Monday 1 August 2016

Pipelines to Nowhere: Energy East, Kinder Morgan make no sense amid global green energy boom, tanking oil market, By Will Dubitsky, Common Sense Canadian, Enhanced/Updated August 2, 2016

Most financial analysts, economists and energy experts would have us believe that the fossil fuel sectors, and the petroleum sector in particular, are in a slump, that this is cyclical, and things will eventually normalize.  This is because their “training” is based on the assumption that the future will follow the patterns of the past.

But what if it is the economic paradigm that is changing?

Two of the largest markets for fossil fuels are electrical power generation and transportation - the latter nearly 100% dependent on petroleum.  With the former, the transition to a green economy is well-advanced. while in the case of the latter market, the signs are that a transition in imminent.

A third element in the equation is that the unprecedented low price of oil has brought the oil industry and the Government of Canada to lower their respective projections of oil production and tar sands production, in particular.  On this point, an internal memo to the federal deputy minister of Finance released to the public in mid-July 2016 indicated that existing pipeline capacity is sufficient to accommodate tar sands industry needs until 2025.

While still optimistic regarding the needs for greater pipeline capacity, the Canadian Association of Petroleum Producers (CAPP) in Early Summer 2016, lowered their original 2030 forecast for oil production in Canada by 400,000 barrels/day.
Two of the largest markets for fossil fuels are electrical power generation and transportation – the latter nearly 100% dependent on petroleum.  With the former, the transition to a green economy is well-advanced, while in the case of the latter market, the signs are that a transition is imminent.

Renewables surpass fossil fuels with new installations

According to the International Energy Agency (IEA),  in 2015, an astounding 90% of all global electrical power capacity added was attributable to renewables.   
In the US, in 2015, renewables represented 68% of new electrical generation capacity installed.
But no country is changing the energy/economic paradigm more than China, the world’s largest energy consumer.  In 2015, nearly 100% of newly installed electrical capacity in China was represented by renewables – attributable to a record of $110.5 Billion in investments for that year.
This has produced an amazing decline in energy-related CO2 in both China and the US and global emissions remaining flat since 2013!  What’s more, for the first time in history, emissions have declined during a period of economic growth.  More amazing, since year 2000, a total of 21 nations have reduced annual emissions while experiencing economic growth. 

This trend is continuing as evident in 2014 and 2015 with the global economy expanding 3.4% and 2.8% respectively while energy demand only rose 1.1% and .5% respectively for those two years.  Concurrently, despite the low gasoline prices, the US experienced weak demand for the fuel during the summer vacation months of 2016. 

Equally encouraging in 2015, for the first time ever, a greater percentage of the global investments in renewables took place in developing countries than in developed countries – $167 Billion vs. $162 Billion.

The above results are part of a trend that has been developing for some time.  Since 2013, more than half of the newly added global electrical generation capacity has been associated with the installation of renewables.

China to close 1,000 coal mines as wind, solar soar

In 2015, China’s total installed capacity for wind and solar farms stood at 145 GW and 43 GW respectively.   An incredible total of 30.5 GW of new wind power capacity had been added in 2015. The solar PV sector saw  15 GW  added in 2015, a world record!  For 2020, the projected installed capacities for wind and solar farms chalk up to 200 GW each!
The result is China’s coal use declined for the second year in a row, approximately 3.7%, in 2015, on the heels of a 2.9% decline in 2014.  Hence, China has made the spectacular announcement that it will be closing down 1000 coal mines in 2016 and not opening any new coal mines for the next three years (2016-2019).
All this translates into China’s coal generated electricity declining 10 percentage points related to China’s total electricity supply sources since 2011, in just 4 years, from accounting for 80% of total electricity consumed, to 70% in 2015.

Free fall of the US coal sector

Coal is having a similar dismal plight in the US. The flip side of 68% of new US electrical generation capacity added in 2015 having renewable energy sources is that US coal producers representing 45% of the country's coal output have filed for bankruptcy.  As if that is not bad enough, the US Energy Information Administration estimates that US coal production in 2016 will experience an annual decline of 16%, something not seen in the US since 1958!

