Canada’s oil industry is facing a dilemma – three major proposed pipelines but perhaps only room enough for two of them.
For years, the oil industry in Canada has been fighting for expanded pipeline capacity. Landlocked Alberta has had trouble getting its oil to market. Every direction except north has been seriously considered, with TransCanada, Enbridge and Kinder Morgan jockeying to advance their competing projects to service Alberta. All of these projects have been bogged down by a combination of the federal approval process, environmental protest and opposition from First Nations.
The Keystone XL pipeline saga is nearly a decade old and there is still no steel in the ground. Over the years, Canadian heavy oil has been forced to sell at a discount because of the shortage of pipeline space. In fact, the lack of pipeline capacity has been singled out as one of the top threats to expanded oil sands production. That is exactly why environmental groups targeted Keystone XL years ago, and it is exactly why the oil industry says building pipelines is its top priority.
“Canada’s energy future relies on our ability to get Canadian oil and gas to the people who need it,” Tim McMillan, president and CEO of the Canadian Association of Petroleum Producers (CAPP) said last year. “Connecting Canadian supply to new and growing markets abroad, safely and competitively, is a top priority.” Canadian pipelines can carry 4 MMbpd, which is just a bit above the actual oil flows in 2015 at 3.981 MMbpd, according to CAPP. Without more pipelines, oil sands companies cannot expand their operations. The industry is targeting an additional 850,000 bpd over the next five years.
In late 2015, the issue looked like it was going nowhere. The Obama administration had just killed off the Keystone XL project, rejecting it on climate grounds. Alternative routes also struggled for acceptance. Moreover, falling oil prices forced oil companies to cancel or delay several dozen oil sands projects.
But a little more than a year later and Alberta finds itself in a different situation: three viable pipelines from three different companies, all of which are determined to move forward in a market that might only need two of them.
In the fourth quarter of last year, the Canadian government gave federal approval to two major pipeline expansions: the Trans Mountain Expansion and the Line 3 replacement. Kinder Morgan’s Trans Mountain Expansion project will see the construction of a twin line that will run parallel to an existing pipeline from Alberta to the Pacific Coast. The expansion will nearly triple its capacity from 300,000 to 890,000 bpd. Enbridge also received approval for the replacement and overhaul of its Line 3 pipeline from Alberta to Wisconsin in the United States. The replacement of the pipeline will nearly double its carrying capacity to 760,000 bpd.
Then there is the Keystone XL Pipeline, which, like a zombie, refuses to die. The election of President Donald Trump brought the project, left for dead by President Obama, back to life. TransCanada hopes to move forward on the project.
But according to Enbridge, there may not be a market for all three pipelines. “If you look at the supply profile and you look at our expansion replacement capacity for Line 3 and one other pipeline, that should suffice based on the current supply outlook, out to at least mid-next decade,” Enbridge’s CEO Al Monaco said on a fourth quarter earnings call. Naturally, Monaco wants his company’s Line 3 to be one of the two pipelines to move forward.
The obvious odd man out would be Keystone XL despite the support from the Trump administration. CAPP expects additional Canadian oil output on the order of 850,000 bpd 2021; the IEA largely agrees, projecting a 900,000 bpd increase by 2022. That lines up nicely with the capacity additions from the Trans Mountain expansion (590,000 bpd) and the Line 3 expansion (roughly 370,000), which would add just under 1 1 MMbpd in new pipeline capacity. Keystone XL, a nearly 1,200-mile pipeline, would add 830,000 bpd in new capacity.
More importantly, the Trans Mountain and Line 3 expansions would be adding new pipes on existing routes, not bulldozing new territory. They would not have the massive seizure of public and private land problems that Keystone XL still has to go through. The two expansions would literally just be installing new pipeline where existing and older pipeline is currently located. Similarly, those projects face fewer legal hurdles than Keystone XL, which still has to overcome local lawsuits.
Thus, the comments from Enbridge’s CEO, warning that not all three pipelines will get built, is worth noting. Wood Mackenzie agrees. “We definitely need two of these pipelines by around 2025 and after that it depends on the supply outlook,” Wood Mackenzie analyst Mark Oberstoetter said, according to Reuters. “There’s not an evident need to get three or four pipelines built.”
So, Keystone XL might be back from the dead, but it is unclear for how long.