On Saturday, China’s vice minister of industry and information technology announced that his country would set a deadline for automakers to end sales of fossil-fuel-powered vehicles. The precise timing is to be determined but to use that most Canadian of metaphors: we know where the puck is going. 

This is bad news for Kinder Morgan, which has pitched its Kinder Morgan Trans Mountain Expansion pipeline as a way to reach the rapidly growing Chinese market and has publicly admitted that without a growing demand for oil, its pipeline could be a money-loser.

That admission came in response to Greenpeace Canada’s challenge to Kinder Morgan’s draft prospectus (the legal document underlying the $1.75 billion share offering in Kinder Morgan Canada that would finance its proposed new tar sands pipeline). We challenged it on the grounds that it contained inadequate disclosure of climate change-related risks and over-estimated the growth in global oil demand, and in particular Chinese oil demand.

To make the case for rising demand in India and China, the prospectus cited the Canadian Association of Petroleum Producers’ (“CAPP”) 2016 Crude Oil Forecast, Markets and Transportation, which in turn cites the International Energy Agency’s (IEA) New Policies Scenario.

Canadian Association of Petroleum Producers Forecast for Total Oil Demand in Major Asian Countries

Millions b/d

2014

2020

2030

2040

China

10.5

12.5

14.7

15.3

India

3.8

4.8

7.0

9.8

Japan

4.1

3.4

2.8

2.3

World

90.6

95.9

99.9

103.5

Source: Table 3.6 in Canadian Association of Petroleum Producers, 2016 Crude Oil Forecast, Markets and Transportation. This table cites IEA World Energy Outlook 2015, New Policies Scenario.

Yet the figures provided in the CAPP report differ markedly from those issued by the China National Petroleum Corporation Economics & Technology Research Institute (“CNPC”), which is the in-house research arm of the state-owned oil company responsible for informing long-term strategy development. The CNPC’s 2016 report entitled 2050 World and China Energy Outlook is considered to be the most up-to-date and authoritative source on oil demand projections produced in China.

The CNPC’s ‘current policies’ scenario has a much lower forecast for increased oil demand than in the CAPP / IEA forecast (see graph below). Even so, the current policies scenario assumed that ownership of electric vehicles would account for a modest 1.3% of total vehicle ownership in China in 2030, rising to 4.5% in 2040 and 11% in 2050.

 

Saturday’s announcement indicates that the Chinese government is considering forcing significantly higher rates of electric vehicle adoption. This would not only lower future Chinese oil demand (more in line with the CNPC 2 degree scenario in the graph above), but likely tilt the global market place in favour of electric vehicles (it is worth noting that India is also contemplating an all-electric policy by 2030).

Following Greenpeace’s challenge, Kinder Morgan modified their prospectus to acknowledge the possibility of lower oil demand, adding:

“In recent years, a number of initiatives and regulatory changes relating to reducing GHG emissions have been undertaken by federal, provincial, state and municipal governments and oil and gas industry participants (including, for example, the decarbonization targets set forth in the Paris Agreement). In addition, emerging technologies and public opinion has resulted in an increased demand for energy provided from renewable energy sources rather than fossil fuels. These factors could not only result in increased costs for producers of hydrocarbons but also an overall decrease in the global demand for hydrocarbons. Each of the foregoing could negatively impact the Business directly as well as the customers of the Business that are shipping through its pipelines or using its terminals, which in turn could negatively impact the prospects of new contracts for transportation or terminalling, renewals of existing contracts or the ability of the Business’ customers and shippers to honour their contractual commitments.”

With market momentum firmly behind a rapid transition to an electrified transportation system powered by renewable energy, investors should be asking why Kinder Morgan is still pursuing the Trans Mountain expansion pipeline.