Clean Transportation:  At the edge of transition

With respect to transportation, the indications are that we are at the edge of the transition to clean transportation.

By far China is leading the pack with 331,000 electric vehicles sold in 2015.  The year, 2016, promises to be much better with China's BYD expecting its electric vehicle sales to triple.  By 2020, it is expected that China will manufacture 2M eco-vehicles/year have 5M of such vehicles on China's roads. 

These current and anticipated developments represent the combined results of 1) 30% of all Government of China vehicle purchases being electric beginning this year, 2016, 2) 3 major regional governments having vehicle procurement targets for hybrids and electric vehicles to represent 30% of their respective fleets, as of 2016;  3) generous subsidies having been set up for consumers for the purchase of electric vehicles in several Chinese cities; 4) Beijing in 2015 invoking restrictions on new vehicle registrations to be exclusively electric vehicles and plug-in hybrids; and 5) Shenzhen targeting to have more than 3,000 electric taxis, 5,000 hybrids and 1,000 electric urban transit buses on the road in 2015.

Norway, California race ahead with electric vehicles

Meanwhile, in 2015 in Norway, thanks to multiple incentives, 25% of new car sales were plug-in electric vehicles and that percentage may climb higher in 2016.
Not to be outdone, California 1) has a target to have 1.5M zero emission vehicles (ZEVs) on its roads by 2025; 2) has established stipulations for automakers that 15.4% of all their vehicles sold in the state be ZEVs by 2025; 3) is supporting ZEV innovation and manufacturing; 4) has set goals for 10% of total state government light duty vehicle purchases in 2015 to be ZEVs and 25% by 2025; and 5) is requiring that all new buildings and parking lots have the electric panel and wiring in place to accommodate electric vehicles.

Here it should be noted that the State of California is often catching up with the avant-gardiste policies of its cities and other local governments.  Cases in point are that the City of Los Angeles has a target of 80% of their fleet purchases to be electric by 2025 and San Francisco in 2014 already had 476 charging stations installed.

But that is not the whole California story.  While other bus manufacturers are developing electric buses, China’s BYD is selling them, including via its manufacturing plant in Lancaster, California.  That plant recently signed a contract with the State of Washington to deliver up to 800 electric buses to that state.

E-buses can cover over 1,100 km in 24 hours

Also on e-buses, there are the Proterra electric buses, manufactured in California and South Carolina.  These e-buses can travel over 1,100 kilometres in a 24-hour period with the support quick charging points along a route, at less than 10 minutes/charge.  Another option is that of a range extender, allowing for 90 minute charges in a bus depot and, hence, fewer requirements for charges along a given route.  Tests conducted in the US by the National Renewable Energy Laboratory have found these buses to be very efficient and reliable, that is, they live up to the range claims of the manufacturer.

Tipping point favouring electric Vehicles may come as early as 2020

Clearly the actions described above will lead to a substantial penetration rates of electric vehicles in the medium term that will be devastating for the demand for oil on global markets.  Such are the conclusions of independent energy advisors Salman Ghouri and Andreas de Vries.  Their research of low, medium and high electric vehicle market penetration scenarios, indicated that, even in the low penetration medium term scenario, there would be a major impact on crude oil to the effect there would be a supply-demand imbalance. 
However the pace of electrical vehicle penetration may be higher than anticipated because the decline in battery storage costs is happening faster than originally projected.  This means that purchase prices for electric vehicles may be competitive within a few years, in part, because "fueling" expenses will be several times less that gasoline-powered vehicles and maintenance costs will be relatively low. The low maintenance expenses are attributable to their being only 20 moving parts for the electric components of an electric vehicle, compared to the 2000 moving parts of an internal combustion engine and it's powertrain.  
It appears that the automakers also view the tipping point coming around year 2020. 

In December 2015, Ford announced it will be investing $4.5B in electric vehicles and that 40% of their nameplates will be electric by the end of the decade.   

