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Canada not running out of pipeline capacity: report

Canada does not need new pipelines, in spite of repeated misleading claims by the oil industry.

That’s the conclusion of a new Oil Change International (OCI) analysis showing that Canada has ample pipeline capacity to export all existing and under construction oil production to market from western Canada. The analysis suggests that industry has manipulated its forecasts to perpetuate an ongoing myth of pipeline constraints in order to advocate for unnecessary new pipeline construction.

The briefing shows that neither the proposed Kinder Morgan nor Energy East pipelines would be required unless Canada intends to abandon its commitments to cut climate pollution by allowing new and additional expansion of the tar sands well into the next decade.

In its annual Crude Oil Forecast, Markets and Transportation report, oil industry lobby group the Canadian Association of Petroleum Producers (CAPP) has wrongly forecast that Canada would run out of capacity to export oil in the following year in each of their yearly forecasts since 2012. Their latest press release in June stated once again that “new major oil pipelines are urgently needed.”

However, OCI’s analysis based on the latest oil industry data suggests that there is actually almost 500kb/d of untapped export capacity currently available – even before additional planned expansions in the system are considered.

“Canada’s oil industry has cried wolf far too many times,” said Adam Scott of Oil Change International. “New pipelines won’t help an industry struggling with low global oil prices, and won’t boost our economy.”

New pipelines won’t raise prices, because the price differential that once forced Canadian producers to sell their oil at a discount is gone. The lifting of the longstanding U.S. crude export ban, the completion of new routes from the Cushing terminal to the Gulf of Mexico, and the crash in global oil prices means that new pipelines will not significantly improve prices producers receive.

Tar sands expansion can’t continue in a world facing an urgent climate crisis. New pipeline capacity from projects like Kinder Morgan and Energy East would only be required if a significant number of new tar sands projects were given a green light in the future. Such a scenario would mean disaster for the climate.

Canada has now signed and ratified the Paris Agreement, which commits it to work to keep the increase in global average temperature to well below 2°C above pre-industrial levels while aiming to limit the increase to 1.5°C. Building new, long-lived, high-carbon tar sands pipelines and extraction projects is not compatible with that goal. In the meantime, there is already enough pipeline capacity to export Canada’s oil.

CAPP’S BAD MATH EXPLAINED

Canada’s oily fossil fuel lobby group the Canadian Association of Petroleum Producers (CAPP) has been trying for years to convince Canadians that we are out of pipeline capacity. They have been repeatedly crying wolf, arguing wrongly every year since 2012 that we would run out of space in the pipeline system within a year. Just last June they once again put out a press release saying Canada would run out of pipeline space this year. Their math just doesn’t add up.

CAPP’s forecasts have been inconsistent. For example, every year they have changed their estimates for the utilization rates for existing pipelines, often assuming pipelines would have more downtime for maintenance than was realistic. Underestimating utilization rates can make it look like there is less space in the pipeline system than there really is. Utilization rates for pipelines are typically quite high as companies work hard to avoid downtime.

CAPP has also been underestimating how much crude is soaked up by refineries in Alberta and Saskatchewan. Crude oil refined domestically does not require export pipelines to get to market. We estimate there is approximately 600kbd of refining capacity in western Canada that soaks up crude produced locally.

And lastly, CAPP has not properly factored in the use of rail to ship crude oil. It is clear that a small number of oil producers (averaging approximately 140kbd on average in recent years) actually prefer to use dangerous rail cars to ship their product to market. These producers may be seeking to ship oil to refineries not connected to the pipeline network, or may have projects that are too small, remote or short-lived to justify connecting the pipeline system. Either way, some rail has to be part of the equation.

If pipeline capacity was actually as tight as CAPP has implied, the price differential between the benchmark for tar sands crude (WCS) and the benchmark for North American crude (WTI) would be much higher than it is. Today, the modest difference in price is attributable mostly to higher shipping costs and lower quality of WCS. Furthermore, tight pipeline capacity could also lead to a spike in the volume of rail shipments. However, Canadian oil being shipping by marginally more expensive railhas actually declined this year due to sustained low oil prices.

In reality, we estimate there is almost half a million barrels per day of spare capacity in the pipeline system today. When we look at the existing crude production and future production from new projects already under construction that will come online in the next few years, we see that we will not run out of pipeline capacity.

The only scenario where we expect Canada would only run out of pipeline space, is if it intends to break its promises to address climate change. Living up to our obligations to cut carbon pollution will be challenging even with the amount of crude oil produced today. Adding any additional tar sands extraction projects would likely put Canada’s climate promises out of reach. The Paris Agreement requires keeping global temperatures well below 2 degrees C, aiming as close to 1.5 degrees as possible. Dealing with climate change means stopping expansion of fossil fuel production.

Ultimately this analysis boils down to three conclusions.

1. Canada’s oil industry is not challenged by a lack of pipeline capacity today. The industry is reeling as a result of the collapse of global oil prices, not a lack of pipelines. Building new pipeline capacity will not change this dynamic, but it will increase our dependency on the value of global commodities.

2. We can’t trust the oil industry seeking to maximize its own profits to look out for the best interests of Canadians. The sky will not fall if Canada says no to new oil pipelines, but the industry might face the prospect of not getting its way. Respecting our land, water, safety, Indigenous rights, and protecting our climate means saying no.

3. We have a stark choice for our future: lock-into new high-carbon infrastructure like pipelines that facilitate expansion of the tar sands or – take strong action to meet our obligations to cut emissions. Canada will not be able to do both.