the U.S. to make up for the decline in Canadian
shipments thus eroding any potential price increase.
c. The assumption of higher oil prices in
Asian markets is inconsistent with the functioning of world oil markets
that erode price differentials between markets by redirecting shipments
to higher priced markets to equilibrate prices. Price differentials may
persist due to market constraints over the shorter term, but over the
last decade heavy oil
prices have actually been higher in the U.S. Gulf than Asia.
Consequently, using TMEP to redirect Canadian shipments from the U.S.
to Asia could result in a lower price relative to shipping to the U.S.
Gulf.
d. The flaws in TM's modeling of the
alleged price benefit of TMEP are confirmed by the fact that the price
discount on Canadian oil shipped to the U.S. has actually declined over
the last fifteen years despite a significant increase in Canadian
shipments to the U.S. This directly contradicts the model forecast that
higher shipments to the U.S.
result in lower prices for Canadian oil.
Conclusions
22. We conclude that:
a. The Government of Canada has not provided a public evaluation of its decision to purchase TM and build TMEP.
b. There have been significant changes
since the completion of the NEB report on TMEP including emergence of
new oil pipeline projects, rising TMEP construction costs, lowering of
oil production forecasts, new climate change policies, and the
cancellation of Keystone XL. As a result of these changes, the
conclusions of the 2016 (and 2019)
NEB reports are no longer valid and cannot be relied on to justify
building TMEP.
c. Our financial impact analysis
concludes that escalating capital costs, new climate change policies,
and construction delays will negatively impact the financial viability
of TMEP. The Government of Canada's purchase of TM, completion of TMEP,
and eventual divestment of the pipeline system will result in a net
financial loss to the federal
government (and to taxpayers) between $2.1 billion and $6.9 billion.
d. Our full project BCA concludes that the
decision to approve and build TMEP will result in a net cost to Canada
under base case assumptions of $11.9 billion. The net cost estimates
range between $8.3 billion and $18.5 billion and there is no likely
scenario in which TMEP will generate a net benefit to Canada.
e. The project completion BCA, which
assesses the benefits and cost of completing the partially built TMEP
by omitting sunk costs, shows that completing construction of TMEP will
result in net cost to Canada between $3.2 billion and $13.3 billion. Therefore, continuing construction of TMEP is not in Canada's public interest and
TMEP should be shelved.
For the full report click here.
This article was published in
April 12, 2021 - No. 27
Article Link:
https://cpcml.ca/WF2021/Articles/WO08274.HTM
Website: www.cpcml.ca
Email: editor@cpcml.ca