The Hyundai-Kia group also aims to lead the charge on next generation vehicles, with plans to introduce 26 hybrids, plug-in hybrids and electric vehicles by 2020.  Hyundai is also planning to introduce a new and distinct generation of luxury vehicles which will include a Genesis all-electric vehicle.   More recently, Hyundai announced that the 2017 Hyundai Ioniq will go on sale in the UK on October 2016 and will be offered in both a pure electric version and a hybrid model, priced to compete with the Prius.

Perhaps the strongest commitment to electric vehicles from "conventional" vehicle manufacturers comes from Volkswagen for which the  CEO Matthias Müller has not only stated that the company plans to  "make electric cars one of Volkswagen's new hallmarks" with 20 new models that plug in by 2020 but also has recently announced a commitment to build an $11B battery manufacturing facility along with major changes to the company's strategy in favour of sustainable development principles. 

Then there is Volvo which has plans for introducing a wide range of electric and hybrid vehicles with a production projection of 1M of these types of vehicles by 2025. 

Meanwhile, a full 10% of BMW’s North American sales in April 2016 were electric vehicles.

And as we have become accustomed to expect from the Chinese vehicle manufacturers, true to form, China's BYD is ahead of the game, ready to launch a line up of electric trucks in the US, trucks to compete with diesel models. These trucks will be manufactured in Lancaster, California where BYD builds its electric buses.

Tesla of course will be in the race for electric trucks and buses as well, as per the Master Plan it announced in July 2016.

Mack Trucks too is has joined the e-race in collaboration with Wrightspeed to produce an electric garbage truck equipped with a gas turbine auxiliary engine to keep the battery charged for a full day of use.

Why fossil fuels won’t be making a comeback

This all brings us back to the following question:
Is the flattening of demand in fossil fuel markets, and oil in particular, a cyclical thing, or an omen that the energy/economic model is changing?  That is, are we in a transition to a green economics?

Well, even BP Chief Economist Spencer DaleUBS – the world’s largest bank – and Governor of the Bank of England Mark Carney have concluded that, with the increasingly aggressive actions on climate by governments all around the globe, the fossil fuel glory era is nearing its end. This means that much of the world’s proven reserves will become stranded assets, or LIABILITIES.

Put another way, the reserves of the 200 largest fossil fuel firms represent 460% of their allocated carbon budget up to the year 2050.  

Should Energy East and the Kinder Morgan go ahead as planned, this would place 1M barrels/day more supply of petroleum on the international market while the indications are there will not be a corresponding increasing in petroleum demand. The result would be the equivalent to the annual emissions of 54M passenger vehicles on the road for about 50 years.  This is in addition to the considerations often raised concerning pipeline spills.  There are no known techniques for responding to the behavior of diluted bitumen in water -- it sinks -- yet Energy East will cross over nearly 3000 waterways.

The need to keep fossil fuel reserves in the ground aside, Canada's tar sands sector is coming around to validating the irrefutable trends to the effect that the corresponding increase in petroleum demand is not on the horizon, though the sector still clings to the belief that the current slump is cyclical, rather than permanent.  In April 2015, Alister Cowan, the CFO of Suncor was candid in saying that “The years of large, multi-billion-dollar projects are probably gone.” 

Candidly, Dinara Millington, Vice-President of the Canadian Energy Research Institute echoed the above-mentioned end of the era of exponential oil demand growth by pointing out that the oil price decline is a reflection of the collapse of the traditional supply-demand model.  

With the 2016 cash flow projected by The Canadian Association of Petroleum Producers (CAPP) to be in the negative for the Canadian oil and gas industry to the tune of spending plans for $30B coupled with revenues of $17B, it is clear that these sectors will be cutting costs and avoiding big projects for several years in the hope of eventually achieving balance sheets in the black.  

Accordingly, the CAPP, anticipates that spending in the Canadian oil and gas sectors in 2016 will likely be 62% less than in 2014.

