Prime Minister Justin Trudeau's statement of support for the Keystone XL pipeline and approval of two other pipelines raises an interesting question. Could we be on the verge of moving from a pipeline shortage to a pipeline surplus? If you look closely at the numbers, the answer is yes and the implications could be costly.
Let's start with the supply side. The capacity of the projects approved by the federal government (Trans Mountain, Enbridge Line 3 and Keystone XL) and under review (Energy East) is 2.9 million barrel per day (bpd). These projects would expand Canadian export pipeline capacity to 7.1 million bpd. If current rail capacity is included, total capacity would be almost 7.9 million bpd.
The demand side remains uncertain. The latest forecast by the Canadian Association of Petroleum Producers (CAPP) for Western Canadian oil supply is 4.9 million bpd for 2025 and 5.5 million for 2030. This means that if all four projects are built, and with adjustments for refinery consumption and U.S. Bakken shipments on Canadian pipelines, there would be a surplus pipeline capacity of 2.4 million bpd in 2025.
Read more: Kinder Morgan deal with British Columbia sets payment precedent (for subscribers)
Since CAPP's oil supply forecast was made, other forecasters have become increasingly pessimistic. In a November, 2016, update, the National Energy Board (NEB) reduced its oil price forecast by $17 a barrel and its 2040 Canadian oil production forecast from its earlier 2016 forecast. The NEB cautions that its updated forecast does not include impacts of new climate policies that could further reduce production.
The recent November, 2016, International Energy Agency (IEA) forecast shows little oil sands production growth after 2020 due to climate change policies and the high costs of Canadian oil production. In its 2015 forecast, CAPP also reflected the uncertainty in oil markets by providing a lower supply forecast based on completion of under-construction projects in addition to its higher growth forecast. In all, CAPP has reduced its Canadian supply forecast by two million bpd in just the past two years.
Using a lower supply forecast similar to the IEA of just completing under-construction projects, Western Canadian oil supply would peak at about 4.6 million bpd. Under this scenario, surplus pipeline capacity in 2025 would be about 2.7 million bpd.
Building all four projects would therefore result in 2.4 million to 2.7 million bpd of excess capacity in 2025, equivalent to about four Trans Mountain expansion projects worth of empty pipeline space. The capital cost of empty pipeline space would be about $25-billion, which would be borne by the Canadian energy sector in terms of higher tolls and by the Canadian taxpayer in terms of lower tax payments to government due to lower corporate profits. If current rail capacity is included, the surplus capacity would be even higher.
Is it possible that the pipeline industry could actually create so much unneeded capacity? The answer is yes. Three of the proposed projects are underpinned by shippers' contracts signed several years ago when oil markets were much stronger. With these contracts, the new projects could be economically viable even though the capacity is not required.
Oil producers would be obligated to ship oil on the new projects by moving oil off existing pipelines that do not have contractual commitments.
The supply/demand analysis shows that under the lower oil production forecast, no new pipeline projects other than completion of the Enbridge Line 3 are required to 2030. Under the higher oil production forecast, only one additional pipeline project may be required in 2023. While some surplus capacity is desirable, building additional projects would create significant excess capacity.
By evaluating each project separately without assessing the overall supply and demand for oil transportation, the NEB and the Canadian government may have created the conditions for a costly mistake of unprecedented proportions. To avoid this, the government needs to evaluate all proposed projects from a social, economic and environmental perspective to determine which mix of projects are required and best meet Canada's public interest.
Such a strategy would start by defining the level of Canadian oil production consistent with Canada's climate change objectives. The strategy would then rank projects and approve the projects as needed based on their relative merits. All four proposed projects connect to tidewater and access similar world market prices, so there is little to choose between based on price. Therefore the ranking would be based primarily on relative cost of transport, environmental impacts and degree of opposition.
The good news is that the more controversial projects with the highest environmental impacts due to reliance on tanker traffic such as Trans Mountain may never be needed. The bad news is the federal government may have missed this opportunity by prematurely approving Trans Mountain before completing a comparative assessment. Nonetheless, such an analysis could still help inform the ongoing debate on pipelines and protect the public interest.
Thomas Gunton is the director of the Resource and Environmental Planning program at Simon Fraser University