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Opinion: NEB's oil forecast is not reliable, new pipelines are not needed
By Robyn Allan in Opinion, Energy, Politics
November 2nd 2016
New forecast from Canada's energy regulator is based on exaggerated
oil prices, inflated production estimates
NEB seems incapable of forecasting a future where we deal with
Forecast excludes federal and provincial climate/energy policies
New pipelines not needed
The National Energy Board’s long-term crude oil production outlook —
Canada’s Energy Future 2016 — was released last January. It was
initially intended for release in November 2015 while the Trans Mountain
expansion review was ongoing, but was delayed until after the hearing
record closed. No one has explained this delay.
The Board did not consider the figures in Energy Futures 2016 when it
prepared its May 2016 report recommending approval for Trans Mountain’s
twin. Instead, the Board relied on stale-dated crude oil projections
from Canada’s Energy Future 2013, the Canadian Association of Petroleum
Producers’ (CAPP) June 2015 outlook and Alberta Energy Regulator’s (AER)
spring 2015 forecast.
The NEB’s January 2016 outlook included a much lower oilsands production
forecast than its 2013 version, but even as Energy Futures 2016 was
published, its projections were already out of date. The NEB knew it.
That's why the CEO, Peter Watson, promised an update this autumn.
Mr. Watson explained in January that Energy Future 2016 relied on NEB
oil price expectations as they existed in mid-2015; that it did not
incorporate cancellations and deferments of oilsands projects announced
after that time; nor did it incorporate the limiting impact climate
change policies might have on future production. Unless policies
intended to combat climate change were embedded in law by the latter
part of 2015, the NEB ignored them.
The NEB released its promised update on October 26, 2016. It adjusted
both its price expectations and production projections downward but
otherwise pretended business as usual would continue in Alberta’s
oilsands for the next twenty-five years.
NEB excluded federal and Alberta climate policies, relied on exaggerated
The Board assumed that the magnitude and pace of bitumen production are
driven by international market price. Numerous climate change policies
currently in development—such as the federal carbon pricing plan and
Alberta’s 100MT cap on oil sands GHGs — are still excluded.
The NEB Update presents production forecasts based on a High, Reference
and Low crude oil price scenario. The NEB adopts the mid-range Reference
Case and concludes that between now and 2040 world oil prices will rise
— just not as quickly — and oil sands production will grow — just not as
fast — as it predicted in its January outlook.
A forecast of rising prices coupled with increasing oilsands production
for twenty-five years makes little economic or market sense.
First of all, the NEB’s Reference Case has the North American light oil
benchmark WTI price rising from $44.50 US in 2016 to $88.25 US by 2040.
These prices are what economists call “real prices” because there is no
inflationary impact in them. Adding the Board’s assumed inflation rate,
the NEB puts the WTI nominal price at $144 US per barrel by 2040.
The Bank of Canada assessed the price of WTI from 1972 - 2013 and
determined that over that 40-year period WTI’s real price averaged
$44.65 US per barrel. The NEB’s real price for WTI from 2014 - 2040
averages $75.86 US per barrel—70 per cent higher than the historical
Excessively high real oil prices over the long term are not sustainable.
This was most recently brought home in 2014. Oil producers responded to
relatively high prices by delivering excess supply to market. Oil prices
rapidly declined. Current prices don’t just reflect a “new normal,” they
are “the normal”.
Increasing prices and expanded production directly contradict what OPEC
is trying to accomplish. The group would like to cut up to 700,000
barrels a day from its current production of just over 33 million. The
cut is equivalent to about one Aframax tanker—the volume Kinder Morgan
says its Trans Mountain’s expansion would deliver to tidewater each day
beginning in 2019.
The international crude oil glut is not going away. State-owned oil
companies are more worried about being left with stranded assets in a
world trying to reduce its dependency on fossil fuels than they are
about market price. Canadian producers who bullishly continue to produce
into the market simply add to the supply driving downward pressure on
Oilsands production is getting chilly
Without an effective production cut agreement, the OPEC cartel will
continue with its plan to retain market share and crowd out higher cost
producers in Canada and the U.S.. Lower-for-longer prices have a
chilling effect in the oilsands whose huge capital investment projects
leave companies exposed to adverse economic conditions and asset
Chinese national oil company CNOOC Ltd. reported an impairment on its
oilsands assets in the first six months of 2016 because current prices
make their expensive operations unprofitable. CNOOC also idled part of
its Long Lake operations, taking production off line.
Imperial Oil and its U.S. based parent ExxonMobil announced last week
that they are faced with the prospect of de-booking more than six
billion barrels of proven reserves at their relatively high-cost Kearl
project. U.S. accounting rules require that Imperial and Exxon evaluate
reserves using 12-month trailing crude prices, rather than price
expectations as allowed under Canadian practice.
The NEB’s Reference Case is not an outlook that should be relied upon.
If any scenarios have merit, it's the Low Price one that better models
market forces, real prices and the structural change that is taking
place in an industry producing a product that is long past its climate
change best before date.
The NEB’s Low Price scenario shows us that crude oil production in
Western Canada peaks around 2025 — projects currently under construction
will have been brought online and fewer (or no) new projects proceed
because market prices do not justify them. This is the scenario that
should be used to translate Western Canadian production into Western
Canadian supply available for export.
Turning production into export supply is a bit complicated. Adjustments
need to be made for refinery demand, volume loss from upgrading, volume
gain from bitumen diluted with imported condensate, refined products
intended for export, and lost Canadian pipeline capacity when it is
allocated to ship U.S. Bakken instead. Once export volumes are projected
they can be compared with transportation takeaway capacity to see
whether it is sufficient.
That is effectively what the NEB did in its January release. It
dedicated an entire chapter and provided detailed spreadsheets for a
“Constrained Case” that relied on Reference Case prices and asked, “what
if Trans Mountain’s twin, Northern Gateway, Keystone XL and Energy East
are not built?” The NEB found that, with a modest reliance on existing
rail, sufficient transportation capacity would be available until at
Under NEB's "Low Price" scenario, new pipelines are never needed
Strangely the Update does not include a revised “Constrained Case.” If
it had, it would show that there is ample transportation infrastructure
to move Western Canadian crude to market without any new pipelines.
There would be hardly any reliance on rail, or even none at all. Using
NEB production figures from the Low Price case — where it becomes
essentially flat by 2025 — Trans Mountain’s expansion, and the other
pipeline proposals like Energy East, are never needed.
Imagine if the NEB modelled the impact of climate change costs
internalized to the oil sands companies who create them — a world where
the polluter pay principle is actually enforced? Even the NEB’s Low
Price scenario might prove too aggressive.
It's not only that the Kinder Morgan expansion and Energy East should
not be built if Canada plans to meet its international climate change
commitments. The NEB’s Low Price scenario — its more likely price
scenario — tells us we can’t afford to.
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