Canada: Still stuck in the Old Economy

Where is Canada in all this?  We are already way behind our competitors, rating 56 among 61 nations on a 2016 Global Climate Change Performance Index.   Put another way, Canada’s share of global clean tech markets is 1.3% and falling.
To make matters worse, the ultra-conservative International Monetary Fund has estimated that fossil fuel subsidies in Canada in 2015, including indirect subsidies for health and climate change, stood at $46B USD/year.

So we have to ask ourselves, why on earth is Canada and the current federal government so committed to increasing the supply of oil on international markets via Energy East and Kinder Morgan, when all the signs are suggesting that the business model for Big Oil is collapsing?  As indicated previously, that business model is based on strong growth in demand, which, in turn, is supposed to engender high prices and the economic viability for non-conventional energy resources, such as tar sands and shale oil and gas.
Shale oil and gas are included in the discussion here because: 1) shale wells lose around 85% of their productivity in the first three years, thus requiring constant heavy investments in new wells 2) in January, 2015, the US shale sector was running up $200B in debt and 3) current indicators are such that up to half of the US shale companies may soon be facing bankruptcy.
But that is not all!  According to a March 15, 2016 article in Le Devoir by Alexandre Shields, 30% of the Energy East capacity will be used to transport North Dakota shale oil via Canada for export to the US East Coast.  This reinforces the premise that Energy East is not economically viable and definitely not viable as a tar sands-specific pipeline.

Canada missing out on Green Jobs

Failure for Canada to act quickly will translate into lost job opportunities.

It is estimated that there are 6 to 8 times more jobs per government unit of investment in green sectors, when compared with government investments in the traditional economy.
China, the world’s most aggressive country on the green economy, had 1.9 million jobs in their solar electricity and solar heating/cooling sectors in 2014 and 356,000 in their wind sector.

Seizing the opportunities

Yet the federal and provincial governments are not even providing adequate support even when a clean tech sector emerges!
A case in point is that Quebec has a significant critical mass regarding the electric vehicle sector, with two battery manufacturers, a super light high energy storage super battery under development, two charging station manufacturers, a designer of an electric motor wheel conceived in Quebec but manufactured under license in China, and an electric bus under development.
In a backhanded fashion Fiat Chrysler Automobile’s CEO, Sergio Marchionne, offered a sense of the opportunities for outside suppliers. In this regard, he expressed worries about the arrival of electric vehicles because the last bastion that the automakers fully control, from design and manufacturing of parts to the final assembly, pertains to the internal combustion engine (ICE) and its powertrain.  A shift to electric vehicles would mean this last bastion would become new entry points for outsourcing or outside suppliers. 

Cases in point are that the Chevrolet Volt and the upcoming Chevrolet Bolt electric vehicle technologies, are largely those of LG Chem.

Budget 2016-17: Low Carbon Economy Fund, reallocating fossil fuel subsidies and clean Technologies

Low Carbon Economy Fund
The Budget 2016-17 two-sentence description of the Low Carbon Economy Fund has a resemblance to the $1B Climate Fund, a fund announced by Stéphane Dion just prior to the defeat of the previous Liberal government by the Conservatives.  Under the still-born Climate Fund, the greater an entity's emissions, the more money one could get from the government to reduce one's emissions.  Put another way, that means that the largest emitters, such as the petroleum and other fossil fuel sectors, would be the largest beneficiaries of a "pay the biggest polluters the most dollars fund" -- a sharp and perverse contrast with "the biggest polluters pay more model".  While this may make the fossil fuel companies appear to be righteous, it is an inefficient and costly way to reduce emissions.

Clean Technology Funds
The amounts of funding for clean technologies in 2016-17 are lower when compared with the funding that was available during past Liberal governments -- a period when emissions went up.  

One example is that of Sustainable Development Technology Canada (SDTC) which had an average allocation of $40M/year during past Liberal governments while Budget 2016-17 only provides for $50M over 5 years. 

Another former Liberal government sustainable development program was Technology Early Action Measures, a program complementary to that of SDTC, which had an allocation of $56M for the period 1999-2001. 

As well, past Liberal governments offered substantial funding for clean transportation innovation but Budget 2016-17 only calls for $56.9M over two years which is to be divided up to cover the development of regulations and standards, including international emission standards for the air, rail and marine sectors.  Thus this money will only cover a handful of clean transportation projects.

