Canadian taxpayers financing of tar sands pipelines could be putting billions of dollars at risk: Carbon Tracker

Research finds that pipeline oil would be uneconomic under Paris targets

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Canadian taxpayers could be putting at risk billions of dollars invested into the controversial Keystone XL and Trans Mountain oil pipelines if the country respects its CO2 reduction commitments under the Paris Agreement and global oil demand drops and prices weaken in line with efforts to meet the targets of the international accord. 

Research by Carbon Tracker in a recent report, titled: Pipe Dreams: Why Canada’s proposed pipelines don’t fit in a low carbon world, says currently ‘unsanctioned’ oil sands projects underpinning future use of the huge pipeline project extensions like Keystone XL and Trans Mountain would be economically uncompetitive under both the 1.7-1.8°C Sustainable Development Scenario (SDS) and the c.1.6°C Beyond 2 Degrees Scenario (B2DS) climate change scenarios outlined by the International Energy Agency (IEA).

Canada’s oil sands production spurt in the last decade has overwhelmed existing pipeline infrastructure and led producers to use expensive rail freight and regulators to impose mandatory supply cuts.

Keystone XL and Trans Mountain have been part of the oil industry's plans to pipe the increased supply. 

But both projects have been hugely controversial.

The Keystone XL pipeline extension, which runs through three US states, was blocked by the Obama administration in 2015, approved by the Trump administration in 2017, and has faced a variety of legal challenges during and since. In March 2020, Alberta’s provincial government made a C$1.5bn equity investment into Keystone XL and committed to a C$6bn loan guarantee in 2021 to enable developer TC Energy to begin construction of the pipeline.

The Trans Mountain Expansion Project (TMX) and the existing Trans Mountain pipeline were acquired in 2018 by the Canadian government at a cost of C$4.5bn, after developer Kinder Morgan threatened to walk away from the project. 

However, Western Canada Select (WCS), the main benchmark price of the heavy oil extracted from tar sands, trades at an average 25% discount to Brent Crude because of lower quality and transport issues.

And the Carbon Tracker research says that at even at a more economic 10% discount to Brent as a result of the increased pipeline capacity, the tar sands oil would need a much higher Brent price to be economic.

Brent crude is presently selling at just short of $45 per barrel (bbl). 

The Carbon Tracker research says: “We estimate that SDS levels of demand can be satisfied by oil projects that deliver a 15% internal rate of return (IRR) at an oil price in the high-$40s, and B2DS at an oil price in the high-$30s. With the lowest cost unsanctioned oil sands project requiring a Brent equivalent $59-62/bbl (two development phases) to generate a 15% IRR, an effective $10/bbl reduction in estimated costs to $49-52/bbl still leaves it a few dollars out of the money under the SDS and well out of the money in the B2DS.”

The report concludes that if the upstream oil production to fill the pipelines remains uneconomic – and if global decarbonisation plans continue – then producers, taxpayers and investors could be stuck with the bill, especially if they are looking to sell the assets.

RI and Carbon Tracker present a free-to-air webinar on Weds August 26 at 16.00 BST (11.00 ET) to discuss the Pipe Dreams report.

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