Published on June 5th, 2018 | by Michael Barnard0
Canada’s Acquisition of Kinder Morgan Pipeline is Based on False Assumptions of Chinese Demand
June 5th, 2018 by Michael Barnard
Canada’s federal government just made a bad deal for the Kinder Morgan pipeline, spending $4.5 billion up front and a projected minimum of another $7.4 billion with little likelihood of an upside. Demand won’t be seen from China in the long term, the cost was at a premium, they have seriously annoyed a natural ally in BC while favouring a province which doesn’t like them, and they are walking into further climate conferences with an oil-soaked albatross around their necks.
The premise is that China’s demand for oil will increase substantially over the next 20 years and that this will form the basis for a new market for Canada’s bitumen.
This is a flawed premise for multiple reasons. Canada’s product is heavy and requires special refining, the large majority of which exists in the USA in the Gulf of Mexico states. Most of the product which is shipped to BC by rail today goes south and returns as gasoline.
China does not currently take or refine Canada crude in any amount. There are multiple sources of cheaper and easier to refine crude oil. Demand for crude from the Kinder Morgan pipeline projects a rapid increase in the number of heavy crude refineries in China and there is no evidence that Chinese refiners are investing in this or would in the future.
The increase in demand is based on BP and Exxon projections, not other projections. Oddly, fossil-fuel companies are asserting massive growth for their products.
“Oil import dependence rises from 63% in 2016 to 72% in 2040. Gas dependence rises from 34% to 43% in 2040.”
Exxon says similar things.
This is based at best on optimistic projections and downplays major changes in the Chinese market place. This is counter to reality.
Let’s evaluate some of their other points to see how much credence to put upon their oil and gas projections. They are projecting that natural gas will lead in terms of increases in electrical generation in China. As of 2016, wind alone was generating more TWh of electricity than gas. Wind and solar were both showing larger increases in year-over-year generation in TWh than gas.
China is doubling down on proven wind and solar, not fossil fuels.
And, of course, China is also leading in increased fracking within its controlled territories and Alberta’s oil sands do not provide natural gas. One Globe and Mail analyst supportive of the Kinder Morgan acquisition actually wrote that with the decline in coal generation, more oil would be used, missing the different use cases entirely.
Another major change in the Chinese market is in the massive increase in electrification of transportation. The majority of oil is consumed in transportation as gasoline, diesel, and bunker oil, and China is leading the world in shifting to battery electric solutions.
¤ 99% of the 385,000 electric buses in the world are in China.
¤ 579,000 of the just over 1 million electric cars sold in 2017 were sold in China.
¤ China is requiring all vehicle manufacturers to achieve massive increases in the percentage of PHEV and full EV cars sold over the next 12 years with the potential for 100% by 2030.
What this means for the BP and Exxon projections is that transportation will be being powered mostly by wind and solar, not Alberta crude oil, in 2040.
The projected increase in oil demand in China is overstated and there’s no reason to believe that they will be buying expensive-to-refine Canadian product. With each passing year, this will be a more obvious dynamic.
One bank estimates that Canada paid a $1.2 billion premium for the existing pipeline, its $200 million annual revenue, and the work done to date to twin the pipeline.
Kinder Morgan had Canada over a barrel. They had a committed buyer and worked it hard. Finance Minister Morneau was undoubtedly in his idea of heaven working a major deal with his business-heavy team, but none of them are oil and gas people.
And the costs are just starting. There is a projected $7.4 billion cost to complete the pipeline, but that’s likely optimistic given that it’s both a mega-project and faces legal and political challenges along most of its route.
Canada is deferring the idea of making money on this deal, and should. Given more realistic demand projections not done by fossil fuel majors, it’s unlikely that there will be too many takers.
No corporate buyer is likely to be buying this asset until all of the hurdles are cleared and the pipeline is working. That’s projected to be 2021 at earliest and more likely later. The demand trends will be more and more obvious by then with conservative analysts such as IEA and the like updating their projections annually with worse news for Alberta’s product. Similarly, the long-term price of oil will be more clearly seen to be in decline, not increasing.
Alberta hates the federal Liberals, outside of the downtowns of Edmonton and Calgary, where only very large numbers of people hate them. The Trudeau name is awful in Alberta. This won’t really help most of those voters change their mind even if it works. They’ll find reasons to hate Trudeau and the Liberals. A major breakthrough in the last federal election saw 4 Liberal Members of Parliament of 34 seats elected in Alberta.
BC votes Liberal federally much more. In the last election, 18 of 42 seats went to BC. There’s more support and more seats to both win and lose.
Alberta loves the Kinder Morgan pipeline, although there are certainly a few people who realize it’s a kind of dumb idea as per the demand analysis above. BC has a very large percentage of people who hate the pipeline and the current government is a minority NDP government propped up by the very anti-pipeline Green Party. There is little political or social license to ship more of Alberta’s product through Vancouver’s port.
It’s a bit head scratching politically why the Liberals are helping the province least likely to elect them in the future at the expense of the BC seats they’ve enjoyed for years.
Global Climate Politics
Trudeau is about to walk into a G7 meeting pushing for increased emphasis on meeting climate change targets.
But he’s just spent another $4.5 billion of federal money boosting fossil fuel subsidies when Canada already is rated 7th among G7 nations in terms of commitment to weaning off of oil and gas (while being first in terms of eliminating coal generation). This buyout and the subsequent costs of construction took the $100 billion of annual subsidies for fossil fuels among the G7 up about 5% to 10%+ by itself. With others diminishing their support, Canada will become an increasing outlier.
The $4.5 billion follows this report by a couple of days. Canada likely wouldn’t have reached an overall ranking of 3rd among G7 but will now be perceived as a laggard.
What moral authority will Trudeau have with the G7 to push for increases as he plans to do this week? I’ve argued in the past that Trudeau’s support for Kinder Morgan enabled the Canadian carbon price and his moral authority to push for a 1.5 degree Celsius aspirational target at COP21, an excellent showing of Canada on the world stage.
It’s hard to understand from the outside of Trudeau’s circle why they made this choice. There was little to lose in Alberta, there’s little to lose from a federal budget perspective. The following chart is from the World Bank. It’s the oil rent, which is the percentage of the GDP represented by oil.
Oil used to be a huge factor in Canada’s economy. Now it’s 0.3%. Imagine that the Kinder Morgan pipeline increases that by 25%. Then oil will be 0.4% of Canada’s economy.
There’s no upside to this. The $4.5 billion and the upcoming billions are throwaways with only political and global image losses to follow.
It’s a bad decision.
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