This has all the appearances of a money shell game.

With Canada's share of global clean tech markets at 1.3% while the green economy is advancing at a extraordinary pace along with a corresponding decline in the fossil fuel sectors -- as outlined in the preceding section -- it is clear that Trudeau and his Liberals have a poor sense of priorities that favours aligning with traditional centres of power and money.

Bonafide and Credible Hearings on Pipelines: A Broken Promise
Perhaps most disconcerting, is the Liberal broken election promise on the creation of bonafide environment impact analyses for pipelines.

First, the "interim plan" for National Energy Board (NEB) hearings on Energy East involve a very short prolongation and an expanded NEB mandate to take into account emissions. The short extension constitutes insufficient time to put into place research contracts on scientific studies on GHG impacts.

More disturbing, is that Budget 2016-17 calls for the "too close" to the industry NEB to be the permanent authority for environment impact analyses concerning pipelines.

But the Liberals have since been forced to modify the NEB review process to save face following a Federal Court decision in late June 2016 that overturned the NEB approval of Enbridge's 525,000 barrels/day Northern Gateway Pipeline to bring tar sands crude from Alberta to Kitimat BC.  

The Federal Court decision ruled that Enbridge failed to properly consult First Nations in the BC areas concerned. Subsequent to the Court decision, Trudeau's Liberals said they would modernize the environmental review process.  The Liberals had no choice because failure to do so would jeopardize hearings on other pipelines, Energy East in particular.  However, there was no indication indication of what would be modernized in their improvisation announcement and, most important, nothing to suggest that the NEB would not continue to play a lead role in the review of the impacts of pipelines 

Unfortunately, the much dismantled and formerly internationally respected Canadian Environmental Assessment Agency, as per the latest Budget, is relegated to that of an advisory body on environmental impact analyses.

A bonafide review would entail starting the Energy East and Kinder Morgan review processes over, with the right parameters from the outset, and overseen by a competent team. -- at least comparable to that of the former Canadian Environmental Assessment Agency.

Re-allocation of Fossil Fuel Subsidies to Support a Rapid Diversification of the Sector
Among Trudeau's broken election promises are those on eliminating fossil fuel subsidies in Canada, which as estimated by the International Monetary Fund to be of the order of $46B/year USD for the year 2015 in this country.

The story line provided by the Trudeau administration is that the economic slump in the resource sectors indicates that now is not the right time to pursue the the subsidy reduction option.

Quite the contrary, now is the ideal time to re-allocate some of those fossil fuel subsidies to kick-start a major diversification of the fossil fuel sectors, the petroleum sector in particular, so that Western Canadian and Canada at-large can engage in a common effort to fully participate in the high growth, high job creation global green economy that is advancing rapidly in China Europe and the US.

Such diversification of the sector is possible, as outlined in Pipelines to Nowhere and as per Norway's Statoil , as 1) their new CEO, Eldar Saetre, is formerly from the Statoil renewable energy division  2) one of its 3 principal thrusts entails more ambitious goals for its renewables division - the company has become a major global investor in clean technologies, 3) the firm has become involved in avant garde clean tech innovation and in this capacity is taking leadership on developing floating platforms for offshore wind and 4) Statoil Energy Ventures has been set up with an initial budget of $200M to invest in clean tech start-ups involving energy storage and smart grid integration technologies, as well as windpower.  With regard to wind energy, Statoil recently entered into a partnership with United Wind of the US which specializes in leasing small scale energy solutions targeting such markets as rural property owners.

Yet another global petroleum leader preparing to make the transition to a green economy is that of France's Total.  In July 2016 the company announced a billion dollar acquisition of the leading battery designer Saft.  With this acquisition, Total intends to become a global top player in the solar sector within 20 years and its Chairman and CEO, Patrick Pouyanné, has announced bold intentions  with regard to electric value chain activity that includes, renewables, energy efficiency and energy storage, biofuels and biojet fuels.

