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Canada’s Pipeline Paralysis

For a country like Canada, which boasts the world’s third-largest oil reserve and its longest coastline, you might think getting crude to tidewater would be a fairly simple matter.

You’d be wrong.

That’s partly because of geography—97% of Canada’s oil is in the Alberta oil sands, which are landlocked some 700 miles from the nearest port—and partly because pipeline politics are never easy.

Nonetheless, as I wrote in a December article, it looked like progress was being made late last year, when the federal government signed off on two out of three major pipeline projects then on the table.

But the devil, as usual, is in the details.

Oil Sands Production Is Rising…

Before we get to the latest developments, let’s address a common misconception: that oil sands’ production is on the wane.

The truth is, forecasters are calling for precisely the opposite: The Canadian Energy Research Institute, for example, says output will rise 595,000 barrels per day (bpd) this year and another 203,000 in 2018. The Alberta government also sees output rising from just over 2.5 million bpd in the current fiscal year to 3.3 million in 2019–20.

Part of that jump will come from the majority-owned Suncor Energy (TSX: SU, NYSE: SU) Fort Hills project, slated to come on stream by the end of 2017. Fort Hills should hit its planned capacity of 194,000 bpd within 12 months.

Meantime, other oil sands producers have slashed costs. In a recent earnings call, Suncor CEO Steven Williams said the company could sustain both its dividend and its existing infrastructure even if oil were to get bogged down in the mid-$40s.

And looking forward, a January research report from CIBC sees new technologies continuing to drive costs lower.

“Our analysis suggests that in the next five years, greenfield oil sands development will be able to earn a 15% rate of return in a US$50-per-barrel-oil world,” reads a portion of the report quoted by the Canadian Press.

…But New Pipes Are Needed

That brings us back to pipeline constraints, which have bedeviled oil sands producers for time immemorial. A recent analysis by business-news site BNN.ca suggests Canada would be pumping at least an extra 500,000 bpd today if not for its history of pipeline bottlenecks.

Enter Prime Minister Justin Trudeau and the two approvals his government issued last December.

One of the green-lighted proposals was the expansion of Kinder Morgan’s (NYSE: KMI) Trans Mountain pipeline, which carries 300,000 bpd 715 miles from Edmonton, Alberta, to Burnaby, British Columbia. The company would spend C$7.4 billion to triple Trans Mountain’s capacity to 890,000 bpd, with construction slated to start in September.

The other approval was Enbridge’s (TSX: ENB, NYSE: ENB) expansion of Line 3, from Hardisty, Alberta, to Superior, Wisconsin. That line is due for a C$7.5-billion upgrade that will take its capacity from 390,000 bpd to 760,000 bpd.

These two projects had another thing going for them: They rely almost exclusively on existing routes. Seventy-three percent of Trans Mountain would involve twinning the current line, while Line 3 is a complete rebuild.

2 Pipeline Wins—With Caveats

But since then, two new snags have emerged.

In the case of Line 3, a group of Manitoba First Nations chiefs filed a legal challenge in January. However, Enbridge CEO Al Monaco recently sounded an optimistic note, predicting that the matter would be resolved by the time workers cross into Manitoba.

Trans Mountain, meanwhile, faces resistance from groups opposed to an increase in tanker traffic off the BC coast. And that opposition has taken a particularly interesting twist since the province—often referred to as the Wild West of Canadian politics—went to the polls on May 9.

The result: the pro-pipeline Liberal Party was reduced to a minority, with 43 of the legislature’s 87 seats. The anti-pipeline NDP took 41, while the anti-pipeline Green Party grabbed the other three.

That gave the Greens the balance of power—and the ability to play kingmaker—for the first time ever in Canada.

While a province can’t overturn the feds’ blessing, an empowered NDP would no doubt be more vocal in its opposition to the project and could cause legal headaches for Kinder.

Once-Dead Pipe Rises Again

Meantime, another player, TransCanada Corp. (TSX: TRP, NYSE: TRP), may be the one to watch here.

TRP’s proposed Keystone XL pipeline, which runs from Hardisty, Alberta, to Steele City, Nebraska, where it joins an existing system running to refineries on the Gulf Coast, has gone from dead pipeline walking under the Obama administration to approval under President Trump.

Keystone, of course, also faces resistance. But it’s important to keep in mind that no matter what happens, TransCanada is much more than just one pipe: The company owns one of North America’s largest natural gas pipeline networks, which extends nearly 57,000 miles. And its crude pipelines transport one-fifth of Canada’s oil exports to the US.

Finally, TRP has plenty of growth projects on the slate (C$22.5 billion worth, in all) that it plans to start up in the next few years.


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