Why Climate leaders sometimes build pipelines – understanding the climate implications of the Trans Mountain Pipeline Expansion Project

One of the most common refrains of the activist community during our recent federal election was the line “climate leaders don’t build pipelines“. As I will explain in this blog post, this refrain, while catchy, is wrong.

I have written numerous blog posts about the Trans Mountain Pipeline Expansion Project (TMX) debunking activist claims about heavy oil, Asian demand for heavy oil, southern resident killer whales and tanker traffic to name a few. But the biggest activist talking point about the TMX is that it will have an oversized climate impact and will increase Canada’s global greenhouse gas emissions. In this blog post I will explain why these claims are not true.

The only way the TMX can increase global GHG emissions is if it spurs enough additional production to negate its emission reductions over other transportation mechanisms. This was the argument put forth by Dr. Marc Jaccard is his submission for the City of Vancouver to the National Energy Board in 2014. The problem with that submission, and all the arguments made by activists since then, is they fail to explain where all that new production would be coming from.

Last week I posed a pretty simple question to the activist community:

Here’s an incredibly simple question for all the anti-#TransMountain activists to answer Since you keep claiming the @TransMtn will increase GHG emissions, please identify which current/planned production that will be made viable/inviable by the new pipeline? #cdnpoli

The activist response…crickets…. I posed the question again to specific individuals and organizations who are leading the fight against the TMX and the closest to a useful reply was this:

Here’s your specific proof It’s basic economics that facilitating cheaper/ faster transport is going to support an increase in production.

The problem with that answer is that it is wrong. The economics of the TMX project are not “basic”. Rather they are complex and driven largely by factors outside of a simplistic supply/demand model.

Unlike light oil in the Permian Basin, if an oil sands producer wants to increase production they can’t spend a couple million to hire a rig to drill a well that is producing oil 2 weeks later. Oil sands projects are long term investments. As such they don’t respond to the same short-term incentives as other production.

Oil sands projects undergo an incredibly long and complex approval process. Consider the now cancelled Teck Frontier Mine. It began its regulatory journey in 2008 and wasn’t nearing completion of that journey in 2020 when it was cancelled. During its initial regulatory run it required multiple regulatory filings:

An environmental impact assessment was submitted to Alberta Environment and Parks, the Canadian Environmental Assessment Agency, and the Alberta Energy Regulator (AER).

Applications were submitted to the AER under the Oil Sands Conservation Act (OSCA), and AEP under the Environmental Protection and Enhancement Act (EPEA), and the Water Act for provincial approvals.

Approvals will be required under the federal Fisheries Act and the Navigation Protection Act for activities that may affect fish and fish habitat and navigable waters.

Approval from the Alberta Utilities Commission will be required for the cogeneration facilities and from the Regional Municipality of Wood Buffalo for parts of the camp.

Ancillary approvals under the Public Lands Act, the Municipal Government Act, and the Historical Resources Act were also required.

Recognize the Teck Mine was not the exception, that is the typical requirement to get an oil sands project up and going. What this means is that it is quite easy for outsiders to establish what projects are in the process because all this regulatory information is publicly available.

It also means that we know EXACTLY what production is in the planning pipeline [pun intended].

Oil sands projects are also massively expensive and are only viable in select financial conditions. Returning to the Teck Frontier Mine. It was a $20.6 billion dollar project. As a big project it needed big oil prices to be viable. Estimates for a break-even West Texas Intermediate (WTI) oil price for Frontier ranged from US$65 a barrel to more than US$80.

This brings us to another major misconception from the activists community. That because new oil sands production costs are high therefore the old production must be equally high. As was reported in a recent article:

Canada’s resources are really expensive to extract, in addition to having a super high carbon intensity,” said Caroline Brouilette, domestic policy manager at Climate Action Network Canada.

This couldn’t be further from the truth. Existing oil sands projects produce exceptionally inexpensive oil. Let’s look at the top three producers:

Suncor identifies two break even prices: an “Operating Breakeven” of $30 WTI which covers operating costs + asset sustainment & maintenance capital. Their Corporate Breakeven of $35 WTI = operating breakeven + full dividend

CNRL has an operating breakeven of $28 per barrel WTI with a free cash flow (full dividend) breakeven of $30

Cenovus has a free funds flow WTI break-even of US$36/bbl

Much of the oil sands production pays for itself and generates a generous dividend at a WTI equivalent prices around $36/bbl…and the WTI has been below that value for only a couple months in the last 10 years.

