Contributed by Robert Lyman © 2018
Robert Lyman is an Ottawa energy policy consultant and was a public servant for 27 years, and a diplomat for 10 years prior to that.
On May 20, 2016 the Globe and Mail published an opinion piece by Wal Van Lierop, President and CEO of Chrysalix Venture Capital, in which he likened the history of energy markets to a baseball game. He compared the present phase to the fourth inning, in which new abundant sources of energy will win out against higher cost sources of supply, including oil sands. He then went on to question the rationale for Kinder Morgan’s proposed (and federal government-certificated) Trans Mountain Pipeline Expansion on the grounds that there will not be enough demand for the crude oil and refined products it will transport. He concluded that Alberta must get into “a better game”.
There are many clouds on the horizon for the Trans Mountain Expansion project, but it is not helpful to imagine some that are not there.
Let us address Mr. Van Lierop’s points one at a time.
As to the assurance of markets for the crude oil, Kinder Morgan would never have invested over $1 billion in promoting the pipeline so far and gone through a draconian regulatory approval review system if it were not persuaded that the producers would sell and the Pacific Rim refiners would buy. What would make one think that an investment analyst outside the company would know better? After all, whose money is on the line? It sure isn’t his.
Second, during the three and a half years of detailed regulatory review and public hearings on the Trans Mountain Expansion Project, the National Energy Board delved deeply into the market for the crude oil and the refined oil products that the expansion would carry, as part of its due diligence on whether there was a “need” for the project. The documentary evidence is there in spades for anyone who wishes to read it, and the NEB addressed it in detail in its report, which one can read here.
Why would we have an independent, expert, professional regulatory body do that and then have the government review its findings if we were prepared to succumb to the second-guessing of external investment analysts?
Third, most of the crude oil that the project would transport is either already in production or soon will be from project expansions whose construction has been underway for years. The production is economic at current prices, in fact even at the heavily discounted current prices because of pipeline bottlenecks. That will not change.
Fourth, what are this analyst’s qualifications to assess future international crude oil prices? I spent about a decade of my career trying to play in that game and I certainly never got it right. I do know that global oil demand has been growing at the annual rate of 1.2 million barrels per day since 2012 and that trend shows no sign of abating. That is the fastest and most prolonged rate of oil demand growth in history. Add in geopolitical factors (Iran, Venezuela, Russia, etc.) and what does that suggest about near-term oil prices?
Fifth, China is not the only Pacific market for oil sands production. It is the entire Pacific Rim. A recent report by Stratas Advisors estimated that crude oil distillation capacity in the Asia-Pacific region was 34.5 million b/d as of January 1, 2017 and that announced refinery expansion projects will add about 6 million b/d over the period 2017-2020 and another 6 million b/d over the period 2020-2025. A summary of the Stratus report can be read here:
The only pitchers that may take Trans Mountain out of the ball game are the governments that have to date mismanaged the review, certification and permitting of this important strategic infrastructure. The markets will not do so.