Exaggerations in the pipeline

There are a lot of claims about the benefits that the Kinder Morgan Trans Mountain Extension (TMX) pipeline project will supposedly have for BC, and Canada generally. Recently, I listened to Alberta Premier Rachel Notley on the CBC the other day making her pitch, emphasizing the economic benefits for BC. Some of what she said made me immediately reach out to Google to try verify the claims she made. Along the way, I looked critically at some of the other assertions the pipeline promoters have made. In the interest of fairness, I’ll briefly mention some of the exaggerations of the pipeline opponents.

At the outset, let me say that I’m generally inclined to support Premier Notley. In particular, I’m an admirer of the Alberta Climate Leadership Plan that was put together by an expert panel led by University of Alberta economist Andrew Leach. This was a major step forward by an oil-producing province traditionally governed by conservatives. To be sure, the plan is insufficient to reduce emissions to safe levels, but there are yet no such plans enacted anywhere.

Show me one.

Jobs

In the radio interview, Notley claimed that the TMX project would create 5000 permanent jobs in BC as a result of operating it. This is much higher than any estimate made even by Kinder Morgan, who, relying on a report by the Conference Board of Canada (CBoC), claim that there will be 1500-2000 operations jobs (i.e., not counting the short-term jobs created during the construction phase). Those numbers rely on the alchemy of economic multipliers. Of those jobs (round numbers warning!): 240-310 would be “direct” jobs created; 920-1200 of indirect jobs (supply-chain jobs, construction, financial and professional services, truckers, etc); and 340-450 induced jobs (resulting from the workers spending their wages).

The range in the Conference Board estimates depends on the degree of utilization of the added capacity on the pipeline. The low end is based on the committed (“ship or pay”) volumes made by 13 oil companies, amounting to about 410,000 barrels per day. The high end assumes use of the full pipeline capacity (“spot” shipments), an additional 180,000 barrels per day. These volumes will generate, respectively, toll revenues of $644 and $835 million per year. The jobs produced are roughly proportional to gross revenues. The economic model seems to assume that every million dollars of revenue creates about 2.4 jobs.

(Side note: It seems unrealistic to me to assume that the employment will be directly proportional to the volume of oil transported or the toll revenues generated. I would have assumed that a certain fixed amount of staff would be needed to keep the pipeline running at low levels and that any marginal increase in volumes would require a relatively small increase in variable labour. Increased toll revenue resulting from full utilization of the pipe capacity surely will mostly go to larger profits for Kinder Morgan rather than more hiring.)

Just 50 extra BC workers will be collecting a paycheck directly from KinderMorgan. The balance of the expected direct jobs (~250) will be contractors.

Kinder Morgan wrote on their website:

According to Conference Board of Canada estimates, the Project, if approved, would create the equivalent of 15,000 construction jobs and the equivalent of 37,000 direct, indirect and induced jobs per year of operations.

This is very misleading. The 37,000 jobs are expressed in worker-years over twenty years of operations, not “per year“. Of course, it’s 1850 permanent jobs per year.

An independent report by economists at Simon Fraser University estimated that just 800 jobs will be created by the project. The SFU researchers considered the TMX economic multiplier assumptions to be unrealistically high. They are much higher than those used for other pipeline projects, like Northern Gateway and Energy East as the SFU economists noted.

The economic impact or input-output approach used by Kinder Morgan to evaluate economic benefits is not universally approved of by economists. For example Andrew Leach, writing in Macleans:

As Stephen Gordon has written before, I don’t believe there’s a technique both more universally loathed by academic experts in the field and at the same time widely used in public policy than economic impact analysis.

And Canadian Centre for Policy Alternatives (CCPA) economist Marc Lee:

The economic case for the pipeline was commissioned by Kinder Morgan, and published in three studies by the Conference Board of Canada, all using a flawed approach called input-output modelling. This approach is routinely used by governments and industry to justify large projects, and is biased towards producing exaggerated numbers.

The input-output approach is not the same as cost-benefit analysis. It does not consider economic, social or environmental costs; it merely counts all economic activity as a benefit. For example, many are concerned about the catastrophic damages that could occur in the event of a tanker accident or spill on land. The input-output approach ignores these risks, which carry potential costs in the billions, but counts increased jobs and income as benefits.

Here is a graph of BC employment since 2011 (data from StatsCan):

bcemployment

The thickness of the blue line is roughly equal to 4000 jobs, twice the maximum Kinder Morgan/Conference Board estimate of direct, plus indirect and plus induced jobs from operations of the TMX project. Over the past 15 years, BC employment has increased, on average, by about 600 jobs every week. In the perspective of the historical employment growth in the province, the largest estimate of added jobs resulting from TMX—even Premier Notley’s grossly exaggerated 5000 jobs figure— is not even a rounding error.

