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Monday, April 16, 2018
Why Building the Trans Mountain Pipeline Will Increase Gas Prices in B.C.
Why Building the Trans Mountain Pipeline Will Increase Gas Prices in B.C.
Last week gasoline prices soared in southern B.C., with the price at the pump in Vancouver hitting over $1.55 per litre. This was not due to a restriction of supply, although Alberta Premier Rachel Notley jumped on the opportunity to once again misrepresent reality in order to draw erroneous conclusions supporting the need for Kinder Morgan's Trans Mountain expansion.
"There are a lot of ways in which the province of B.C. can assure an adequate supply of gasoline in order to combat the ridiculous prices that they pay," Notley said in Calgary last week.
If B.C. wanted to keep gasoline prices low, she said, it should stop opposing the Kinder Morgan oil pipeline expansion as it would increase "the ability of Alberta to ship more product to the West."
Notley assumes B.C. needs more crude oil to supply the Parkland refinery in Burnaby and more refined petroleum product to supply the retail outlets that Parkland's refinery does not. She also assumes that building Trans Mountain's expansion means Alberta's oil producers and refiners will ship more product to B.C. Neither assumption is correct.
Let's review the facts.
High gas prices are not due to a shortage of supply.
Gas prices are not high because of a lack of supply. There is plenty of supply to serve the B.C. market.
High gas prices are the result of a decades old strategy in Alberta to charge what the market will bear, not charge based on the costs of production and delivery (including a reasonable return on investment) as would be the case in a well-functioning market. This unfair or predatory pricing is sometimes referred to as price gouging. This reality exists to varying degrees all across Canada, although it is more prevalent in Lower Mainland and Vancouver Island markets.
Every time the pain at the pumps from this inappropriate pricing practice becomes obvious, it appears industry apologists are standing at the ready to trot out phoney "reasons" for the increase in gas prices.
The facts show B.C. exports more gasoline than it imports. Port of Vancouver statistics reveal that during 2017, exports to the U.S. exceeded imports by almost 70 per cent, giving rise to net gasoline exports of 6,000 barrels a day. There is no supply shortage in B.C. — chronic or otherwise.
Kinder Morgan's new pipeline will not increase the shipment of product to B.C.
Trans Mountain's expansion is intended to ship 540,000 barrels a day of diluted bitumen — heavy oil — to the Westridge dock for offshore export. None of this crude is destined for B.C.
The Parkland refinery already receives all the light crude oil it can refine from the existing pipeline so there is no shortage there. Further, the refinery is not configured to use heavy oil like diluted bitumen from the oilsands. This is why a heavy oil pipeline through B.C. is of no benefit to B.C.
As far as refined product is concerned, Kinder Morgan's business case for the Trans Mountain pipeline is explicitly based on no increase in crude oil or refined product supply to B.C.
Kinder Morgan told the National Energy Board (NEB) that "refined product shipments will not increase as a result of [the Trans Mountain Expansion Project]."
Unfair pricing at the pump will not change no matter what happens with the Trans Mountain expansion because it is not due to a scarcity of supply. Addressing the failure of the market to fairly determine gasoline prices requires policy direction from government and meaningful regulation.
If the Trans Mountain expansion is built, B.C.'s gas prices will increase.
We know regional gas prices will rise if Trans Mountain's expansion proceeds because the NEB approved an increase in toll rates on the existing pipeline that guarantees it. The board gave Kinder Morgan permission to more than double the cost of delivering a barrel of gasoline or diesel to B.C. motorists on the existing pipeline in order to help pay for the new one.
Higher transportation costs on the existing line will ratchet up pump prices. Producers and refiners consider increased transportation costs a cost of doing business and they get passed onto end-users.
Trans Mountain's expansion — a heavy oil pipeline Notley maintains is for the benefit of offshore markets in Asia — is not commercially viable unless B.C. consumers and businesses subsidize it through higher gas prices here at home.
Big Oil needs B.C.'s market demand more than B.C. needs Alberta's refined product.
Notley has threatened B.C. with an ultimatum — stop resisting the expansion or face serious supply restriction. But her threat to "turn off the taps" is idle.
Kinder Morgan and Alberta's oil producers and refiners will not allow this kind of behaviour. It would send shock waves through the international business community and will fundamentally cost Alberta's oil sector more than it will cost B.C.
B.C. is an important market for Alberta's refiners and light oil producers.
If supply from Trans Mountain is shut off, the Parkland refinery can turn to offshore crude while other retail distribution systems can seek imported refined product — likely at lower prices if existing supply agreements are rendered invalid through Alberta legislated restrictions. A marine terminal to deliver jet fuel to the Vancouver International Airport is in the process of being constructed with the expressed purpose of being able to access jet fuel supply at lower cost from numerous markets.
Turning off the taps in B.C. would flood the Prairies and end up costing Alberta's refinery sector.
Since the Trans Mountain pipeline delivers gas from Edmonton refineries to B.C., if supply were to be curtailed, downward pressure on retail prices in Prairie markets would mount because of a corresponding over-supply there.
That would mean every barrel supplied in Alberta would take some hit — not just the barrels diverted from B.C.
In order to limit supply in one market without a corresponding loss, there needs to be demand in another. The demand is not there.
Which companies are poised to take the hit in Alberta? Suncor, Imperial and Shell.
Suncor is poised for a double whammy. Suncor is the major shipper of refined gasoline and diesel product to B.C. along Trans Mountain for sale in Petro-Canada stations, but also under agreement with other retail outlets.
There is little likelihood Suncor will break contracts and destroy long-term business relationships with others in B.C. undermining not only its short-term, but long-term profitability in order to support Notley's political posturing.
Kinder Morgan has too much to lose if shipments along its pipeline are curtailed — including the ability to finance its project.
Notley has not connected the dots between Kinder Morgan Canada Limited's (KML) revenue stream and the company's ability to proceed with the Trans Mountain expansion, either.
Current toll rates charged on the existing pipeline provide a significant portion of the company's cash flow. It is not trivial.
Interrupting Kinder Morgan Canada's revenue stream by limiting supply impedes the company's ability to pay dividends to its shareholders. This not only hurts Canadian investors, it particularly hurts Kinder Morgan's 's Texas-based parent Kinder Morgan Inc. (KMI) in Houston.
Kinder Morgan senior still owns 70 per cent of the Canadian company. KMI needs dividends from the Canadian operations to support its ongoing financial challenges. An interruption of Trans Mountain's existing revenue stream would get in the way of KMI's cash flow needs .
Interruption of Trans Mountain's existing revenue stream, by limiting pipeline shipments, would also impede Kinder Morgan Canada's ability to pay dividends on its $550 million in outstanding preferred shares.
As well, Kinder Morgan Canada still needs to raise more than $2 billion in equity capital to help finance its expansion. Try going to financial markets to raise risk capital while revenues are impaired because of a legislated election ploy.
Finally, if reduced cash flow from "turning off the taps" — even just a little bit — causes a credit rating downgrade for the Canadian operations, Canada's big banks could pull their $5.5 billion construction loan facility. Without the credit facility keeping the expansion afloat, the Trans Mountain expansion sinks.
Image: Todd Bigelow / Aurora Photos
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