February 2018, Vol. 245, No. 2


Pipeline Politics Destroyed Canada’s Reputation for Investors

By David Yager, Energy Policy Analyst

It took a decade. It happened so gradually few noticed. Those who did were regarded as alarmist. Those opposed who participated, knowingly or otherwise, in an organized, well-financed, multi-year plan to destroy the future of the oil sands were pleased.

No country in the world has written more about pipelines that were never built. Northern Gateway. Keystone XL. Energy East. Federally approved Kinder Morgan Trans Mountain is bogged down in endless controversy, posturing and obstruction. Although construction in Canada is underway, Enbridge’s Line 3 replacement is stuck in the approval glue in Minnesota. KXL may proceed but only because of President Donald Trump. A decision from Nebraska as to whether the pipe can pass through that state was just recently approved.

When TransCanada Corporation voluntarily withdrew its application to build Energy East, a new level of introspection emerged about why Canada can’t get anything built. Energy East used existing pipe, was entirely in Canada, would displace imports, didn’t go anywhere near the west coast, and was sought by New Brunswick. If anything made sense surely it was Energy East.

Its death was rehashed at an event recently featuring former TransCanada VP Dennis McConaghy, U of A academic and architect of Alberta’s carbon policy Andrew Leach, and Canada West Foundation head and former Liberal Cabinet Minister Martha Finley Hall.

TransCanada blamed unacceptable delays in the regulatory process because the federal government and the NEB kept changing the rules. When TransCanada was told its application must consider emissions from the post-delivery use of the contents – unheard of in known pipeline regulatory processes – it gave up.

The debate began. A Calgary Herald report stated, “Leach … was among the loudest voices crying foul over TransCanada’s implication” that the process was hopeless. The Herald wrote, “Leach contended that Energy East’s fate was clear once Trump was elected, production predictions have been slashed and once Keystone XL was back on the table, the less-efficient Energy East was doomed.”

McConaghy, who worked developing TransCanada’s pipeline projects before retiring in 2014, disagreed completely noting it was termination, not delay. He said, “…but when it (the company) went on to terminate it, and that was fundamentally driven by a conviction they would never get a permit.”

Finley summed it up best when she said, “There is total uncertainty in this country about whether we can get anything built.” The news story wrote of Finley’s subsequent remarks that among resource companies Canada was beginning to acquire the reputation for political uncertainly of a banana republic.

The assertion that the pipe wasn’t needed because there wasn’t enough oil is the exact opposite of what has happened. If in fact there is not enough oil (even this is questionable) it is because there’s not enough pipe. The greens won and industry and the country lost. Here’s how.

Canada never possessed the most prolific reserves and has always been a high cost place to operate. The trade-off has been political certainty and the rule of law. Virtually every major private-sector oil and gas company in the world has invested here because Canada was regarded as a safe and predictable to operate. At least that used to be the story. No longer. Canada’s pipeline paralysis has created a mass exodus of foreign capital and investor interest.

The number one barometer of investor trust and confidence in Canada is Crown land sales. An oil company or investor bids on the right to develop oil and gas and the highest price gets a development license. They do this with science, research, data, cash, trust and hope. They hope they’ve got it right – that there’s something commercially viable down there – and they trust the governments and regulators to give them then chance to make some money.

The chart shows Alberta Crown mineral petroleum and natural gas leasing revenue for the past 20 years. Across the bottom is the average price of WTI in U.S. dollars for the year. Because of strong natural gas prices, even when oil prices were low conventional leasing activity was steady. The biggest spike took place from 2010 to 2013 as producers staked their claims in the light tight oil boom in reservoirs like the Montney, Duvernay, Cardium and Viking.

The chart also shows what would prove to be a one-time spike in oil sands leasing from 2005 to 2007 when the world woke up to the potential of Alberta’s massive bitumen reservoirs. From 1991 to 2017 the Crown collected $4.2 billion selling oil sands development leases. Of the total, $3.1 billion or 73% appeared between April 1, 2005 and March 31, 2008. Of the 7.7 million hectares of oil sands leases sold between 1991 and 2017, 3.3 million or 42% was staked in this short three-year period.

What happened? A refresher came from David Collyer who was CEO of the Canadian Association of Petroleum Producers (CAPP) during this period. He explained it was a culmination of factors including higher oil prices for the first time in over a decade, the mantra of “peak oil,” and the success of steam-assisted gravity drainage (SAGD) to recover bitumen from reservoirs too deep to mine. Collyer noted there were very few places in the world were privately-held (non-government) oil companies could secure development rights to large reserves. So companies from all over decided to stake out a chunk of the oil sands as an element of their portfolio.

Collyer also said the serial entrepreneurs who dominate Calgary’s independent producing sector were willing to stake out a lease, do a little work and flip it to a larger company later. Many fortunes were made this way.

This was assisted by the continued success of Great Canadian Oil Sands (Suncor) and Syncrude. GCOS had been producing since 1967 and Syncrude came on stream in 1978. Imperial Oil had been expanding subsurface thermal bitumen recovery at Cold Lake since 1975. It worked. With time and practice the technical risk was falling. Because of higher oil prices, these operations were now very profitable.

