December 2017, Vol. 244, No. 12


Canada’s Pipeline Industry Takes Another Hit

Pipeline & Gas Journal News Services

Another oil pipeline in Canada bites the dust with TransCanada’s decision to scrap its plans to build a 2,800-mile major pipeline that would traverse nearly the entire country, closing off a crucial potential export route for Canada’s oil sands.

The $15.7 billion Energy East pipeline would have transported 1.1 MMbpd of oil from Alberta to Canada’s eastern coast for refining and export. It faced significant opposition from communities affected along the pipeline’s route, but TransCanada had been confident that it could overcome those hurdles.

More recently, however, top Canadian regulators decided that the pipeline would need to face an assessment of the project’s impact on greenhouse gas emissions, a review that TransCanada fiercely opposed. Ultimately, it appears that the Canadian pipeline company shelved the project in light of the heightened environmental scrutiny.

Canada’s pipeline industry cried foul, blaming the government for regulatory uncertainty. “The common thread here is that Canada generally has displayed an unwelcoming policy environment and an uncertain approval process,” Explorers and Producers Association of Canada President Gary Leach, told the Financial Post, citing other billion-dollar projects that have been canceled in the past year. “For Canada, this is a blow. We are deluding ourselves if we think Canada is a place with a stable, predictable investment climate.”

The lack of pipeline capacity is why so much onus has been put on Keystone XL, a pipeline that has been in limbo for the better part of a decade.

Lack of Capacity

But the problem for TransCanada is that Energy East was always going to be a heavier lift than other projects. While some blame regulators for the death of Energy East, others see changing market conditions behind TransCanada’s decision to pull the plug. The project ran into trouble when oil prices cratered in 2014. Also, even with Keystone XL blocked, there are other projects that are more attractive than Energy East.

Last year, Enbridge’s Northern Gateway pipeline to the Pacific Ocean was killed by the Canadian government, but Kinder Morgan’s Trans Mountain expansion project was approved, largely because it was seen as the least controversial out of all of the proposed projects since it would consist of a twin pipeline built parallel to an existing line. The project will nearly triple the system’s capacity to 890,000 bpd.

Meanwhile, even as Keystone XL has attracted a ton of attention, Enbridge’s Line 3 expansion to the U.S. has quietly moved forward. The billion-dollar restoration of the system will bring capacity back up to 760,000 bpd, effectivity adding new takeaway capacity to the U.S. Both the Trans Mountain expansion and the Line 3 replacement have been approved by the Canadian federal government.

A research note from AltaCorp Capital does conclude that the Alberta oil industry faces a shortage of pipeline capacity, but that the issue could be resolved when Line 3 and the Trans Mountain expansion come online in 2019. However, those two projects are not out of the woods yet either. New legal challenges could delay Trans Mountain, including some from First Nations who argue they were not consulted on the project. An unfavorable ruling could derail – or at least delay – the project.

Hurdles Ahead

Keystone XL still faces a lot of headwinds as well, despite the support from the Trump administration. The pipeline expansion is still awaiting some legal decisions in the state of Nevada, but even if the courts give the project a greenlight, it’s unclear that TransCanada still thinks the project is worth it. The company has struggled to ink contracts for the project’s capacity – the U.S. has seen a surge in oil production and a corresponding build out of its pipeline infrastructure over the decade since Keystone XL was originally proposed, making the business case for Keystone XL much shakier. TransCanada is expected to decide on moving forward with Keystone XL by the end of the year.

With Energy East effectively dead, and Keystone XL and Trans Mountain facing huge challenges, Alberta’s oil industry is still struggling with a perennial problem of not being able to export enough oil. Enbridge’s Line 3 would help, if it’s completed, but it still leaves Canada at the mercy of its southern neighbor. Without access to tidewater, just about every barrel of oil produced must be sent via pipeline, rail, or truck to the U.S. The overwhelming dependence on the U.S. market has hamstrung development and has raised concern for oil producers.

“We don’t have diversity of markets,” Jackie Forrest, director of research for Calgary-based ARC Energy Research Institute, told the Wall Street Journal. The industry agrees. “We’re beholden to the U.S.,” said Tim McMillan, president of the Canadian Association of Petroleum Producers (CAPP), according to the WSJ.

Also, Line 3 is insufficient for what the industry needs. CAPP says that Canada’s pipeline network can carry 3.3 MMbpd of oil, but that the country is set to producing nearly 4 MMbpd this year and 4.2 MMbpd in 2018. The dearth of pipeline capacity leads to higher costs and heavier discounts for Canadian oil, making it much less competitive.

A lot more oil will have to travel by rail if the remaining pipeline projects stall. Without both Keystone XL and Trans Mountain, “you are looking at an industrywide problem in a very short amount of time,” Carl Evans, an oil analyst at Genscape Inc., told Bloomberg.

Last Greenfield Project

In its report, consulting firm ESAI Energy said that with oil prices recovering, but still below $60 for WTI, producers in the Canadian oil sands are being selective in their allocation of capital to growth projects. The 190,000 bpd Fort Hills mine, due by the end of the year, might be the last greenfield mining project in the oil sands for a number of years.

Operators are experimenting with solvents and new processes that have the potential to reduce both costs and emissions, but new greenfield projects are unlikely to go forward until after 2020. ESAI Energy expects incremental growth will continue from expansions to existing SAGD projects that require less initial outlay of capital and that can come online in less time.

Pipeline capacity to accommodate production growth is also proving to be elusive as lengthy regulatory reviews and court challenges delay projects. Current takeaway capacity for surplus Canadian crude remains constrained until the Line 67 expansion comes online in late 2018, and provides some temporary relief. ESAI Energy’s Elisabeth Murphy explained, however, that “even with decelerating growth in 2019, additional capacity beyond the Line 67 expansion will be needed to accommodate production growth after 2019.”

Canadian Struggles

Natural gas prices have slumped for several years in Western Canada but hit a new low this past summer, according to a CBC News report. On a few occasions, prices fell to zero – and then turned negative. Essentially, companies would have had to pay money to get rid of the gas they produced. Commodities analyst Martin King said he did a double-take when he first saw the minus sign in front of the gas price. He even picked up the phone and made calls to ensure it wasn’t a mistake.

“It cost more to get it out of the ground then to buy it on the spot market,” said King, with GMP FirstEnergy, following a talk to the oil and gas industry in Calgary on Sept. 25. He has followed prices for nearly 25 years. “It’s a very, very unusual situation. I’ve never seen anything like it.” The steepest temporary price crashes were due to pipeline maintenance, which cut off some storage options and caused supply to back up. But, overall, prices have been falling due to oversupply. Western Canada gas at the Alberta hub sold for about $3 per MMBtu in May but had dropped to less than $1 by late October.

For an industry already struggling, this summer was exceptionally tough and the winter may be just as bad. Producers are hoping for a cold winter in North America to create more demand. “(But) you can’t rely on weather, which is inherently unpredictable,” said King. “At the end of the day, Canada just needs more options for gas.”

Those options have shriveled recently as companies halted proposals to build major liquefied natural gas export facilities on the West Coast. While some LNG projects are still in the planning phase, there are few other options for Western Canada’s prolific gas reserves. 

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