The ‘Canada Needs More Pipelines’ Myth, Busted

For years, the Canadian public has been besieged with the same message: Alberta’s pipeline network is completely maxed out, meaning the oilsands are landlocked and new pipelines must be constructed to allow producers to ship their product to new markets and eliminate the discount imposed on exports.

It’s a notion that’s been repeated by politicians of all stripes, including Alberta Premier Rachel Notley and Prime Minister Justin Trudeau.

But there’s no merit to that argument, according to a new report from the Washington, D.C.-based nonprofit Oil Change International.

In the briefing, titled “Canada Not Running Out of Pipeline Capacity,” authors Adam Scott and Greg Muttitt point out that there’s around 400,000 barrels/day of unused capacity in the network, easily accommodating exports for projects currently operating and under construction.

This calculation was derived from the organization’s Integrated North American Pipeline model, which then concluded the network was 89 per cent full.

As a result, the only reason that new pipelines like Kinder Morgan’s Trans Mountain and TransCanada’s Energy East would be required is if there’s a massive expansion of the oilsands, a move that would arguably undermine the Paris Agreement and other international climate commitments (an argument also made by David Hughes in his thorough June 2016 report for the Canadian Centre for Policy Alternatives).

“When you look at the reality of the situation building new pipelines would not increase the amount of money that producers receive because there isn’t a shortage,” Scott told DeSmog Canada. “And there’s no discount anymore that could be relieved by building a new pipeline.”

“It’s really that missing piece of the puzzle that Canadians are not getting good information on.”

Only Reason for Kinder Morgan and Energy East Would Be For Huge Oilsands Expansion

Scott isn’t discounting the historical existence of an artificial price differential. Rather, he’s arguing that it no longer applies.

There was a serious pipeline constraint in 2012 and 2013 that resulted in a transport-related price gap between Western Texas Intermediate (WTI) and Brent Crude with Western Canadian Select (WCS). In other words, the lack of pipeline access rendered bitumen production and transport less economically viable.

But that changed with the construction of new pipelines between Illinois, Oklahoma and refineries on the Gulf Coast in 2013 and 2014, as well as the removal of a 40-year ban in the U.S. on exporting domestically produced oil in December 2015 (which the report suggests “reduced market distortions between shale oil and oil sands crude oil at U.S. Gulf Coast refineries”).

Now, oilsands producers are facing three major issues that ultimately have nothing to do with pipelines: lower quality crude, distance from major markets (almost exclusively in the U.S. given access to heavy oil refineries) and extremely low global prices.

“In reality, that differential is basically gone now,” Scott says.

He suggests that the pipeline network may come close to full in 2018, resulting in a “very brief” spike in prices.

But there are more expansions planned for the network that will likely come online to loosen that bottleneck: Enbridge is currently planning to add 800,000 barrel/day worth of pipeline capacity to its mainline system by 2020, which wouldn’t require new permits as it would be an expansion rather than a new pipeline. Kinder Morgan and Energy East wouldn’t be constructed until 2020 or so.

“It has nothing to do with the decision about current pipelines,” he says.

Taking the Enbridge expansion into consideration, the Oil Change International report concludes that “only significant additional plans to increase production beyond projects already operating, in-construction or sanctioned would change this situation.”

One Million Additional Barrels/Day Allowed Under Oilsands Cap

Here’s a bit of rough math to provide some additional context.

The oilsands currently produce about 2.4 million barrels/day and 70 megatonnes (Mt) of carbon emissions per year. Alberta’s new emissions cap on the oilsands allows for only 100 Mt per year.

Assuming that per-barrel emissions stay constant (which is unlikely given that most new production will occur via the more energy intensive process of in-situ), the cap allows for another one million barrels/day or so of production, up to around 3.4 million barrels/day.

David Hughes has also calculated the 45 per cent increase in production could be accommodated via existing pipeline and rail networks, which includes a 15 per cent surplus for maintenance and pipeline problems.

Specifically, the potential addition of 800,000 barrels/day from Enbridge added to the 400,000 barrels/day in current spare capacity allows for 1.2 million barrels/day in new production.

If Kinder Morgan Trans Mountain or TransCanada’s Energy East are approved by the federal government, it will serve as a clear signal that nobody’s taking that cap seriously.

That’s the assumption that allows the Canadian Association of Petroleum Producers to estimate that oilsands production will increase from 2.4 million barrels/day in 2015 to 3.7 million barrels/day in 2030, and the National Energy Board to calculate that oilsands exports could increase to 4.5 million barrels/day by 2040.

Oil Industry Is ‘Betting That In The Future the Government Will Ignore Its Own Climate Policy’

But such a spike can’t happen if Canada has any intention of meeting international climate commitments, especially its Paris Agreement target of reducing emissions by 30 per cent below 2005 levels by 2030.

A widely shared report published in September by Oil Change International titled “The Sky’s Limit” concluded that no new oil, gas, or coal extraction projects can be built if the world has any legitimate interest in staying below the mark of two degrees celsius above pre-industrial averages.

“Investment in new projects beyond what’s already under construction has stalled completely with the oil prices,” Scott says. “The oil industry knows these pipelines aren’t required and they’re betting that in the future the government will ignore its own climate policy and that somehow, miraculously, the price of oil will recover. Both of those things would be required for those pipelines to be needed.”

A recent analysis by economist Robyn Allan found that constrained oil production in the oilsands is exclusively the result of low oil prices, not restricted pipeline capacity. Allan found a total of 2.7 million barrels per day of oilsands production was cancelled between January 2014 and September 2016 due to the low price environment.

Per-Barrel Emissions Have Increased by One-Quarter in Last Decade

It also assumes that technological innovations will help decrease per-barrel emissions in order to meet those climate commitments.

Yet recent history shows little precedent for that: a Pembina Institute report from August 2016 noted that total emissions intensity has increased by 25 per cent between 2004 and 2014.

Technologies such as using solvents instead of gas to extract bitumen via in-situ isn’t very advanced, Scott says, and the increasingly popular technology features a far higher per-barrel emissions rate in both carbon dioxide and sulphur dioxide than open-pit mining.

“With the crash in oil prices, [research and development] budgets and the willingness of the oil industry to spend extra marginal dollars on extra technology that would increase the cost is gone,” he says.

“We don’t expect the oil industry will have a real ability to dramatically reduce emissions intensity.”

Yet politicians across Canada continue to push for pipelines, with the Kinder Morgan Trans-Mountain project expected to receive approval shortly before Christmas.

Scott suggests that such elected officials “are completely ignoring the reality of what the Paris Agreement means” and those who contend that new fossil fuel development can be allowed under such commitments “don’t understand climate science.”

“We’re not saying we need to shut down the fossil fuel industry tomorrow,” Scott says.

“But Canada can’t meet its own obligations to the Paris Agreement if it intends to allow for that expansion. In that way, the decision of whether or not to build these pipelines is a direct choice from politicians about whether or not they’re going to honour their obligations on climate change. It’s that simple.”

Image: Alberta Premier Rachel Notley, Prime Minister Justin Trudeau and Calgary Mayor Naheed Nenshi. Photo: Government of Canada