The problem with Alberta is market access. For natural gas and conventional crude oil, serving North American markets had been good business for a century. But the oil sands were so massive they clearly had export potential outside of North America. Asia was very interested. So for the companies that plunked their money down last decade, pipe was going to be essential to unlock the full commercial potential. No corporation could justify investing that much capital in an expensive, land-locked resource without reliable and low-cost access to market. And it never occurred to anyone that pipelines would become the environmental battleground.

As the world flocked to the oil sands, pipelines were not an issue. Nor had they ever been an issue. The chart above shows the list of major exports pipelines proposed this century. Enbridge was talking with Asian partners about an oil pipeline to the Pacific as early as 2002. TransCanada Keystone and Enbridge Alberta Clipper were well underway as producers filled Alberta’s treasury with oil sands lease bonuses.

Confident that pipelines were the least of their worries, developers got on with the great Alberta oil sands boom. Construction began and production increases following. CAPP reports that in 2004 oil sands CAPEX was only $4.2 billion. The oil sands investment rocket lifted off in 2005 when $10.4 billion was spent. That figure peaked at $33.8 billion in 2014.

From when the leasing boom began in 2005 to when investment began to decline significantly in 2015, a staggering $226.8 billion in capital was invested in oil sands to develop the leases purchased when the world trusted Canada and Alberta as safe, secure and predictable places to invest. Implicit in this investment was belief that pipeline access to market would not be a problem. An attraction of the oil sands is long reserve life and low decline rates. For 40-year projects, pipe was critical.

Production followed. Total oil sands output in 2000 was 610,000 bpd. By 2016 this had quadrupled to 2.4 million bpd. When production began exceeding pipeline takeaway capacity as early as 2012, producers began examining shipping crude by rail using tank cars. Although this was much more expensive than pipe – and as high- profile disasters like Lac Megantic would prove incredibly more risky – oil prices were high enough to justify significant investment in crude-by-rail capacity. And it was only temporary. Surely pipe was coming.

About 2008 the “tar sands” came on the radar screen of the U.S. environmental movement. Dead ducks. Filthy tailings ponds. Massive strip mines. The message was the expansion of the oil sands would result in the end of life on earth as we know it. The green movement in the U.S. needed a new crusade and the oil sands were a handy target. And, of course, it was all in another country. Canada. Where’s that? In the New York Times in 2012 James Hanson, somebody important with NASA, wrote about growing oil sands development as, “Game Over For The Climate.”

Much has been written about how well-funded organizations effectively lobbied and financed everybody with doubts about oil. This included the Obama White House, Nebraska, aboriginal groups, environmental groups, and, using social media, the young and economically ignorant. Most claims were outrageous, but the effect was clear. The easiest way to save the world and sleep at night was to oppose pipelines and in doing so arrest the development of the oil sands. The movement was so noisy more politicians believed they must react or risk losing the next election. After all, what could be more important?

It worked. Long before oil prices collapsed and Alberta’s NDP government brought in carbon taxes and emission caps, oil sands developers began voting with the feet and wallets. Total and Statoil cancelled projects in 2014 citing project economics including pipeline access. A year later Shell halted construction partway through the development of Carmon Creek. A news report stated the termination was in part due to, “…a shortage of pipeline capacity constraining growth in Canada’s oil sands industry.”

Then came the selloff. Suncor bought Murphy Oil’s interest in Syncrude for nearly a billion dollars in April of 2016. In late 2016 Statoil sold the last of its oil sands assets and effectively withdrew from Canada. In the last year the companies that have exited the oil sands in whole or in part include Chevron, Shell, Conoco-Phillips, Koch and Marathon.

CAPP remains optimistic about future oil sands production growth, but this enthusiasm is qualified. CAPP says capacity could be as high as 5.4 MMbpd by 2030 but current pipeline capacity is only 4 MMbpd. You can do the math. But to show how pipe has helped change the investment landscape, CAPP’s 2030 output estimate was 6.8 MMbpd. A year later it was down to 6.5. While rising costs and low oil prices has affected investment all over the world, pipe has been a huge factor in Canada and Canada alone.

Looking back to the high expectations of the leasing boom of a decade ago, how the mighty have fallen. There are lots of reasons why oil investment decisions don’t work out as planned. Commodity prices. High costs. Cash flow constraints forcing focus and tough decisions. New opportunities in other markets.

But going back to land sales as the number one barometer of international investor interest and confidence, the numbers speak for themselves. Alberta has fallen off the map. This is not the case in the Permian Basin or other places, particularly in the U.S. Successful pipeline opposition has clearly capped the oil sands.

The International Energy Agency (IEA) agrees. In its mid-month November report the IEA wrote the U.S. was on its way to become a net oil exporter and the largest energy producer in the world. Meanwhile, a Financial Report story titled “Canada to be stuck on sidelines in ‘extraordinary times’ for global energy” read, “Canada will likely remain a minor actor, its global plan dashed partly through self-restraint and rules, and also by its next-door neighbor who is upending global markets and disrupting Canada’s plans to export oil and gas in the process.”

When commentators like Andrew Leach claim the termination of Energy East doesn’t matter because there’s not enough oil to fill it (assuming one or more the other gets built), to not connect current and future oil sands production with previous pipeline cancellations – combined with endless delays and changes in Canada’s investment, regulatory and decision-making processes – is utterly disingenuous. P&GJ

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