Canada's acquisition of Kinder Morgan's Trans Mountain Pipeline and expansion project (TMX), and its subsequent efforts to begin construction, have been fraught with delays, opposition and court challenges. This report assesses the latest data on the need for the project and its likely impact on Canadian producers and commitments under international climate agreements.
There have been significant new developments that bear on the need for TMX since the government purchased the project in 2018 and approved it for the second time in 2019. These include:
- Announced expansions and optimizations of existing pipelines that will increase export capacity over the next two to three years, including the Enbridge mainline, and the Aurora-Rangeland, Keystone and Express pipelines
- The reversal of the Southern Lights pipeline for export use in 2023
- The likely completion of the Line 3 expansion project in 2021
- The release of new production forecastssince June, 2019, by the Canada Energy Regulator (CER, formerly the National Energy Board), Alberta Energy Regulator (AER), Canadian Association of Petroleum Producers (CAPP) and International Energy Agency (IEA)
- The release of the latest update of Alberta’s Oil Sands Emissions Limit Act in January 2020
- The release of Canada’s 2020 emissions report by economic sector which allows an updated assessment of future emissions from the oil and gas sector and compliance with Alberta’s 2020 Oil Sands Emissions Limit Act
- The increase in the cost of the TMX project from $7.4 billion when it was purchased in 2018 to $12.6 billion in February 2020, which will significantly increase shipping costs for Canadian producers selling oil to Asia compared to U.S. exports
- The COVID-19 pandemic of 2020 which has resulted in an unprecedented decline in the demand for oil and is likely to reduce demand in the longer term
Key conclusions of this report are as follows:
- Emissions from the oil and gas sector alone are on track to exceed Canada’s emissions reduction target in 2050 by 81 per cent—even with a 100 megatonne (Mt) per year cap on oil sands emissions (as evidenced from the latest CER oil and gas production forecast, coupled with the latest Environment Canada emissions report). Without thecap, emissions from the oil and gas sector would exceed this target by 101 per cent.
- The increase in oil production forecast by CER (with an oil sands emissions cap), AER, CAPP and IEA can easily be accommodated for the next decade with existing pipelines, including announced optimizations and the Line 3 expansion, without rail or the TMX and Keystone XL pipelines. These forecasts, however, substantially overstate likely production increases as they do not account for the impact of demand reduction resulting from the COVID-19 pandemic or the need to reduce emissions from oil and gas production to meet Canada’s emissions reduction targets.
- There is no price premium to be had selling Canadian heavy oil to Asia. In fact, based on Pemex sales of Maya heavy oil (comparable to Canada’s Western Canada Select heavy oil benchmark) over the past six years, cargos bound for the Far East sold at an average discount of $4.27 per barrel compared to cargos bound for the U.S. (The higher price paid for heavy oil in the U.S. reflects the fact that the U.S. has more than half of the world’s refineries equipped to process heavy oil.)
- Transportation costs to Asia from Alberta are also higher than to the U.S. Midwest or Gulf Coast. Transport costs to south China are between US$1.88 to US$3.52 per barrel higher than to the U.S. Gulf Coast, and from US$5.90 to US$7.92 per barrel higher than to the U.S. Midwest.
- Thus, the narrative that the Trans Mountain Expansion project will lead to increased netbacks for Canadian producers is not supported by the evidence. The discount from selling Canadian heavy oil to Asia, coupled with higher transportation costs, will lead to a reduction in netbacks for Canadian producers, compared to the U.S., of US$4 to US$6 per barrel or more.
- Therefore, the government’s claim that TMX must be built in order to provide increased revenue to Canadian oil producers and $500 million per year to reduce emissions must be viewed with extreme skepticism. An expenditure of $12.6 billion tax dollars on a project that will likely reduce revenues for Canadian producers would certainly be better spent directly on reducing emissions.
Canada’s emissions reduction policies have so far proven to be ineffective at the scale required. Although Canada has committed to a 30 per cent reduction of emissions by 2030 (from 2005 levels), emissions were down only 0.14 per cent by 2018. Emissions in Alberta, where the oil to fill TMX would be produced, have increased by 17.5 per cent since 2005. The $12.6 billion the government plans to spend on the construction of TMX is counterproductive, as it is unlikely to increase the profits of Canadian producers or result in a revenue stream that will both cover construction costs and provide additional funds to reduce emissions in a meaningful timeframe.
If anything, TMX will exacerbate the emissions problem by incentivizing additional production growth while diverting funds that could otherwise be spent on actual emissions reduction. TMX will also increase the risk of oil spills along its route and in the marine environment. Canada urgently requires a viable strategy that will effectively address future energy security needs, environmental objectives, and emissions reduction targets.