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A map of the Kinder Morgan Trans Mountain pipeline is seen in the foreground as the National Energy Board releases their report on the Trans Mountain pipeline expansion project are seen in Calgary, Thursday, May 19, 2016.

Jeff McIntosh/THE CANADIAN PRESS

Canadian crude producers face increasingly tough competition in the long-sought-after Asia-Pacific market, Environment Canada warned, even as the National Energy Board recommended that Ottawa approve Kinder Morgan Inc.'s TransMountain expansion.

The warning from officials at Environment and Climate Change Canada contrasts with the more optimistic market outlook that buttressed the NEB's conclusion that the benefits of Kinder Morgan's proposed expansion outweighed the burdens, and that therefore the $5.4-billion (U.S.) project is in the national interest.

"While the Pacific market offers opportunities for Canadian crude oil, there are potential competitive challenges," the Environment Canada report said. It noted that producers from the Organization of Petroleum Exporting Countries (OPEC) and Russia are competing aggressively to supply Chinese demand, while some analysts forecast the Pacific market has excess refining capacity, which could lead to lower demand over the medium term.

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In an effort to strengthen the much-criticized regulatory approval process for pipelines, the Liberal government added an Environment Canada review to determine to what degree the added pipeline capacity would generate more greenhouse gas emissions from expanding oil sands production in Alberta.

The Liberals have not laid out a strict "climate test" that would result in the rejection of any project that added substantially to Canada's greenhouse gas emissions. That was the litmus test cited by U.S. President Barack Obama in rejecting TransCanada's Keystone XL pipeline last November.

Instead, the GHG assessment will be one factor that cabinet will consider in deciding whether to approve the Kinder Morgan project, along with the NEB's recommendation and the results of additional consultations being undertaken by a newly appointed panel with aboriginal and other communities, Caitlin Workman, a spokeswoman for Environment Minister Catherine McKenna, said Friday.

Alberta Premier Rachel Notley and industry executives have insisted that access to Pacific markets would add tremendous economic value to the province, and the National Energy Board agreed. It noted TransMountain's evidence that the project would provide total producer benefits of $73.5-billion (Canadian) over a 20-year span.

The Environment Canada report raises some questions about that rosy outlook.

Kinder Morgan's consultants identified California, China, South Korea and Japan as the most likely markets for crude shipped via TransMountain. While China is adding refining capacity, 30 per cent is tied up in joint ventures with Saudi Arabia and Russia, while Iraq and West African producers are competing aggressively there. Venezuela is borrowing heavily from Beijing with plans to repay those loans with oil – assuming the crisis-ridden state-owned oil company can continue to produce sufficient volumes.

South Korea and Japan process primarily light crude, and, while California refines heavy crude, the state produces plenty of its own oil and is instituting climate policies that could discourage importation of oil sands crude.

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However, oil sands producers are taking a long-term view and still see Asia-Pacific as a premium market, said Alex Ferguson, vice-president at the Canadian Association of Petroleum Producers.

In assessing the emissions impact of the Kinder Morgan project, Environment Canada officials considered private sector reports on global oil demand, as well as Canadian supply and transportation options.

They concluded that the production of crude needed to fill the expanded capacity of TransMountain would emit as much as 17 million tonnes of carbon dioxide annually, nearly a tenth of the industry's current total.

However, the added pipeline capacity can be served by production currently being brought on stream plus some diversion from rail – meaning there would be no real increase in emissions from oil extraction as a result of the expansion, Environment Canada said. But if TransMountain was constructed along with other pipeline projects such as Energy East and Northern Gateway, that would spur further oil sands production and higher emissions, the report said.

Critics say the Liberals need to look at the pipeline proposals in total. And they insist the plans for expanded market access are inconsistent with Prime Minister Justin Trudeau's commitment in Paris to ensure Canada plays its role in keeping global temperatures from rising more than two degrees above preindustrial temperatures.

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