Canada at Crossroads in Bid to Become Energy Superpower
Canada’s bid to become what Prime Minister Stephen Harper calls an energy “superpower” is at risk as approval delays for new pipelines threaten an industry already hurt by high costs and rival production.
The world’s sixth-largest crude producer can’t get its surging crude supplies to markets in Asia where prices are higher than in North America. Decisions in the next year or so on proposed pipelines designed to connect oil-sands production to supertankers on the Atlantic and Pacific coasts may set the tone for the future of the nation’s energy industry.
“There’s no doubt that over the next 12 to 24 months, there will be some significant decisions made on pipelines infrastructure in Canada,” Ian Anderson, president of the Canadian division of Kinder Morgan Energy Partners LP, said in a Nov. 29 interview in Lake Louise, Alberta. “What’s important about the time frame is, there’s a window of opportunity here to build this infrastructure.”
Prime Minister Harper is counting on Asian markets to reduce the $30 a barrel discount between Canadian heavy crude and the U.S. benchmark as well as to provide job and economic growth and boost tax revenue. Harper has referred to Canada as an emerging energy superpower because it has the world’s third-largest oil reserves, and as output from the oil sands is projected to double over the next decade.
Further delays on pipeline projects may set back Canada’s ability to capture rising demand for fossil fuel and condemn its producers to lower prices, said Judith Dwarkin, director of energy research at ITG Investment Research Inc. in Calgary.
Pipeline Reviews
“The reality is it’s by no means certain which of them will be approved and built,” Dwarkin said. “In the meantime, Alberta’s bitumen producers can’t stop or won’t stop the production train.”
Proposed pipelines currently being reviewed by regulators who will probably make decisions on approval or rejection in 2014 and 2015 include Enbridge Inc.’s C$6 billion ($5.7 billion) Northern Gateway and its Line 9B reversal; TransCanada Corp.’s C$5.4 billion Keystone XL and C$12 billion Energy East projects, as well as Kinder Morgan’s Trans Mountain expansion.
Some of these projects are already delayed. TransCanada was originally planning to have Keystone XL online in 2012 while Enbridge had forecast a decision on Northern Gateway by the end of 2012 and to get it up and running by 2017.
Aboriginal Opposition
Enbridge has faced opposition from aboriginal groups, including the Yinka Dene Alliance as well as the Haisla and Haida First Nations. In addition, the pipeline is opposed by the New Democratic Party, Canada’s official opposition party. Keystone, which must be approved by the U.S. because it crosses the U.S.-Canada border, has been challenged by U.S. environmental groups.
“Is 2014 going to be the year of the pipeline?,” Michal Moore, a University of Calgary professor of energy economics, said by phone. “I think it’s going to be the year of understanding how badly we’re planning for pipelines.” Canada lacks a strategy for developing and transporting oil and natural gas, he said.
The Northern Gateway review may “serve as a poster child for how to do it wrong,” by allowing too many participants to be involved, Moore said. Energy East and Trans Mountain applications, while benefiting from new firm review deadlines, won’t escape the politicization of a process that needs streamlining, he said.
Canada Discount
There’s an excess of export pipeline capacity proposed to North American coasts that should start coming online in 2016 – more than 3 million barrels of crude a day – to account for future oil-sands production increases, Dwarkin said. With ITG forecasting bitumen output will rise by just over 200,000 barrels a day annually from 2014 to 2020, there are another three years of “discounted prices” for Canadian heavy crude, she said.
Spot prices for Western Canadian Select, the benchmark for heavy crude, dipped to its lowest point this year at $51.37 a barrel on Nov. 5 and traded at $63.22 on Nov. 29. That compares with $92.72 for West Texas Intermediate futures and $109.69 for Brent.
Production of bitumen, which is refined into fuels such as gasoline and diesel, is poised to double from last year to 3.8 million barrels a day by 2022, according to the Alberta Energy Regulator.
‘Economically Challenged’
Pipelines in Canada already carry 15 percent of the nation’s exports in the form of crude, mostly to U.S. markets. Canada’s oil trade rose 7 percent to about C$73 billion last year, according to Statistics Canada, and is set to grow faster than the total economy.
Rising costs because of labor shortages and operating in the remote region of northern Alberta mean Canada’s energy industry is already at a cost disadvantage to competitors, said Murray Edwards, chairman of Canadian Natural Resources Ltd., the country’s largest heavy oil producer.
“We’re already a high-cost industry and a lot of projects are economically challenged,” Edwards said in an interview in Lake Louise. The prospects of Iranian oil exports and rising interest rates put the industry further at risk, he added.
In addition, the industry faces public scrutiny over the environmental impact of its operations. Environmental groups including Greenpeace have called for a halt to oil-sands development, citing damage to local ecosystems, rising emissions of carbon dioxide and the risk of leaks from pipelines.
Meanwhile, investors are boosting the value of Canadian energy stocks. The Standard & Poors/TSX Energy Index has risen 6.9 percent this year through Nov. 29, compared with a 7.7 percent gain in Canada’s benchmark gauge. Enbridge has gained 1.6 percent, while Canadian Natural has surged 21 percent. TransCanada is little changed.
