October 2017, Vol. 244, No. 10

Features

Implied Emissions Could Cost Energy East Half of Profits

I t seems that hardly a week goes by without some new announced barrier to the construction of pipelines to allow Canadian oil to flow to markets other than the glutted United States.

The National Energy Board (NEB) recently issued a news release announcing the topics to be considered in its assessments of the $15.7 billion Energy East and Eastern Mainline projects. Environmentalists are celebrating what they know is a major setback for pipeline production in Canada. Most of the topics are pretty obvious. Pipeline safety, environmental impacts, socio-economic impacts and so on.

But the NEB’s release injected a massive dose of uncertainty into the proposed projects by including consideration of “upstream and downstream” greenhouse gas emissions in determining whether any project is compatible with governmental greenhouse gas reduction targets, and the impact of those targets on the “economic viability” of the projects.

The NEB explains that “upstream” emissions include “all industrial activities from the point of resource extraction to the project under review. The specific processes included as upstream activities will vary by resource and project type, but in general they include extraction, processing, handling and transportation.” It identifies downstream emissions as including “all activities from the point of the product leaving the project to the final end-use. The processes will include further refining and processing, transportation and end-use combustion.”

In other words, the NEB plans to judge a proposed oil carrier’s project on the greenhouse gas emissions of the people who produce the oil, as well as those who eventually consume it, theoretically, assessing whether the total emissions of the overall lifecycle align with government’s greenhouse gas emission reduction targets.

It goes without saying that pipeline companies have absolutely no control over any of those issues.

What this will mean in practice is hard to know since eventually the carbon emission costs will have to be allocated along the entire development/utilization process. But let’s do a calculation starting from the assumption that Prime Minister Justin Trudeau’s federal carbon price floor represents the government’s estimate of climate damages from a given quantity of greenhouse gas emitted ($50 per ton) and is the mechanism by which the government will internalize climate costs of the new upstream/downstream emission impacts.

The Energy East pipeline would move 1.1 million barrels of oil to market each day, or about 400 million barrels a year. According to a report by IHS CERA, the lifetime greenhouse gas emissions for Canadian oil sands is approximately 550 Kg CO-2 per barrel. So 400 million barrels of oil, fully produced and consumed cradle to grave, would emit about 220 million tons of CO-2 equivalent per year.

Taxed at the 2022 federal carbon tax floor of $50 per ton, that would add about $11 billion per year to the cost of the entire production/transport/consumption cycle. If oil were to hit $60 a barrel in 2022, the revenue from the same quantity of oil would be about $24 billion per year.

So the implied upstream/downstream carbon emission cost would consume about half of the value of the overall endeavor. It’s hard to see how halving the economic potential of an infrastructure project (or any project) is likely to pass the NEB’s consideration of a project’s economic viability.

But it’s also hard to see why producers would even produce in such a regime. And that may well be why proponents of the new upstream/downstream test are cheering.

Need for New Pipelines Questioned

Meanwhile, a new report by the Center for International Governance Innovation in Toronto is questioning the need for new pipelines to carry oil sands production to tidewater for export.

Jeff Rubin, a senior fellow at the centre and a former chief economist at CIBC, says in the report published by The Canadian Press that the claim that additional pipeline capacity to tidewater will unlock higher prices is not corroborated by either past or current market conditions. He says overseas markets pay even lower prices for bitumen than in North America, so there is no economic case for additional pipeline capacity to tidewater or expanded oil sands production. Rubin says international commitments to reduce global carbon emissions over the next three decades will also reduce the size of future oil markets.

The report follows a move by TransCanada to ask the National Energy Board to put its application for the 4,500-km Energy East pipeline on hold after the regulator said it would consider indirect greenhouse gas emissions in evaluating the pipeline.

Rubin recommends the NEB consider a rapidly decarbonizing global economy as the base case when modeling future oil demand and use the heavy oil price benchmark Western Canadian Select when evaluating projects. His report also noted that pension plans need to stress test their long-term investments in the oil sands against expected declines in global consumption.

And in Ottawa, The Canadian Press reported that Natural Resources Minister Jim Carr said on Sept. 14 that the federal government has no intention of scaling back its push to study all emissions impacts from new pipeline proposals.

No Change in Policy, Carr Says

Carr commented a week after Trans Canada said it would suspend its application to build $15.7 billion Energy East pipeline. He said the government made clear in January 2016 that greenhouse gas emissions would be reviewed as part of an interim overhaul of the environmental assessment process, pending a full review and restructuring.

That review was completed earlier this year and a decision on the permanent process is expected this fall. Carr said the government is not bending on including emissions as a factor to be considered when deciding if a project is in the national interest.

He said the interim principles helped inform the government’s decision to give the green light to projects like the Kinder Morgan Trans Mountain Expansion and it’s up to the company, not the government, to decide if the market forces are there to continue with any particular project.