Using Numbers Instead of Adjectives to Evaluate an Economic Decision

The discovery of oil in the province of Alberta in 1947 soon led to the desire to transport it to the west coast of Canada, and in 1953 oil began to flow through a pipeline built by the Trans Mountain Pipeline Company (route of all pipelines discused in this post in red on the map above). The pipeline took oil from Edmonton, the capital of Alberta, over the Rocky Mountains, to Vancouver on the coast of British Columbia. In 2008 a second pipeline, over part of the same route as the original, was built by the Canadian offshoot of the Texas company Kinder Morgan. This one was parallel to the first over part of the route, and increased the transporting capacity to 300,000 barrels a day (bbl/d).

In 2013, Kinder Morgan applied to the Canadian government to add another pipeline, which would increase the carrying capacity to 890,000 bbl/d. For this development, to be called the Trans Mountain Expansion Project (TMEP), the oil to be transported will be the product of the Alberta oil sands, and consist of bitumen mixed with a chemical diluent (“dilbit”) to allow for its transport by pipeline. The dilbit delivered to Burnaby, in the port of Vancouver, will be loaded onto tankers, which will exit the port for foreign markets. Although some of the oil currently delivered to Vancouver is refined and used there, the dilbit flowing down the new pipeline will all be shipped offshore.

Not surprisingly, the TMEP is controversial. It pits pro-development governments (Canada and Alberta) against one that is more environmentally-concerned (British Columbia). It pits entrepreneurial agents (oil sands development companies) against climate change activists. The arguments are usually based on closely-held values, and are couched in descriptive terms — despoliation of the environments, realization of locked-in resource value, trampling of the rights of indigenous peoples living along the route. But there’s another kind of analysis which can be developed through readily-available facts and figures.

Why an analysis of TMEP matters

The Trans Mountain Expansion Project (TMEP) has generated a great deal of opposition, mostly on the west coast of Canada. In addition to concerns about possible rupture of the pipeline itself, there is a concern about the damage that would be caused by a tanker spill, and also about issues related to the interests of indigenous peoples. In a dramatic recent turn of events, and largely as a result of the actions of pipeline opponents, Kinder Morgan decided the delays were intolerable, and withdrew from the TMEP. The Government of Canada is buying Kinder Morgan’s current pipeline and financing the construction of the new one.

This analysis of the decision to pursue the TMEP is constructed according to the principle promoted by the late Sir David MacKay, namely, that we need to analyze complex issues with more numbers and fewer adjectives.

It focuses initially on the economics of the project, following the philosophy that if it’s not worth doing, it’s not worth doing well; in other words, if it doesn’t promise sufficient reward, the arguments against it, based on environmental risk, dominate the discussion. What is the risk, and what the benefit?

Economics — Money

A key selling point for the TMEP is that it will be a source of revenue for the governments of Alberta, BC, and Canada, and for Canadians generally. A pro-pipeline website has estimated the royalty and tax money that will flow to the government of Alberta at $19.4B (B for billions; all values are in Canadian dollars) over 20 years of operations. However, the government of Alberta’s current annual revenue is almost $50B; income from the TMEP would thus make at most a 2% contribution. A much smaller revenue stream would flow to BC, and even less to municipal governments. Looked at another way, such a revenue stream for the Alberta government would represent $241 per capita. By comparison, a sales tax in BC produces $1110 per capita. (Alberta has no general sales tax.)

Kinder Morgan previously estimated that producers of oil sands bitumen will see increased revenues of $73.5B over 20 years of TMEP operations, or about $3.7B per year. The embedded assumption is that Asian markets will pay more for dilbit than the American market currently does. This assumption has been challenged as being unrealistic, for reasons that include higher transportation and refining costs.

It’s difficult to know precisely what contribution the TMEP would make to Alberta’s overall economy. One way to evaluate this is to compare its estimated total earnings, after royalties and taxes, of  $3.7B per year to the GDP of Alberta, which was $354B in 2015.  The extra income brought in by the TMEP would thus be a little over 1% of the 2015 GDP.

