Apr 23, 2018

Kinder Morgan: Costs and benefits unbalanced, not in the national interest

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Image: Detail of route map of "Trans Mountain Expansion Project PPBoR Segments,” National Energy Board, 2017

The Alberta and federal governments claim that Kinder Morgan’s Trans Mountain Pipeline Expansion (TMX) is in the national interest due to its economic benefits. But a closer look at TMX’s full range of benefits and costs shows the project to be extremely lopsided in its distribution.

First, the economic gains accrue almost entirely to Alberta while benefits for BC are minimal. Yet BC bears most of the potential economic costs of the project due to environmental risks. In addition, achieving those economic gains not only ignores Canada’s commitments to the Paris Agreement on climate change, but would impose huge damages from the additional carbon emissions.

Alberta benefits

The economic benefit of the TMX lies in the additional income from building and using this new infrastructure:

  1. gains to Alberta companies and workers from increased oil sands production.
  2. additional royalty and taxation revenue to federal, provincial and local governments.
  3. employment income to workers in BC and Alberta, primarily in the construction phase and also on an operating basis.

The primary benefit for Alberta of TMX would be to allow the province to increase production from the oil sands, which would benefit oil sands companies and workers as well as the Alberta treasury. However, developments in recent years are undercutting these potential benefits to Alberta.

Much planned new investment in the oil sands (which would require the new TMX pipeline capacity) was shelved in the aftermath of the collapse of oil prices since 2014. At the same time, new competing pipelines—Enbridge’s Line 3 expansion and TransCanada’s KeystoneXL—have been approved. These would go directly to the heart of US refining capacity that is needed to process diluted bitumen into refined petroleum products.

The economic gains accrue almost entirely to Alberta while benefits for BC are minimal.

Also notable are the increased estimated costs to build TMX. Originally billed as a $5.4 billion project in 2013, as of 2017 it had risen to $7.4 billion, an amount that will need to be recouped from oil sands producers through higher tolls.

The argument that “tidewater access” from TMX will lead to better prices in Asian markets is simply a myth.

In a paper for the CCPA, earth scientist David Hughes notes that the lower price received by Alberta arises from selling an inferior product that requires more intensive refining as well as higher transportation costs to get it to market. Prices for similar heavy oil product in Asia are comparable to North America, but the additional pipeline and tanker costs of landing product in Asia would actually lower the price Alberta producers receive.

Premier Notley talks about Alberta being captive to one buyer, the United States. True, Alberta’s current exports go mostly to the US Midwest or the Gulf Coast. But the us and them rhetoric is misleading—these are often transactions within the same company moving its product from one side of the border to another.

While Asia is more a theoretical market for diluted bitumen, TMX would primarily deliver product to a different region of the US—California, which is largely cut off from pipeline access to the other major refining areas.

Benefits to BC have consistently been exaggerated

In contrast to Alberta the gains to BC from TMX are very small. There are two principal areas where BC could benefit: new job creation and new revenues to the BC government.

The previous BC government negotiated a deal with Kinder Morgan that would provide revenues of $25 million per year for two decades. That may well be all BC gets in terms of revenues given the complex corporate structure of Kinder Morgan, which appears designed to minimize taxes paid (as uncovered by economist Robyn Allen).

In terms of jobs, gains to BC include temporary construction jobs, many of which may go to workers from outside BC and who would be employed elsewhere in the absence of TMX construction. Averaged over a two-year construction period, about 2,500 full-time workers will be needed according to Kinder Morgan’s submission to National Energy Board (volume 5B, pages 2–16).

As for permanent jobs, Kinder Morgan’s application notes that the existing Trans Mountain pipeline supports 100 jobs in Alberta and 100 jobs in BC. Kinder Morgan projects an additional 90 workers as a result of the expansion, 50 of which would be in BC.

Claims of massive economic benefits beyond this should be treated with caution. They are derived through use of a flawed technique called input-output analysis, which includes some dubious assumptions that exaggerate benefits to BC (see this post).

Claims of massive economic benefits should be treated with caution.  