Suppliers to the oil sands

The Canadian Association of Petroleum Producers’ put out a news release headlined: British Columbia Top Supplier to Oil Sands which is highly misleading.

DECEMBER 05, 2016 – CALGARY, ALBERTA
British Columbia is the top supplier of goods and services to the oil sands, a bi-annual industry review reveals, reaffirming a partnership that creates jobs for British Columbians and supports communities.

In fact, according to the their own numbers, Ontario companies supply $3.6 billion to the oil sands, whereas BC provides $1.7 billion. BC is only the “top supplier” in the trivial sense that the number of companies supplying the oil sands is slightly higher in BC than Ontario. BC suppliers are smaller companies than Ontario’s are.

What missing is any mention of the contribution of suppliers from Alberta. That province is certainly and naturally the top supplier to the oil sands by far. Moreover, neither the CAPP study, nor the Conference Board report on TMX mentions foreign suppliers at all. China and South Korea are likely large suppliers of goods and the United States is certainly a major supplier of both goods and services. It is hard to believe that this is an oversight.

Both CAPP and Conference Board studies are spun to make the benefits of oil sands developments appear to be more evenly widespread throughout Canada than they are.  With the new federal government approval of the TMX project, the pressure is on to persuade British Columbians that the economic benefits for the province are significant, even if that requires cherry-picking and outright exaggeration.

Fiscal benefits

The Conference Board of Canada Report writes:

In aggregate, we expect the TMEP [TMX] to support $1.1 billion in provincial government revenues over the first 20 years of its life. This is equivalent to 0.3 per cent of total provincial revenues in 2012. At $607 million, corporate income taxes would account for the majority of the provincial fiscal effects. Indirect taxes (which include sales taxes) and personal income taxes would account for most of the rest of the effects, at $237 million and $200 million, respectively.

The breakdown by province would be as follows:

• The largest benefits would accrue to British Columbia: 66 per cent of the total, or $727 million. This is equivalent to 1.7 per cent of British Columbia’s 2012–13 revenues.

Note the statistical sleight of hand. Cumulative taxes collected over twenty years of the project are compared to one year of provincial revenues. This inflates the impact on taxes in BC and other provinces by a factor of twenty. It is hard to believe that this was done by chance. And BC will not be the largest beneficiary, Alberta will be, by far.

On its website the CBoC claims that:

We are dedicated to building a better future for Canadians by making our economy and society more dynamic and competitive.

  • The foremost independent, evidence-based, not-for-profit applied research organization in Canada.
  • We are objective, independent and evidence-based.
  • We do not lobby for specific interests.Funded exclusively through the fees we charge for services to the private and public sectors.

The report they prepared for Kinder Morgan was neither objective nor independent. It was designed to calculate the largest economic benefits possible by using multipliers bigger than those used in other Canadian pipeline evaluations. It presented the numbers in such a way to exaggerate the economic benefits to provinces, especially BC.

Supply and demand

The main economic goal of the TMX project is to increase netbacks to oil sands producers by avoiding bitumen oversupply problems at Cushing, Oklahoma (also known as “The Pipeline Crossroads of the World”) and by providing an option on selling the product into alternative markets in Asia and California. Nobody knows how much this premium will be: guesses range from $5-10 per barrel. In ten years’ time it could be more, it could be zero. There is every chance that more efficient vehicles and limits to future fuel consumption in Asia’s megacities, already choked by traffic and pollution will not result in increased petroleum use. Stalled global oil demand, combined with a continuing oversupply of light crude oil, could sour global market needs for a growing supply of bitumen.

Economist Jeff Rubin reckons that the Asian pricing advantage has been overstated. Mexican Maya crude, a blend very similar to diluted bitumen, has access to the Pacific Ocean and does not currently receive a better price in Asia than it does in North America, according to Rubin.

Let’s assume that the TMX project will secure an additional netback of $5-10/bbl for the roughly incremental 200 million barrels transported each year as a consequence of TMX. This will provide additional revenues in the range of $1-2 billion per year. According to the CBoC study, 68% of this money will go to the producers, 20% to Alberta in royalties and taxes and the remaining 12% to the rest of Canada through federal taxes.

