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The Progressive Economics Forum

Odious profits and the Enbridge pipeline

Two obvious but generally unstated details about the Enbridge Northern Gateway Pipeline are climate change and that oil and gas companies stand to make mega-profits. An honest appraisal of the project would be something like, “yes, putting in the pipeline will facilitate even more greenhouse gas emissions from the Alberta oil sands, but our buddies stand to make bucketloads of cash.” Of course, proponents cannot say that so they have to resort to bullying and name-calling to disguise the indefensible.

The two, climate and profit, are very much related. The gains from doing this are “odious profits” that exist only because of massive costs externalized onto third parties (I’m riffing off the term “odious debt” — that incurred by dictators, usually for military hardware, for which the people are forced to pay even after the dictator has been deposed). Anyone who advocates well-functioning markets, as opposed to unbridled capitalism, should see the logic of ensuring that all costs of production are captured in the market price. The huge negative externality associated with fossil fuels is what prompted Nicholas Stern to call climate change the biggest market failure in history.

How much are we talking here? The pipeline itself is a $5 billion investment so it will have to make back a decent annual return. Enbridge’s estimates for toll structure and throughput imply revenues of just under $900 million per year. Based on financial statements in Enbridge’s 2010 Annual Report, profits from pipeline operations (after-tax earnings plus dividends) averaged 34% of revenues over the past three years. At this rate, profits from NGP would be over $300 million per year. These are not trivial amounts, and they do not include “costs” such as lucrative executive compensation – for example, Patrick Daniel, the CEO of Enbridge, made more than $6 million in 2009, and several other executives had more than $1 million in compensation.

Beyond the pipeline itself, we can also include the gain in profits to oil sands producers from higher market prices in Asia, estimated to average $3.6 billion per year by Wright Mansell, a consulting firm whose report is included in the application. So call it $4 billion in annual profits and you can see why a government with no morals would want to cozy up to the pipeline and start calling it ethical oil.

But at what environmental cost? There is a certainty of oil spills from the pipeline itself and tankers on the BC coast. Enbridge pipelines had 800+ oil spills on its pipelines over the past decade and a bit, and the record of other pipeline companies is no better with 5,600 incidencts in the US alone gong back to 1990.

But I’m more interested in the climate impacts. The Northern Gateway Pipeline would transport 525,000 barrels of diluted bitumen per day. The carbon content of this fuel is translates into annual global emissions of approximately 70 Mt CO2e. In addition, there are emissions associated with extraction of the resource (6.5 Mt CO2e, according to Pembina) and emissions associated with the energy needed to run the pipeline and ship bitumen to Asia. Finally, there are emissions from upgrading and refining bitumen into oil and other petroleum products (8-9 Mt CO2e per year, although this emissions-intensive process would happen in the importing country). All in, annual emissions associated with the pipeline could be in the range of 90-100 Mt CO2 per year, and this is not counting emissions associated with construction (manufacturing and transport of steel pipe, and machinery and equipment on-site).

So what is the damage — the negative externality — from all of that carbon? The most credible recent study estimating a range of values for the “social cost of carbon”, with most estimates in the range of $150-500 per tonne of CO2, but possibly as much as $893 per tonne. To put this in more recognizable terms, BC’s $25 per tonne carbon tax translates into less that six cents per litre. Internalizing the external costs of the pipeline into market prices would require a mix of regulation, carbon pricing and removal of any caps on liability in relation to spills. Indeed, the corporate form in practice limits liability to the initial investments made by owners of stock, which could be exceeded in the form of massive clean-up costs for a catastrophic spill.

Based on the numbers above, a low estimate of 80 Mt of CO2 into the atmosphere per year with external costs of $50 per tonne would imply $4 billion per year in externalized costs. Using a higher estimate of 100 Mt at $200 per tonne, external costs reach $20 billion per year. These numbers assume that bitumen would stay in the ground in the absence of the NGP, which may not be realistic given other options, but the point is that the NGP would facilitate the combustion of large volumes of fossil fuel, and doing so imposes very large costs on third parties from future climate impacts.

Bottom line: the Enbridge pipeline makes odious profits and they must be weighed against the costs of GHG emissions and oil spills. Privatize gains, socialize losses. Which is why the industry and their government make no reference to either the profits to be gained or climate change. While there will be some jobs created along the way, they are very small in number. Governments get a cut, too, through royalties and taxes (though the latter are being phased out for people fortunate enough to be corporations), but these are like the royalties on export of blood diamonds.

So thanks to Natural Resources Minister Joe Oliver, who unintentionally shone a massive spotlight on this project. The Conservatives would have been better off had he just shut up (though I’m figuring his letter came from central command and he was forced to sign his name to it). Let’s follow the money and have a real debate about the impacts of this pipeline from Alberta to China.

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Comments

Comment from Darwin O’Connor
Time: January 27, 2012, 11:22 am

I don’t think stopping these pipelines will to much to curb global warming. The demand to burn oil will still be there. It just means it will more expensive to transport. Would it be any better if the oil was transported by train, instead?

I guess one advantage of fighting pipelines is that there might be some success. Fighting to reduce demand has been largely futile.

Comment from Michael Barkusky
Time: January 27, 2012, 3:29 pm

Great work, Marc !

I would also think of counting as opportunity costs, against this project, the prospect that in the medium to long term future

(1) the price of a barrel of competing conventional crude oil could be much higher than it is now or will be in the next 5 years, making it disadvantageous to rush the unrefined bitumen to market now
(2) that technologies might emerge to extract and refine the oil at much lower environmental cost than can now be foreseen (which would take quite a while)
(3) that technologies might emerge to combust the refined products of resource in a way that does not release as much CO2 per unit, as would be the case at present
(4) prices paid by East Coast US and Canada refineries for crude oil might surpass those being offered in Asia

OR ENTIRELY CONVERSELY that

(1) further technological progress in renewables might make it uneconomic and unnecessary to ever extract more bitumen from the tar sands
(2) further progress in gas-to-liquids technology would make it commercially attractive to produce liquid hydrocarbon fuels from the reputedly now abundant feedstock of natural gas in Western Canada, at plants based in Western Canada, thus making it unnecessary to extract the bitumen rapidly, and now, for that reason.

All of these risk/option factors, on top of those so carefully laid out by Marc, suggest that the Northern Gateway makes economic sense only to its investors and customers (and perhaps to some construction workers). I won’t draw the obvious implication about why it is so popular with the present federal government. Suffice it to say that if incompetence at economic analysis is the reason for their enthusiasm, that would be less damning of them, than if it were the other plausible reason.

To all the rest of us, this pipeline proposal is a net loser; one that will simply push us further down the path of Dutch Disease and the Resource Curse, more generally.

Michael Barkusky
Vancouver

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