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Kinder Morgan pipeline expansion would cost Canadians over $6 billion

June 1, 2015
New study shows additional capacity not needed

VANCOUVER—A new study from Simon Fraser University concludes that the proposed Kinder Morgan pipeline expansion is not needed and far from being a benefit to Canada, would actually cost Canadians more than $6.4 billion.

The study estimates that investment in the Kinder Morgan pipeline will create excess pipeline capacity that will cost $3 billion, including costs to the taxpayer in the form of reduced royalties and taxes.

Kinder Morgan’s own analysis shows that construction of currently approved and proposed pipeline projects will create over 2.5 million barrels per day of empty pipeline space by 2020. That is equivalent to three Kinder Morgan pipelines worth of empty space.

The study estimates that the cost of unnecessary investment in pipeline projects could exceed $15 billion by 2020.

A smaller, but important part of the cost is represented by the subsidy the project would receive from BC Hydro. The study estimates that this subsidy would be $27 million per year, or a net cost for the project’s life of $257 million. The cost is based on the difference between the industrial rate at which BC Hydro would sell power to the project and the cost of replacing that power with new projects like the Site C dam.

The study also estimates that environmental costs of the Kinder Morgan project would be more than $3.4 billion, emphasizing that the environmental costs estimate is conservative, in that it omits a number of environmental impacts that are more difficult to evaluate.

“There is no trade off between the economy and environment in the case of Kinder Morgan’s expansion proposal,” said Karen Wristen, Executive Director of Living Oceans Society. “We can avoid all the environmental risks of Kinder Morgan and be better off economically by not building projects that are not required.”

The study cautions that unnecessary projects such as Kinder Morgan’s expansion may be financially feasible for the private company to build because they have secured long term contracts from shippers that were negotiated before the current downturn in oil markets.

The problem is that if they are built they will take oil away from existing pipelines that will then have empty space. Ultimately, the cost of this empty space will get pushed back to oil producers and to the Canadian taxpayer in the form of reduced royalties and taxes.

The study concludes that Canada needs to develop a comprehensive oil transportation strategy that comparatively evaluates all proposed projects to determine which project or mix of projects are best for Canada.

“There is an urgent need for a comprehensive federal energy policy that places the needs of Canadians at the forefront,” said Wristen. “These recent proposals are driven exclusively by corporate interests working in a policy void, so it comes as no surprise that Canada stands to gain nothing—even to lose money—by their completion.”

The study was commissioned by Living Oceans Society for the National Energy Board hearings on the TransMountain pipeline expansion.

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Contact Information

Karen Wristen
Executive Director
Living Oceans Society
604-788-5634

Background

The SFU study entitled Public Interest Evaluation of the Trans Mountain Expansion Project was prepared by Dr. Thomas Gunton, Dr. Sean Broadbent, Dr. Marvin Shaffer, Dr. Chris Joseph and James Hoffele for Living Oceans and other intervenors. The study is submitted as evidence to the National Energy Board hearings on the Trans Mountain Pipeline Expansion Project.

The study reviews the economic case made by Kinder Morgan (Trans Mountain Pipeline ULC, or ‘TM’) for its Trans Mountain Expansion Project (TMEP) and concludes:

  1. The evidence in the TMEP application that the TMEP is required and in the public interest is incomplete and deficient in the following respects:
    1. TM’s assessment uses gross economic impacts as the primary measure of the contribution of the project to the public interest instead of net impacts and net economic benefits;
    2. TM incorrectly assumes that economic impacts are a measure of benefits without taking into account the opportunity cost of the labour, capital and other resources it uses;
    3. TM overstates the need for the TMEP by underestimating current and potential WCSB transportation capacity and relying on optimistic oil price forecasts;
    4. TM overstates project benefits in its estimates of the impact of the TMEP on oil netbacks to producers;
    5. TM understates costs by not estimating the economic losses resulting from the excess transportation capacity TMEP will cause; omitting cost estimates of the environmental impacts and risks of TMEP; and not evaluating other adverse consequences that should be taken into account in a full and proper public interest benefit cost analysis of the project.  
    6. TM fails to provide any benefit cost analysis undertaken in accordance with well-established principles and guidelines, and does not set out in a clear and comprehensive way the advantages, disadvantages, and trade-offs of its proposed project as is necessary for determining whether the TMEP is in the public interest.
  1. The study includes a benefit cost analysis of the TMEP that concludes:
    1. Under base case assumptions the TMEP results in a net cost to Canada of $6.5 billion. The study cautions that this is a conservative estimate because it omits many environmental costs that could not be quantified.
    2. to address uncertainty in estimating benefits and costs of the TMEP the study includes a number of sensitivity analyses to test the impact of alternative assumptions. Under all scenarios tested, the sensitivity analysis shows that the TMEP will result in a net cost to Canada that ranges between $4.1 and $22.1 billion.
  1. One of the primary reasons that the TMEP will result in a large net cost to Canada is because TMEP will create excess pipeline capacity. TM estimates in its original application that there will be 1.8 million bpd of surplus capacity by 2019 if all proposed transportation projects proceed as planned. Based on TM’s updated forecast (TM 2015), surplus capacity is now estimated to be approximately 2.5 million bpd in 2019. TM’s updated base case forecast shows that if all proposed projects proceed as planned there will be surplus pipeline capacity beyond 2037 (Figure 1). Surplus capacity may be even higher than TM’s forecast because TM excludes rail transportation in its estimates.
  2. This unused capacity would impose a large cost on Canada’s oil transportation sector, oil producers and the Canadian public in the form of reduced tax revenues. These pipeline projects were proposed before the current downturn in the oil markets and some were able to secure long-term shipping contracts that may allow these projects to be feasible financially while externalizing the cost of the surplus capacity onto existing transportation systems, oil producers, and governments.
  3. There may be a need for some new oil transportation projects in the future. However,  creation of surplus capacity should be prevented by rejecting or deferring new projects that are not required and developing a comprehensive oil transportation strategy that comparatively evaluates all proposed projects from a social, economic, and environmental perspective to determine which project or mix of projects are required and best meet Canada’s needs.
  4. A further reason that the TMEP will result in a net cost to Canada is due to the major environmental risks it entails, including the risk of oil spills in British Columbia. The marine spill risk can be avoided by relying on other transportation options that do not require oil tankers to ship crude oil to markets through Canadian waters

Figure 1. TM/IHS Estimates of Western Canadian Supply for Pipeline Export vs. Pipeline Capacity

Table 1. Benefit Cost Analysis Results for TMEP


Item

Net Benefit (Cost),  
Base Case
(million $)

Sensitivity Analysis Range
(million $)

TMEP Pipeline Operations

0

(792) to 396

Unused Oil Transportation Capacity

(3,098)

(8,018) to (2,112)

Oil Price Netback Increase

0

0 to 2,008

Employment

77

77 to 284

Tax Revenue

242

242-892

Electricity

(257)

No sensitivity

GHG Emissions from Construction and Operation of TMEP and marine traffic in defined study area

(289)

(916) to (289)

Other Air Emissions

(85)

(427) to (9)

Oil Spills

(1,022)

(1,022) to (310)

Passive Use Damages from Oil Spill

(2,026)

(17,667) to (2,026)

Other Socio Economic, Environmental Costs not estimated

See Appendix A

 

Base Case Net Cost

(6,458)

(4,070) to (22,099)