Rachel Notley claimed in the CBC radio interview that the TMX project will have no effect on oil sands production (obviously, she was not addressing an Alberta audience at the time) and hence will have no effect on increasing emissions. Her argument was that the new oil sands projects are already approved and will happen anyway, new pipelines or not. She did claim, perhaps correctly, that the TMX project would increase netbacks by 50%. Of course, the development of new oil sands projects depends on a recovery in the world oil price. The $5-10 boost that may be provided by TMX will be significant as prices rise from the current WTI $50 per barrel to the $70+ level likely needed to see an oil sands development renaissance. With increased netbacks, economic viability thresholds will be lower and exceeded sooner if there is a global oil price recovery.

It is not reasonable for Notley to claim that increasing bitumen netbacks by perhaps 50% at current prices will have zero stimulative effects on production. Looking at it another way, if netbacks were somehow to be cut by 50%, it would be rightly be regarded as something of a disaster for the industry. You can’t have it both ways

Carbon tax

Many people claim that the Alberta’s proposed carbon tax is already killing the industry. The right-wing extremists who have been holding rallies in Alberta against the tax attribute all kinds of evils to it and demand its immediate repeal. That they exaggerate, should go without saying.

Firstly, the tax hasn’t actually been applied yet. It becomes C$20/tonne next year and $30 in 2018. According to economist Trevor Tombe, the average levy on upstream emissions from bitumen extraction will be about $2.25 per barrel at a carbon price of $30/tCO2e.  Some of the cleanest producers will pay only $1.20/bbl, but the dirtiest may pay as much as $6.00. What the Ctax protesters forget is that there will be a big rebate, paid to producers, of about $1.50 per barrel. This means that producers on average will pay about $0.75 per barrel (less than the price of a postage stamp). The cleanest producers will actually get a small net subsidy from the carbon tax. The dirtiest will have a real incentive to reduce their emissions closer to the level of the industry’s best performers.

The effect of the Alberta carbon tax on oil sands production economics is exaggerated.

On the other hand…

Do environmental activists exaggerate too? Yes. In a bitter partisan struggle, moderation gets drowned out by excessive claims from both sides

One exaggeration is the description of the Alberta bitumen deposits as “the biggest carbon bomb on the planet”. This just is not so. Global coal is many times bigger, as are gas and conventional oil resources. In fact, Alberta’s coal deposits contain more carbon than the oil sands do.

The distinguished climate scientist and activist James Hansen has been partly responsible for this exaggeration.

I’m going out on a limb here. My limited attention span means that I have not researched the effects of the TMX project on the marine environment for myself. If I’m wrong in what follows, please put me straight.

Firstly, I’m guessing that there are exaggerations about some of the effects of increased oil tanker traffic in the Salish Sea. Rachel Notley in her CBC  radio interview pointed that the extra tankers would add about 6% to the overall regional traffic volumes. She also claimed that container ships and ferries were as noisy as tankers. I don’t doubt that local orca populations are stressed by noise and other human interference, especially with regards to salmon abundance. Chalking up their possible future demise to tankers alone seems like a stretch to me. Of course, a big diluted bitumen spill in the Salish Sea would be a disaster for the orcas and much other marine wildlife besides.

Secondly, the claims that an oil spill in Vancouver harbour could kill tens of thousands of people due to a benzene plume seem overdone. I’m persuaded by Blair King’s analysis of these claims. Make no mistake, a major dilbit leak in Vancouver would be a catastrophe, I just have doubts about this particular claim about benzene.

Summary

  • Rachel Notley claimed that many more BC long-term jobs will be created by the Trans Mountain Expansion Project than even the top estimate claimed by the Conference Board of Canada (5000 vs 2000). Notley’s estimate of 5000 jobs is more than seven times the 800 in the Simon Fraser University report.
  • Even 2000 extra jobs is less than 0.1% of BC’s employment. Over the past 15 years, on average, BC has added this number of jobs every three weeks.
  • Kinder Morgan claimed falsely that 37,000 jobs would be generated per year of operations. The real figure, which they report elsewhere, is twenty times less than this.
  • CAPP’s recent headline claim that BC will be the largest supplier to the oil sands is false. Within Canada, BC trails as a supplier far behind Alberta and Ontario. The contribution of foreign suppliers is unreported in CAPP and CBoC studies. We are not told what a boon the oil sands are to Chinese, South Korean and American suppliers.
  • The Conference Board of Canada compares the fiscal contribution of the TMX project over twenty years to  BC’s annual revenues (1.7%, allegedly). In fact the project will add, even using their inflated economic benefit multipliers, only 0.09% to BC’s revenues.
  • Although the estimate is highly uncertain, the TMX project will add $5-10 per barrel to realized prices for dilbit by accessing new markets. This will profit mostly the industry and the province of Alberta. Rachel Notley claims that this could add 50% to industry netbacks. Astonishingly, she claims that this will have no effect on future production or upstream emissions.
  • In 2018, the $30/tonne CO2e Alberta carbon tax will add a net average cost of $0.75 per barrel. Many conservatives claim that this (not-yet-enacted) tax is already crippling the oil sands industry. However, pipeline proponents claim that the ten times larger bonus achieved by the TMX project will have no effect on future production.
  • Pipeline opponents have exaggerated the potential of Alberta’s bitumen resources to ruin the climate. Some opponents may also exaggerate the potential for a public health catastrophe resulting from a spill in Vancouver harbour, as well as the effect of increased tanker traffic on the health of struggling Salish Sea orca populations.

