Canadian oil companies have struggled for years to build enough pipeline capacity to get their oil out of landlocked Alberta, and more than a handful of proposed projects have been stifled by intense opposition from people living in affected areas.
Still, the industry is applying a lot of pressure on the Canadian government to allow them to build an outlet out of Alberta. Bloomberg reports that Prime Minister Justin Trudeau is keen on approving at least one major pipeline in his first term. The leading candidate is the Trans Mountain Expansion, a project proposed by Kinder Morgan that would send Alberta oil to the Pacific Coast in British Columbia.
Prime Minister Trudeau is attempting a difficult balancing act, hoping to hold onto his image as a green-friendly leader, repairing Canada’s image as an oily pariah in international climate change circles. But he also wants to appease the oil industry, which has issued dire warnings about the future of Canada’s oil sector if no new pipelines are approved.
Trudeau hopes that a tougher regulatory process with greater environmental safeguards will thread this needle. There are at least four major projects that he is being forced to grapple with – Enbridge’s Northern Gateway, TransCanada’s Energy East, Kinder Morgan’s Trans Mountain Expansion, and Petronas’ natural gas pipeline that would feed an LNG export terminal in British Columbia. Related: Are Hedge Funds Positioning For An OPEC Disappointment?
All of the projects face some degree of opposition from environmentalists and First Nations, not to mention provincial governments and voters in both British Columbia and Quebec. Nevertheless, it could be Kinder Morgan’s Trans Mountain Expansion that gets one of the few, or only, approvals. Trudeau likely sees that pipeline easier to stomach because it is simply an expansion on an existing pipeline route, a twin conduit to be built next to one already running from Alberta to British Columbia.
Trudeau seems to lean against Northern Gateway – which will run through the Great Bear Rainforest and also anger BC voters – and also is skeptical of the Energy East – which is hugely unpopular in Quebec. But he is also under tremendous pressure from the industry. Trudeau will not be able to be everybody’s friend. He will upset many of his Liberal voters for approving any pipeline at all. But the approval of one line is unlikely to befriend him to Canada’s oil industry.
“We need pipelines, we need pipelines to the West Coast, and most advantageous for Canada of course are pipelines into the Asia-Pacific basin and Trans Mountain would certainly be helpful,” Jim Prentice, former Alberta Premier and advisor to Warburg Pincus, said at a Bloomberg conference in New York this week. But he acknowledged that investors are losing interest in Canada’s expensive oil, and the difficulty in exporting oil because of a dearth of pipeline capacity is only making things worse. “The concern that really should alarm us as Canadians is low-cost capital is exiting the Canadian basin,” Prentice said. Related: Iranian Expert Uses Climate Change To Pressure OPEC To Cut
Enbridge recently announced its decision to spend $28 billion to takeover Spectra Energy, which will make the combined company the owner of the world’s largest oil and gas pipeline network. The move was seen as a diversification away from Canada – with so many pipelines stalled in Canada, Enbridge is looking to the U.S. for a more accommodating market. “Infrastructure companies have to run to the U.S. to get growth,” Rafi Tahmazian, partner and senior portfolio manager at Calgary-based Canoe Financial, told Bloomberg. “We’ve stifled all of them from their ability to grow.”
Parts of the U.S. are also unfavorable right now. Enbridge was forced to delay its plans for the Sandpiper pipeline, which would carry Bakken crude from North Dakota, through Minnesota to Wisconsin. The $2.6 billion project was put on ice for the time being because Bakken production is falling and the pipeline is no longer needed. And the Dakota Access Pipeline has been temporarily stalled, echoing the huge blow that TransCanada received last year with the denial of its Keystone XL Pipeline.
While midstream companies are getting hit hard by opposition to their projects on all fronts, low oil prices are hurting upstream producers in Canada as well. According to the Canadian Association of Oilwell Drilling Contractors, 2016 is shaping up to be the worst year on record. “The oil and gas services industry is facing the most difficult economic time in a generation,” CAODC president Mark Scholz said in a release. “In fact, 2016 will be the worst year in our recorded drilling activity history.”
By Nick Cunningham of Oilprice.com
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