Also a fossil fuel company leader in the transition to clean techs is Denmark’s Dong Energy, 60% owned by the Danish Pension Fund, which plans to shift from around 85% of its investments in fossil fuels and 15% in clean energy, to the reverse of this ratio by 2040. Dong is the world’s largest investor in offshore wind.

This all suggests that, diversified Canadian energy companies headquartered in the West can do more than just develop local infrastructure in their respective regions. Rather, they can become key players in the global market by bringing together clean tech expertise from all across Canada. This would include economic diversification stakeholders and others previously not involved in the clean tech, high job creation/growth areas.  Note, that it is the blending of different fields of expertise that often brings about world leadership.
More generally, it is clear that Canada, to be competitive, should be focusing on clean technologies at-large and not just on clean energy.

Examples of More Cost-effective  Ways for Canada to Catch up with it's Competitors on the Green Economy
There is no magic solution for achieving climate goals, rather it is like addressing poverty. One needs a combination of measures that collectively contribute to goals pursued.  With so many countries ahead of Canada, there is a wealth of examples from other countries to draw upon. These examples include:   
1) a legislative agenda with meaningful penalties for non-compliance;
2) expenditure-neutral shifting of some of the $46B/year in 2015 USD in Canadian fossil fuel subsidies to investments in a) the clean tech sectors and b) the diversification of the fossil fuel sectors, to accelerate their migration towards green economics while integrating the training of fossil fuel workers for green jobs; and c) more generally, the creation of a more diversified and less vulnerable Western Canada economy;
3) engaging the Business Development Bank of Canada and other financing arms of the federal government to establish clean technology portfolios/programs regarding the development of green sectors coupled with a meaningful green bond programs, comparable to European models (as opposed to the paltry/token green bonds fund of Budget 2016-17);
4) revamping government supported clean technology innovation activities to include a) networks of research centres on clean technologies that cultivate public-private partnerships plus b) a national clean technology integration centre that links clean energy, low carbon buildings and clean transportation -- the US National Renewable Energy Laboratory is one model, among many models, on clean tech integration nodes;
5) measures to support for clean technology product development and manufacturing including meaningful support for Quebec's electric vehicle sector to reap the opportunities associated with vehicle manufacturers increasingly turning to outside suppliers for these technologies; 
6)  initiatives comparable to that of China and California for encouraging a rapid migration to low and zero emission vehicles including a) vehicle fuel consumption legislation more stringent than that of the US federal government, with examples including California and 7 other US states; and b) policies to influence consumers on their respective choices of vehicles; and 
7) government procurement policies -- to name just a few! 

Canada at a crossroads

More fundamentally, it time to face the music and recognize that Energy East and Kinder Morgan are white (or, more appropriately, “black”) elephants. This means focusing on how Canada can engage in a fast-forward catch-up with its competitors on the transformation to a different economic model: Green economics.

Roadmap for Canadian transition to green economy

It is in this context that I have assembled a detailed paper on the subject – a roadmap for getting Canada up to speed on the transition to a green economy (read full paper here). This 55 page comprehensive discussion document is based on models from around the globe, adapted and improved upon for “Made in Canada” applications; plus my own Government of Canada employee experience on sustainable development-related experiences in policies, legislation, programs, projects and other initiatives.
What makes this document distinct is this:
While other organizations are emphasizing why we should change and what goals we should pursue, the aforementioned discussion document specifically maps out of HOW TO MAKE THE TRANSITION TO A CANADIAN GREEN ECONOMY.  It does so by presenting broad palettes of policy/strategy options, amenable to cherry picking by stakeholders, as per their respective preferences.

No need to reinvent the wheel

Canada need not reinvent the wheel on the green transition because there is so much to learn from the successes and failures of countries far ahead of us and from our own Government of Canada empirical evidence stemming from past climate change action plans.

We don’t need to be stuck with white/black pipeline elephants.  Accordingly, I invite anyone interested to have a look at the Roadmap so that we can finally get the dialogue going on how Canada can move forward and fully participate in the high-growth, high-job creation, global green economy.

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