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article imageWas the Trans Mountain Pipeline report 'fatally flawed?'

By Karen Graham     Mar 21, 2018 in World
Prime Minister Justin Trudeau and Alberta Premier Rachel Notley have both repeatedly claimed the Kinder-Morgan Trans Mountain Pipeline Expansion will secure higher prices for Canada's heavy crude, but where did they get that information?
The Alberta - British Columbia disagreement over the Kinder-Morgan pipeline extension has grown to the point where over 5,000 people marched against the expansion and 14 protesters ended up being arrested recently. And of course, there is still the threat by Notley to cut off oil and gas supplies to British Columbia looming in the background.
However, there is more to this Kinder-Morgan issue than meets the eye, as The Tyee notes. At issue is Trudeau and Notley's assertion that the Kinder-Morgan extension will help the economy and create jobs while "being conservatively expected to generate $46.7 billion in government revenue.”
Trudeau claims, “We know that Canadian oil is discounted because we only have access to the U.S. market right now, and creating more access to overseas markets will actually get a better price for jobs, for workers, for the Canadian economy on our resources.”
The Kinder-Morgan consultant's report
Just how solid are the Prime Minister's arguments and what are all the numbers based on? The Tyee found out through research that the politicians’ promises of riches rest on one Kinder Morgan consultant’s report that is being challenged by critics.
An Alberta government website that was created to advocate for the pipeline acknowledges the $46.7 billion in government revenue cited by Notley comes from Kinder Morgan’s Trans Mountain’s website. The site claims, “By increasing Canada’s capacity to get resources to market, producers will see $73.5 billion in increased revenues over 20 years.”
“A Conference Board of Canada report has determined the combined government revenue impact for construction and the first 20 years of expanded operations is $46.7 billion, including federal and provincial taxes that can be used for public services such as healthcare and education,” the company’s website says.
While the website does not provide any source for the numbers, it comes from the “Market Prospects and Benefits Analysis of the Trans Mountain Expansion Project for Trans Mountain Pipeline” report prepared by consultants Muse Stancil.
Muse Stancil is a Dallas, Texas-based global energy consultancy, offering “a personalized consultancy service tailored to meet individual client needs solving specific problems."
The Conference Board of Canada used the report as the basis for its forecast of government revenues in reports in 2016, never challenging Muse Stancil's economic assumptions. Company president Neil Earnest wrote the report. While he has a degree in chemical engineering and an MBA, he is not an economist.
Earnest claimed the pipeline extension would lift oil prices via a 20-fold increase in diluted bitumen transportation from 25,000 barrels a day to 540,000 a day, generating an additional $73.5 billion in revenues. Muse Stancil used a proprietary mathematical model to reach its conclusions, but this means no one else can check their results.
Economists who looked at the Muse Stancil report during the NEB hearing recognized so many failings that the report was "without merit,” according to economist Robyn Allan, former CEO of the Insurance Corporation of BC.
Wrong assumption on Canada's heavy crude
One fatal flaw in the Muse Stancil report was the assumption that Canada's low-quality heavy crude would be sold for higher prices with the completion of the pipeline extension. But Earnest overestimated the impact of the light/heavy differential on Canadian heavy oil.
Earnest made the assumption that heavy crude would be sold at much lower prices than light oil is sold based on spot-prices if the pipeline wasn't built. But only about 10 percent of Canada's heavy crude is subject to spot-pricing or any other volatile market issues.
Most oil companies protect themselves from differences in light and heavy oil prices by using what is called “the heavy oil discount" with a variety of means, including upgrading and refining bitumen or hedging. And there is a reason for this.
As Imperial Oil notes “The market price for western Canadian heavy crude oil is typically lower than light and medium grades of oil principally due to the higher transportation and refining costs.” Even big companies, like the Koch Brothers, describe it as a “garbage crude” that serves as cheap feedstock for their refineries.
In 2017 energy expert David Hughes, a geologist who worked for the federal government for 32 years, took another look at the Muse Stancil report. What he had to say is pertinent to the whole Kinder-Morgan pipeline expansion today: “The U.S. is not unfairly discounting Canada’s oil and no Asia price premium exists,” Hughes wrote. “The construction of the Line 3 expansion and Keystone XL pipelines with the Trump administration’s support will allow access to the highest prices available and provide surplus export pipeline capacity. Politicians knew this information, or should have known it, when Trans Mountain was approved in November 2016.”
Allen suggests there are only two reasons why Notley and Trudeau are still quoting the flawed report. "Either they haven’t read the original report or they do understand and are being wilfully deceptive.”
More about trans Mountain pipeline expansion, Alberta government, Justin trudeau, Muse Stancil, erroneous report
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