Remarks to the Canadian Senate Committee
on Transport and Communications
Hearings on the Transport of Crude Oil in Canada
Calgary, September 21, 2016
CERI is a 40-year old Institute that provides objective research dealing with the economic and environmental impacts of energy issues. Due to our neutral status, we do not make recommendations or suggest policy options. We do our best to give government and industry factual evidence from which to base their decisions.
There is a lot of debate in Canada right now about the transport of crude oil on pipelines and rail. As I see it, the argument breaks down into four questions:
1. What is the physical risk to people living along the route in the case of an incident?
2. What are the environmental impacts of such an incident?
3. How does the addition of new transport capacity effect upstream emissions?
4. Are these costs offset by the benefits of increasing the transport of crude oil to tidewater?
CERI has not done any research into the risk of an incident along the route nor the extent of the environmental impacts. We see a couple of recent examples of pipeline leaks and train accidents such as the Kalamazoo river in Michigan. This was the largest spill in the US with clean up cost approaching $800 m. Another example is the fatal Lac-Mégantic crude oil spill on a rail line. The loss of 47 people was tragic and no cost benefit assessment of that accident could convince family and friends that the loss of their loved one was worth it.
We know there is a risk to pipeline and rail transport of crude, the question is; Should this mean not allowing such transport or putting in better safeguards to further minimize the risk? If we take our queue from other industries such as airline service or prescription drugs, the clear direction is increased safety measure to reduce harm, but still allowing the activity to continue.
Taking the third question of upstream emissions, the debate has focused on the higher emissions from oil sands production. Due to the higher energy use in producing oil from oil sands there is a correlation between increased production and increased emissions. However, a study produced by CERI last year showed that with best in class technology that exists today emissions from oil sands can be reduced by 29%. Interestingly that is equivalent to the differential between emissions from oil sands crude and crude from the Middle East or the US.
This latter observation comes from work done by the Carnegie Endowment for International Peace who developed an oil-climate index. This means with investment in innovation in oil sands production, oil sourced from Alberta would be similar in emissions impacts with oil from the US or the Middle East.
That being the case, emissions are still occurring and people are rightly concerned about climate change and its long term impact globally. The federal and provincial and territorial governments are hard at work drafting a comprehensive climate strategy which will deal with the emissions concern. If we have faith in that process and those potential policies, should those same concerns be considered in the crude transport question? Surely, the policies when completed will have taken into account public interest on greenhouse gas emissions and determined the optimum approach. Addressing them during the review of crude transport seems duplicative and of little value. It might even result in a tribunal issuing decisions that are not consistent with government policy.
So, we know there is some risk to the transport of crude in Canada, even tragic circumstances. We know with appropriate technology innovation and government policy the emissions issue can be dealt with. What remains is whether the benefit of transporting crude in Canada, and in particular to tidewater outweighs the risk?
By way of example, in 2014 CERI produced a cost benefit analysis of the Energy East Pipeline project. Our analysis showed that over the 28-year period of the research, the pipeline alone adds almost $34 Billion to the Canadian economy. This works out to approximately $1.2 Billion per year. It would create about 48,000 jobs during construction and 7900 during operations. Interestingly the largest economic benefit is to Central Canada. GDP impacts in Ontario and Quebec come to almost $20 billion.
One calculation we did not do at the time is the higher price western Canadian producers would receive for their crude oil. As a captive supplier to the U.S. Western producers face a discounted price, averaging $15 compared to the West Texas Intermediate price point. It is difficult to say what the actual impact would be bringing Canadian oil to tidewater, but in another study CERI completed this year on price impacts, we calculated a $1.7 Billion benefit to the Canadian economy each year, for a $1 increase in the average price of crude. Let’s assume the discount could be reduced by $5. That would mean an increase of $8.5 Billion to the Canadian economy each year. This does not include the balance of trade benefits by purchasing oil domestically instead of imports.
To summarize, the risk of transport is real and can have tragic consequences. Emissions can be managed through technology innovation and government policy. Then, the clear decision in this example, for policy makers is whether the benefit to the economy of approximately $9.7 billion a year is worth taking on that risk? Another question is; Should some of those risks be mitigated by allocating some of the economic benefit to those most at risk? This approach is one that should be considered when assessing the costs and benefits of crude oil transport in Canada.