These aren’t projects that live and die on the $2 – $3 dollar savings made by the presence or absence of the TMX. They are projects that can afford to keep pumping out product and shipping it by rail or US pipeline for decades to come…even as the US Permian and other global sources gets completely priced out of the market.

So I can imagine a lot of you are asking why, if these projects are still making money, does the TMX matter? The quick answer is because the TMX allows producers to get better value for their same production and will generate billions in additional revenues for our federal and provincial governments via increased royalties and tolls.

I go into detail about this topic in an earlier post, but put simply even if the pipeline went massively over budget and cost a lot more than proposed it would still be a financial boon to the Canadian economy by generating more revenue and royalties from the same production.

Going back to my initial point. The one thing the TMX does not do is influence production. Why? Because while it improves transportation costs it doesn’t make any marginal project viable and its absence does not make any existing project less viable….and when it comes to oil sands we have to talk about specific projects we can’t just wave our hands and say “supply and demand”.

Essentially the Alberta oil industry has a strict dichotomy. There are existing greenfield projects and upgrades that will be financially viable irrespective of whether the TMX is built and there are more expensive projects that will never be viable given our new regulatory environment and carbon tax structure.

There are no marginal projects in the works that this pipeline will make viable. Thus the argument that the TMX will generate more production because it slightly reduces the cost of transportation is nullified by the particular realities of the Alberta oil sands industry. The activists’ claim is not supported by the data.

This brings us back to refrain I discussed at the start of my piece that “climate leaders don’t build pipelines“. Well my response is that unless an activist can show me a specific project that will go ahead based solely on the existence of the TMX then that refrain is false with respect to the TMX. As I have shown numerous times at this blog, the TMX will move oil more safely while generating lower emissions than that alternatives (oil-by-rail or oil-by pipeline to Texas and then by ship to Asia).

For politicians and climate leaders the TMX is thus a no-brainer. It will move the same production more safely, while generating fewer emissions and in doing so will generate more revenues and royalties for our federal and provincial governments. The reason Mr. Trudeau supports this project couldn’t be more clear. It makes absolute sense from an environmental, climate and financial perspective. The activists who claim otherwise either haven’t made themselves familiar enough with the Canadian oil industry or simply don’t care about the truth because it disrupts their preferred narratives.

This entry was posted in Canadian Politics, Pipelines, Trans Mountain. Bookmark the permalink.

2 Responses to Why Climate leaders sometimes build pipelines – understanding the climate implications of the Trans Mountain Pipeline Expansion Project

  1. Colin C says:

    Always love your analysis!

    Like

  2. Andrew Roman says:

    This is an excellent post, in which you have successfully disposed of the single factor
    theory that TMX will cause more oil production, all by itself. But there is the other part of the “climate leaders don’t build pipelines” story to consider: who or what is a “climate leader”?

    Obviously, no one literally leads the climate. The idea is that there are leaders in the fight against climate change. Leaders require followers. Otherwise they are merely participants, not leaders. The implied message is that Canada is a world leader in this fight, and other countries are following Canada’s lead, but if Canada allows TMX to be built it will lose or forfeit its leadership position. I have seen no evidence that Canada is such a leader, nor any evidence that Canada has any followers.If so, whether Canada builds or doesn’t build TMX cannot affect its nonexistent leadership position.

    Under the Paris Accord every signatory country is entitled to present its own nationally determined contribution. Thus every country is unique, and doesn’t lead or determine the contribution of any other country. I would like to see some evidence that any other country’s nationally determined contribution says anything like “I am following Canada’s lead”. If we have even one such follower we have at least a weak claim to leadership. Absent that follower, we are just another participant.

    To amend the story to “Participants don’t build pipelines” takes away its rhetorical flair. And to recognize that even participants do build pipelines, for sound reasons, shows it to be mere empty sloganeering.

    Like

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