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‘Western Canada’s oil sands are high-cost ventures compared to most other types of oil resources,’ shows Carbon Tracker’s recent report, Pipe Dreams: Why Canada’s proposed pipelines don’t fit in a Paris-compliant world.“In an economically rational low-carbon world where structurally lower oil demand is satisfied with the most competitive (lowest cost) supply options, no new oil sands projects would go ahead on economic grounds.”

Pipe Dreams: New Pipelines Don't Fit A Paris-Compliant World, Below2C

(This post is sourced from the Carbon Tracker Pipe Dreams report and the Carbon Tracker website.)

No New Pipelines Are Needed

“Oil demand will be lower in a Paris-aligned world…The projects which go ahead in a world of limited demand are those that have the lowest production costs.”

Prospective pipeline projects represent a significant expansion of capacity, with taxpayer support. However, new pipelines are surplus to requirements under Paris Agreement demand levels.

The Pipe Dreams report has 7 key findings.


Our research has previously shown that no new oil sands projects are needed in a low carbon world. All unsanctioned oil sands projects are uncompetitive under both the International Energy Agency’s 1.7-1.8°C Sustainable Development Scenario (SDS) and c.1.6°C Beyond 2 Degrees Scenario (B2DS).

All proposed new pipelines from Western Canada, in particular Keystone XL and Trans Mountain expansion, are surplus to requirements in a Paris-compliant world. Pipeline capacity may have proved a constraint in recent years, but under SDS, all future oil supplies from Western Canada can be accommodated by upgrades and replacements to existing pipelines, local refining and limited rail freight.

Even if discounts for Canadian crude narrow, new oil sands projects remain uneconomic. Western Canadian heavy oil trades at a steep discount to international benchmarks due to quality and transport challenges, averaging $25 below Brent over the last decade. Even if greater pipeline capacity reduces this to $10 in the future, in line with levels seen during previous periods of unconstrained supply, new projects still remain uneconomic under the SDS. Indeed, even if Canadian heavy oil were to trade at parity with Brent, which is extremely unlikely due to its lower quality, there would still be no new oil sands production under the B2DS and just 120,000 bbl/d would enter the market in the SDS – a level which would be covered by existing rail capacity.

Investors in oil sands face depressed cash flows in a low carbon world of falling oil demand and weak pricing, but will be forced to produce or pay the price due to inflexible “take-or-pay” transport fees for excess new pipeline capacity.

While take-or-pay contracts spread the impacts, pipeline investors still face financial risks as upstream production weakens. Uncontracted capacity will probably remain unused by producers, and contracts may cannibalise tariffs from other pipelines. Even take-or-pay commitments are subject to counterparty risk in a falling oil market.

The Canadian government’s stakes in Keystone XL and Trans Mountain could well prove to be a drain on the public purse. Under the SDS, government tax revenues and the value of the assets are unlikely to reach the levels anticipated at the time of sanction.

Canada’s leadership position on climate change may be undermined by its support for projects reliant on the failure of the Paris Agreement.

Lastly, the Canadian authorities face the challenge of trying to reconcile their natural resources development plans with their positioning on climate. With Canada previously having shown leadership on climate change issues, the government’s support for pipeline projects reliant on the failure of the Paris Agreement risks damaging its global credibility.

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