Economics — Jobs

A second focus for the economic contributions of the TMEP is employment. Oil sands production was about 2.8M bbl/d in 2017. The TMEP, if it reaches full capacity, would add another 590,000 bbl/d, or 21% of current production. The number of workers directly employed in the oil sands was 22,300 in 2012. A 21% increase would mean an additional 4,700 jobs if this number scaled similarly. Of course, there are also pipeline jobs, but of the total of 6,300 of these in Alberta, only a fraction would directly involve oil sands production.

Developments such as these are considered to produce not just direct jobs, but indirect and induced jobs required for the project. But even a multiplier effect of 3 to take these into account would mean about 15,000 new jobs due to the TMEP. This is less than 1% of the total number of currently employed Albertans, which was 2.29 million in 2017. Of course, we can also expect workers from other provinces to move to Alberta and take up some of these jobs, as they have done in the past whenever there were large developments in the oil industry.

On the other hand, oilfield jobs have been disappearing as producers develop more automated and streamlined procedures. According to the “PetroLMI” Labour Market Information website, the efficiency of production in the oil sands industry in Alberta went up by 7.6% (barrels of oil equivalent per day per worker) between 2013 and 2017. The number of oilfield jobs in the future, with developments such as driverless trucks, cannot be accurately estimated, with or without the TMEP. Even if there is an immediate increase in jobs directly or indirectly related to oil sands extraction, the total number of jobs is headed downward over time, and is unlikely to provide a strong driver for total employment in the province.

The number of jobs provided during construction has been variously projected. Industry figures are significantly higher than those of its critics. But even the figure 4,500 direct construction jobs estimated by Ian Anderson, President of Kinder Morgan Canada, represents only 0.1% of the total employment in Alberta and BC (which is approaching 5 million). Even with related indirect and induced jobs, this is not a large number.

Tanker traffic issues

Most popular opposition to the TMEP is based on concerns for the environment. Supporters of the TMEP bring up factors such as the required use of double-hulled tankers already in place, and that the increased tanker traffic would only represent about a 10% increase in total marine traffic into the port of Vancouver. Because there is much heavier tanker traffic to US ports, thetotal tanker traffic would go up from present 600 a year inbound through the Salish Sea to about 1,000. Tanker traffic to Vancouver would increase from the present 5 a month to about 33, more than 6-fold.

There are several problematic issues with the benign assessment of TMEP supporters. Firstly, double-hulled tankers are not immune to spillage following collision with other ships, and such collisions have occurred in the past, and continue to occur. The Tyee lists 3 that occurred globally in 2009-2010.   The recent disaster off the coast of China, in which a double-hulled tanker (the Sanchi) carrying 136,000 tonnes of natural-gas condensate from Iran to South Korea was rammed and sunk by a cargo ship, is sobering. The greatest risk contributing to such accidents is human error, which cannot be completely eliminated, regardless of design and protocols. The Georgia Strait Alliance states that between 1995 and 2008, there were 14 oil spills from tankers travelling to or from Washington State. In addition, it claims there were 132 near misses.

Another concern, one that can be addressed but hasn’t yet been, is that Canadian maritime regulations and controls are not good enough. According to The Tyee, “U.S. laws [regarding tugs accompanying tankers through the Salish Sea] specify vessel type, training and mandatory drills. The U.S. has also invested millions in escort tug studies and simulations.In Canada, you cannot find a copy of the tanker escort guidelines, let alone any performance monitoring information.”.

Summary

Is the investment in the TMEP economically sound? This analysis indicates that the difference it would make to the economies, particularly of the most affected part of Canada, Alberta, is minimal — in the range of 1% in employment and GDP, and perhaps 2% in government royalty and tax revenue. Against this is the cost to the people of Canada, since it is now a federal government undertaking, of $4.5B to purchase the existing Kinder Morgan pipeline, and a minimum (almost sure to be exceeded) of $7.4B for further construction. When the project was still Kinder Morgan’s, one business observer stated “[Stakeholders] need a better understanding on how strong the business case for Kinder Morgan is, or if this investment could turn into a ‘soon to be stranded’ asset”. That warning is even more apt now that the project is to be run by the government.

In summary, a quantitative analysis of the transmountain expansion project indicates that the costs and risks, both environmental and financial, are too high for the benefit hoped for.

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