Some of these exaggerations might be excused by politicians like Rachel Notley talking off the cuff and getting the facts wrong. Perhaps, but we’ll have to see if her future comments use more accurate information or if she corrects the errors she made during the CBC interview.

The cherry-picking and misleading framing by Kinder Morgan, CBoC and CAPP are less excusable. Perhaps we should expect this of CAPP since they are a lobby group. Kinder Morgan might also be expected to exaggerate the benefits of its proposal. However, the Conference Board of Canada touts its objectivity and independence. It’s clear from reading their reports that they have been written to promote the interests of their client, Kinder Morgan.

As for the exaggerations of the activists, it would be better if they had some of their own studies independently reviewed. Anecdotally, I have noticed that the “biggest carbon bomb on the planet” talk has toned down recently. Perhaps this is because one of the scientists who defused the “bomb analogy” was Andrew Weaver. He is now one of the fiercest critics of the TMX project.

The effects of a big spill of diluted bitumen in the Salish Sea will be disastrous. No exaggeration is required.

Oh, for a better regulatory process

The National Energy Board hearings on the TMX project were a farce. The proponents of the pipeline did not answer legitimate questions about their economic rationale posed, among many others, by Robyn Allen. The economic assessments, although in theory done by an independent think-tank (the CBoC), are actually a partisan report done under contract with the proponent. Would it be asking too much for a project of this magnitude to be assessed in a transparent way by a truly independent panel of experts hired by the government? Could the environmental risks, also be assessed independently? The US State Department contracted out just such studies on the Keystone XL pipeline and they were reviewed by the EPA, environmental groups and the public. NEB hearings could be held allowing proponents and opponents alike to question the independent reports. Additional submissions by proponent and opponent alike would be similarly open to cross-examination.

As it is, the current process is conducted by a captured regulator that sees its job as getting to “yes” as efficiently as possible. For a major project like this, in which the bulk of the benefits accrue to one province and the bulk of the risks to another, the regulatory process needs to be particularly transparent, thorough and impartial. The NEB and the federal government have failed in this regard. The political outcome may be years of prolonged and bitter division between regions of western Canada.


Afterthought on economic leakage

This isn’t really an exaggeration, it’s rather just an overstated claim made by people who think that restricting infrastructure is ineffective.

Serious people sometimes deliver a patronizing lecture to anti-pipeline activists, telling them that restricting supply is useless, because invisible hands will simply produce more oil elsewhere to balance demand. If you want to reduce oil consumption, they say, focus on reducing demand.

This is true, but only partly so. Demand has its own market leakage, also. If we were to reduce demand in Canada, let’s say by all deciding to cycle to work, there would suddenly be a bunch of new oil on the global market (oil transportation limitations notwithstanding). This would lower prices and stimulate global demand. Demand leaks, too.

Nobody seriously argues that reducing oil demand in one country would be useless. Alex Doukas of Oil Change International had a good Twitter thread on this recently, storified here. Here’s an excerpt.

doukas

Of course, the best way of reducing global fossil fuel supply and demand is to have everybody on Earth doing it simultaneously. Which is what the Paris agreement was all about.

 

 

 

 

 

 

 

 

 

 

 

3 thoughts on “Exaggerations in the pipeline

  1. I recall reading somewhere (I forget where, sorry) that as part of the agreement with suppliers, KM will get paid for transporting dilbit whether or not the suppliers have dilbit to ship. Do you happen to know if there’s any truth to that?

    • Yes, 13 producers have committed on a “take or pay” basis to ship or pay the tolls for an additional 410,000 barrels per day, whether they have the oil available or not. That guarantees KM with annual revenues of C$644 million. This is a standard arrangement for new pipelines.

  2. Also, where is the comparative analysis of some entrepreneurs wanting to create next-generation energy solutions? A friend who is a welder always says that he’d be happy working on a windfarm than at Syncrude, but nobody wants to set them up. (I am no venture capitalist myself, but …)

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