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Canada’s Pipeline Picture Gets Clearer

By Chad Fraser on December 16, 2016

When it comes to pipelines in Canada, the question has always been east to west, north to south … or not at all.

In 1956, for example, the Liberal government of Prime Minister Louis St. Laurent decided a natural gas pipeline running from Alberta to Ontario and Quebec, staying inside Canadian territory the whole way, was an important national priority.

To that end, it sponsored a bill to authorize TransCanada PipeLines—now TransCanada Corp. (TSX: TRP, NYSE: TRP)—to build the line. The St. Laurent government also proposed to grant a loan to the company, which was made up of Canadian and U.S. investors.

The Official Opposition pounced, stoking nationalist fears about excessive American influence on the project. But the Liberals used parliamentary procedure to ram the bill through. One year later, they were out of office. The 2,200-mile line was completed anyway, in October 1958.

Fast-forward six decades, and another Liberal government, this time under Prime Minister Justin Trudeau, has waded into the pipeline fracas, making controversial calls on the fate of three projects designed to carry Alberta oil sands crude to points west and south.

Its decision? As we wrote a couple weeks ago in Investing Daily’s Canadian Edge, Trudeau approved one east-to-west pipeline, canceled another and signed off on a third line headed to U.S. refineries.

So if you’re keeping track at home, that’s 1 for north-south; 1 for east-west; and 1 for not at all.

The Winners

When the dust settled, two pipeline heavyweights—Kinder Morgan (NYSE: KMI) and Enbridge (TSX: ENB, NYSE: ENB)—saw major projects get the feds’ blessing.

For Kinder, it was the C$6.8-billion Trans Mountain pipeline expansion, which will boost the capacity of a line that currently carries crude 715 miles from Edmonton, Alberta, to Burnaby, B.C., from 300,000 barrels per day (bpd) to 890,000.

The other winner, Enbridge, got the government’s go-ahead for its expansion of Line 3, which runs 1,000 miles from Hardisty, Alberta, to Superior, Wisconsin. Line 3 carries about 390,000 bpd, and Enbridge’s C$7.5-billion upgrade—the largest project in the company’s history—would hike that to 760,000.

But it wasn’t all good news for Enbridge. The company’s Northern Gateway line, which would have run from Edmonton to Kitimat, B.C., was canceled due to worries about oil-tanker traffic in the ecologically sensitive Douglas Channel.

Then there’s TransCanada, which had no dog in this particular hunt but could soon see its Keystone XL pipeline resurrected if President-elect Trump signs off on it—as he’s strongly hinted he will.

The downside for TRP? That, combined with Trudeau’s moves, could reduce the need for the company’s proposed 1.1-million bpd Energy East line, from Alberta to New Brunswick.

Extra Capacity Needed…

These moves come as Canada’s oil pipelines face a squeeze between rising oil sands production—despite the oil-price collapse and tighter emissions regulations—and a lack of capacity.

According to the International Energy Agency, oil sands output will rise by 800,000 bpd over the next five years, driven by expansions and new projects already in the works. Meantime, the country’s pipes moved 3.981 million bpd last year, according to the Canadian Association of Petroleum Producers, just shy of their 4.0-million bpd capacity.

With that in mind, new pipelines would be an obvious plus for oil sands producers, including Suncor Energy (TSX: SU, NYSE: SU), not only for the excess capacity but because shipping by pipeline is a relative bargain. Right now, it costs about US$7 to ship a barrel from Alberta to refineries on the U.S. Gulf Coast by pipeline, vs. US$16 to US$20 by rail.

Lower shipping costs would, in turn, help narrow the gap between Western Canadian Select (WCS), the price Canadian producers receive for oil sands crude, and benchmark West Texas Intermediate (WTI). Right now, that discount sits at around US$14.

…But Obstacles Remain

Just like back in 1956, these lines face stiff opposition, this time from environmentalists and First Nations communities along the route, with Trans Mountain being the most controversial of the two projects Trudeau approved.

Both lines must also meet a long list of conditions. The National Energy Board, for example, slapped 157 stipulations on Trans Mountain and 89 on Line 3.

So where does all this leave us? While we shouldn’t expect shovels in the ground anytime soon, the government’s move at least gives us a hint of what Canada’s future pipeline network could look like, and that’s something the debate has lacked for more than a decade.

And unlike St. Laurent, it doesn’t look like Trudeau’s pipeline approvals will cost him his job. At least not yet.


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