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OPEC's War Against Shale Is Far From Over

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Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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Canada’s Pipeline Industry Takes Another Hit

pipeline

Another oil pipeline in Canada bites the dust. TransCanada announced last week that it would 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 billion Energy East pipeline would have carried 1.1 million barrels of oil per day 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 cancelled in the past year. “For Canada, I think 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.

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. Related: The New Challenger To Lithium Batteries

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.

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 not clear 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 whether or not to move forward with Keystone XL in a few months. Related: OPEC To Take Drastic Action Despite Shale Slowdown

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 United States. 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 mb/d of oil, but that the country is set to producing nearly 4 mb/d this year and 4.2 mb/d 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.

By Nick Cunningham for Oilprice.com

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  • Mike Kom on October 15 2017 said:
    What I find incredible is that the major opposition to the pipelines being built are due to, what I might take a liberty of using the word "environmental" issues....yet they seem to ignore that FORTY-SEVEN people burned to a crisp due to lack of pipelines.
    Those people paid the ultimate price in the same province that some of the noisiest critics come from.
    The hypocrisy is staggering.
  • Gerald Landry on October 15 2017 said:
    Mike, the MM&A Railway lobbied the Regulator to operate a Dangerous Goods Train with only one Engineer and No Brakeman the fellas that apply the mechanical brakes. Oil runs downhill just like runaway trains parked on a grade without enough hand brakes applied. You would think one of the fireman that put out the fire in the engine would have understood that the trains Air Brake System would bleed off once they shut the locomotive off. Surely someone must have had an Air Brake Ticket for trucking. Not going to wake up the Engineer sleeping at a Hotel was another fail.

    Now on conn/verted natural gas pipelines to push oil east. The Beardmore Explosion took 11 hours to Shut Off the Mainline Valves in 2011. The explosion on top of the hill overlooking the community was melting snow on rooftops. The river was frozen around the community which would have pooled the diluted bitumen turning that hamlet into a piece of charcoal 3 years before Lac Megantic.
  • Mike Kom on October 16 2017 said:
    So, then.....what you're saying is.....
    The railcar delivery system, by virtue of it's nature (travelling through populated areas), killed dozens. The pipeline system, by virtue of it's nature (shipment via remote areas), killed nobody.

    I'm glad you cited examples that reinforced my statement.

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