Rather than put public money behind TMX, public investments would be better spent on renewables and green infrastructure. Investments in green jobs and industries would create between 10-20 times the number of direct jobs per million dollars spent while building the green infrastructure we need for the future.

Even within Alberta, a better jobs strategy would be to invest in upgrading and refining capacity so that the province get more jobs per barrel of oil extracted. Most of the projected growth in oil sands would be from in-situ production, which injects steam below the surface to extract bitumen. That bitumen is then diluted with condensate so it can flow through a pipeline. In contrast, the more traditional surface mining of bitumen is usually upgraded into synthetic crude that has higher market value. Alberta’s plan to increase production is one that moves the province down, not up, the value chain.

Damages from spills are an economic cost

BC is most concerned about diluted bitumen in terms of spill impacts and whether they can be adequately cleaned up. This brings us to the economic costs of TMX, which include potential spills along the pipeline route or from tankers leaving Vancouver harbour as well as costs or damages associated with increased carbon emissions.

A risk analysis by SFU’s Tom Gunton and Sean Broadbent finds that pipeline spills are more or less guaranteed over the lifetime of the project. It’s more a question of how large they would be and how costly to clean up. For tanker spills, the probability is a 58% to 98% likelihood over the lifetime of the project. Spills are a routine aspect of doing business from a corporate perspective, but a large spill would quickly deplete available public resources allocated to spill response.

Potential economic damages from a major spill in Metro Vancouver from the TMX project would range from $2 to 5 billion, according to a 2014 cost-benefit analysis from SFU’s School of Public Policy. The report found that in the event of a major spill on land or at sea “the costs will exceed, or greatly exceed, the benefits for BC and Metro Vancouver.” Damages would include adverse impacts on existing industries that employ thousands of people in fisheries and tourism.

Ignoring damages from climate change

TMX will also mean increased carbon emissions in Canada (from extraction, processing and transport) and in overseas markets (from combustion for energy). The TMX would facilitate about 84 million tonnes of CO2 into the atmosphere every year or 2.5 billion tonnes over 30 years.

Economists call these damages the “social cost of carbon” and they are generally estimated in the range of $50–$200 per tonne emitted although some estimates go much higher. This range implies some $4–$16 billion in economic damages from the pipeline’s carbon emissions every year. Because carbon emissions have global impacts the damages would not necessarily be in Canada. Such estimates are imperfect, and if anything they understate the long-term damages and the potential for catastrophic outcomes associated with climate change.

Planning for and banking on the growth of the oil sands as a core economic strategy is clearly at odds with the intent of the Paris Agreement on climate change. A central problem with the Paris Agreement is that countries commit to reduce the carbon emissions within their borders but not the carbon extracted and exported for someone else to burn. This loophole means Canada has an incentive to increase fossil fuel production and exports even as it strives to reduce domestic emissions.

While the need to rapidly transition off fossil fuels seems to have fallen on deaf ears in Ottawa and Alberta, future constraints on carbon from new climate policies should be in the mix. David Hughes finds that if Alberta’s oil sands emissions cap is taken seriously—even though it permits a 40% increase in oil production—the TMX is not needed.

Given the multi-decade lifespan of the TMX project, these matters should be of greater concern. As former Bank of Canada Governor Mark Carney has warned, multi-billion-dollar fossil fuel infrastructure risks becoming a “stranded asset” as the world transitions to clean energy sources.

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While BC bears huge environmental risks associated with the new pipeline and tanker traffic, economic benefits to the province are miniscule. Federal and Alberta insistence that the project is in the “national interest” seems intent on BC making all of the sacrifices while studiously ignoring the consequences of increasing carbon emissions.


This piece was published as part of the Corporate Mapping Project (CMP). The CMP is a six-year research and public engagement initiative jointly led by the University of Victoria, the Canadian Centre for Policy Alternatives’ BC and Saskatchewan Offices, and the Alberta-based Parkland Institute. This research was supported by the Social Science and Humanities Research Council of Canada (SSHRC).

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