China weakness, geopolitical risk & the U.S. Government shutdown are all weighing on U.S. econom...
Canadian Oil: The Biggest Hobo
11/15/2012 12:14 pm EST
Canada is looking for the best way to the Pacific for its oil, which is especially critical if the US decides against the North-South pipeline, observes Gordon Pape of The Canada Report.
If the Las Vegas bookies offered betting lines on such things, the odds against Enbridge's (ENB) controversial Northern Gateway pipeline ever being built would probably be at least 5:1.
The twin buried pipelines, which would run from near Edmonton to Kitimat, BC where a shipping terminal would be built, has a proposed length of 1,177 km and would carry an average of 525,000 barrels of petroleum products per day. The projected cost is C$5.5 billion, and start-up would be in the second half of 2017.
Ottawa desperately wants it as part of Stephen Harper's new national energy vision, and has done everything it can to speed up the review process. The government of Alberta wants it—there is growing concern in the province that the booming shale oil industry in the US will reduce that country's demand for Canadian crude, leaving the West grasping for alternative markets. Opening up Asia by greatly increasing pipeline capacity to the West Coast would help compensate for the loss of any US business.
It would also enable Alberta producers to charge something closer to world prices for their oil. Right now, they are forced to sell at deep discounts to the prices charged for Brent North Sea crude (the international standard) and even West Texas Intermediate Crude (the North American standard).
However, the combined weight of the federal and Alberta governments probably won't be enough to push through Northern Gateway. They are facing a formidable opposition coalition composed of environmental groups, First Nations (which control part of the land along which the pipeline would be built), and perhaps most important, an NDP government-in-waiting in British Columbia that is adamantly opposed to the venture.
Kinder Morgan's (KMP) $1.4 billion proposal to twin its Trans Mountain pipeline appears to have a better chance of success, if only because the existing line, which runs 1,150 kilometres (715 miles) from Edmonton to Vancouver and Washington's Puget Sound, has been in place since 1953.
It has not been problem free—in the 51 years since Kinder Morgan began reporting significant incidents to the National Energy Board (NEB), there have been 78 spills, most of them (70%) affecting only company property. During the past 30 years, only two spills exceeded 1.5 million cubic feet of oil along the pipeline right-of-way, and all were quickly contained.
Despite this record, lobby groups have been trying to get the NEB to consider environmental issues during its upcoming hearings into commercial terms for the proposed twin pipeline. However, they have been shot down, with the NEB saying that such concerns are not relevant to issues such as pipeline tolls. That doesn't mean the topic won't resurface in the future—it almost certainly will—but for now it is off the table.
If the Kinder Morgan plan is approved—and right now the bookies would probably quote odds at least 2:1 in favor—the twinning would increase capacity from 300,000 barrels a day to 750,000. That would certainly provide some relief to Alberta producers, but even if the project is fast-tracked, the earliest the new line would begin operation is 2017—five years from now, and the same target as Northern Gateway.
But even if one or both projects get a go-ahead, what happens in the interim? The pricing situation is so acute that Bank of Canada Governor Mark Carney said earlier this year that it is becoming a drag on the national economy.
Bloomberg News reported in May that the Canadian Imperial Bank of Commerce estimated the differential in pricing between Brent crude and Alberta oil is costing Canada $18 billion per year. Bank of Montreal analysts put the figure at $19 billion.
Any way you look at it, that's a lot of lost revenue. Yes, some of that would fall to the bottom line of the producers, but a significant chunk would go to taxes and be earmarked for job-creating capital spending.
The shortage of pipeline capacity has pushed some oil companies to look at alternative methods of moving their product to market. A recent Globe and Mail report by Calgary-based Nathan Vanderklippe quoted industry sources as saying that up to 80,000 barrels a day are now being transported by rail (which is arguably more risky than pipeline transmission). This compares to only 5,000 barrels a day last year.
Vanderklippe wrote that the same sources predict that by next year, rail transport could account for up to 200,000 barrels a day. One oil company executive was quoted as saying that the additional cost of rail transport was only $2 a barrel, compared to a sales price differential of anywhere between $10 and $30.
However, the $2 figure depends on where the oil is originating and the final location. For a haul from, for example, Edmonton to the Gulf Coast refineries by unit trains (trains devoted entirely to the movement of oil from one location to another) the differential would be in the $3 to $10 per barrel range.
Among the obvious beneficiaries any move to increased rail shipments are CN Rail (CNI) and Canadian Pacific (CP), which provide the trackage. CN reported a year-over-year revenue increase of 19% in the petroleum and chemical category. However, the major players would be midstream companies that own and operate unit trains and the firms that provide services to them.
It's clear that Alberta's oil producers are actively seeking alternative ways of getting their output to market. With pipeline builders facing unprecedented challenges, increased rail transport may be the only realistic alternative to shutting in some operations. Some environmentalists might welcome that. No one else would.
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