Canadian Pipeline Companies: The Unlikely Cultural Ambassadors

With the US shale boom crowding out Canadian crude from pipelines, Canadian energy shippers have resorted to alternative methods to get their crude to market, including rail. But the US isn’t the only market for Canada’s vast energy reserves, even though hope remains that the Obama administration will eventually approve the Keystone XL pipeline.

Indeed, Canadian energy producers are looking toward Asia as a prime destination for their commodities. And Enbridge Inc’s (TSX: ENB, NYSE: ENB) proposed 731-mile Northern Gateway pipeline will be one of the main avenues for moving inland crude to coastal export facilities.

The CAD6 billion pipeline is expected to transport an average of 520,000 barrels of crude oil per day from the oil sands in central Alberta to the west coast in British Columbia. That amount would account for one-third of oil sands production, based on 2011 numbers.

However, construction has yet to begin on the pipeline, and it isn’t expected to commence operation until late 2017, at which point oil sands output is forecast to be markedly higher. Including Northern Gateway, Enbridge has a portfolio of about CAD30 billion of pipeline projects in various stages.

But building pipeline infrastructure is an expensive and time-consuming process that has now been further complicated by the array of forces opposing it. At least that was the story that emerged from a panel discussion at the Bloomberg Canada Economic Summit in Toronto earlier today.

Toronto Dominion Bank Deputy Chairman Frank McKenna inveighed against the lack of Canadian pipeline infrastructure with dramatic comments such as the following:

“The value destruction in Canada is staggering. The amount of money that we are vaporizing every day in this country is staggering.”

McKenna estimated that Canada could lose as much as CAD1 trillion in gross domestic product over the next 20 years because of the pricing differential between Canadian crude and benchmarks such as US West Texas Intermediate (WTI) and Brent Crude. In particular, the heavier crude produced from Canada’s oil sands trades at a significant discount to these two benchmarks. Though that gap narrowed in recent months, Western Canada Select still trades at a 21.5 percent discount to WTI and a 27.6 percent discount to Brent.

While the focus has been on Canada’s west coast, owing to its relative proximity to Asia, McKenna noted that the lack of takeaway capacity linking oil producers with refineries in Eastern Canada means the latter have been paying for crude on the global market.

Both McKenna and Enbridge CEO Al Monaco acknowledged that pipeline projects face an uphill battle in the public relations arena, as environmental activists shrewdly employ social media to leverage their influence. McKenna colorfully described the “proxy war” that pipeline projects must endure as a focus of activists who see pipelines as an easier target than the refiners and producers who depend upon them:

“Fighting pipelines is a proxy for fighting the oil sands, it’s a proxy for fighting elections … and it could be a proxy for First Nations’ claims, and possibly even nationalism in Quebec.”

By contrast, Monaco was much more reserved in his remarks. “It’s not so much about getting regulatory authority,” he observed, “It’s all about ensuring that the public is comfortable. That’s the price of entry and that’s where we have to focus our energy more.” Indeed, even the most cursory glance at the Northern Gateway website shows a clear emphasis on the benefits the project should afford various constituencies.

Additionally, both Enbridge and TransCanada Corp (TSX: TRP, NYSE: TRP), the country’s other pipeline behemoth, have devoted considerable energy to ramping up hiring for staff who specialize in communications, lobbying and community relations.

But that doesn’t mean there won’t be more stumbles along the way. Recently, for instance, the arrival of Enbridge spill response surveyors in Gitga’at First Nation territory during an annual food harvesting camp upset the nation’s council and resulted in the company being asked to leave. However, that’s consistent with the nation’s longstanding opposition to the pipeline.

In fact, the First Nations in general are staunchly opposed to the pipeline, which means the battle to build new pipelines could eventually shift from the public relations front to the courts. Even so, Monaco has personally met with a half-dozen leaders among the different First Nations in order to improve relations and possibly broker deals.

Similarly, TransCanada has also been meeting with aboriginal communities in preparation for an application to build a gas pipeline to Canada’s West Coast. The company hopes that this inclusive approach at the outset will forestall opposition at a later, more critical juncture.

Although pipeline companies aren’t especially well suited to cultural sensitivity, they’re doing what it takes to get the job done in a constructive manner. Nevertheless, that likely also means additional delays for projects whose scale is already daunting.