‘Delaying Growth’
“Next year could certainly be an inflection point,” said Jamie Bonham, who’s in charge of extractives research at NEI Investments, which oversees C$5.5 billion in assets. “There are several decisions coming, especially Northern Gateway and possibly Keystone, that may set the tone for how and how much Canadian oil is exported and could lead to some soul searching for both industry and government. The outcome of one of these projects being approved may have an impact on the others.”
“Today our nation is at a crossroads,” New Brunswick Premier David Alward said in Lake Louise. “The fundamental issue we face is whether we move forward. We don’t have the luxury of delaying these projects and delaying growth.”
The world’s sixth-largest crude producer can’t get its surging crude supplies to markets in Asia where prices are higher than in North America. Decisions in the next year or so on proposed pipelines designed to connect oil-sands production to supertankers on the Atlantic and Pacific coasts may set the tone for the future of the nation’s energy industry.
“There’s no doubt that over the next 12 to 24 months, there will be some significant decisions made on pipelines infrastructure in Canada,” Ian Anderson, president of the Canadian division of Kinder Morgan Energy Partners LP, said in a Nov. 29 interview in Lake Louise, Alberta. “What’s important about the time frame is, there’s a window of opportunity here to build this infrastructure.”
Prime Minister Harper is counting on Asian markets to reduce the $30 a barrel discount between Canadian heavy crude and the U.S. benchmark as well as to provide job and economic growth and boost tax revenue. Harper has referred to Canada as an emerging energy superpower because it has the world’s third-largest oil reserves, and as output from the oil sands is projected to double over the next decade.
Further delays on pipeline projects may set back Canada’s ability to capture rising demand for fossil fuel and condemn its producers to lower prices, said Judith Dwarkin, director of energy research at ITG Investment Research Inc. in Calgary.
Pipeline Reviews
“The reality is it’s by no means certain which of them will be approved and built,” Dwarkin said. “In the meantime, Alberta’s bitumen producers can’t stop or won’t stop the production train.”
Proposed pipelines currently being reviewed by regulators who will probably make decisions on approval or rejection in 2014 and 2015 include Enbridge Inc.’s C$6 billion ($5.7 billion) Northern Gateway and its Line 9B reversal; TransCanada Corp.’s C$5.4 billion Keystone XL and C$12 billion Energy East projects, as well as Kinder Morgan’s Trans Mountain expansion.
Some of these projects are already delayed. TransCanada was originally planning to have Keystone XL online in 2012 while Enbridge had forecast a decision on Northern Gateway by the end of 2012 and to get it up and running by 2017.
Aboriginal Opposition
Enbridge has faced opposition from aboriginal groups, including the Yinka Dene Alliance as well as the Haisla and Haida First Nations. In addition, the pipeline is opposed by the New Democratic Party, Canada’s official opposition party. Keystone, which must be approved by the U.S. because it crosses the U.S.-Canada border, has been challenged by U.S. environmental groups.
“Is 2014 going to be the year of the pipeline?,” Michal Moore, a University of Calgary professor of energy economics, said by phone. “I think it’s going to be the year of understanding how badly we’re planning for pipelines.” Canada lacks a strategy for developing and transporting oil and natural gas, he said.
The Northern Gateway review may “serve as a poster child for how to do it wrong,” by allowing too many participants to be involved, Moore said. Energy East and Trans Mountain applications, while benefiting from new firm review deadlines, won’t escape the politicization of a process that needs streamlining, he said.
Canada Discount
There’s an excess of export pipeline capacity proposed to North American coasts that should start coming online in 2016 – more than 3 million barrels of crude a day – to account for future oil-sands production increases, Dwarkin said. With ITG forecasting bitumen output will rise by just over 200,000 barrels a day annually from 2014 to 2020, there are another three years of “discounted prices” for Canadian heavy crude, she said.
Spot prices for Western Canadian Select, the benchmark for heavy crude, dipped to its lowest point this year at $51.37 a barrel on Nov. 5 and traded at $63.22 on Nov. 29. That compares with $92.72 for West Texas Intermediate futures and $109.69 for Brent.
Production of bitumen, which is refined into fuels such as gasoline and diesel, is poised to double from last year to 3.8 million barrels a day by 2022, according to the Alberta Energy Regulator.
‘Economically Challenged’
Pipelines in Canada already carry 15 percent of the nation’s exports in the form of crude, mostly to U.S. markets. Canada’s oil trade rose 7 percent to about C$73 billion last year, according to Statistics Canada, and is set to grow faster than the total economy.
Rising costs because of labor shortages and operating in the remote region of northern Alberta mean Canada’s energy industry is already at a cost disadvantage to competitors, said Murray Edwards, chairman of Canadian Natural Resources Ltd., the country’s largest heavy oil producer.
“We’re already a high-cost industry and a lot of projects are economically challenged,” Edwards said in an interview in Lake Louise. The prospects of Iranian oil exports and rising interest rates put the industry further at risk, he added.
In addition, the industry faces public scrutiny over the environmental impact of its operations. Environmental groups including Greenpeace have called for a halt to oil-sands development, citing damage to local ecosystems, rising emissions of carbon dioxide and the risk of leaks from pipelines.
Meanwhile, investors are boosting the value of Canadian energy stocks. The Standard & Poors/TSX Energy Index has risen 6.9 percent this year through Nov. 29, compared with a 7.7 percent gain in Canada’s benchmark gauge. Enbridge has gained 1.6 percent, while Canadian Natural has surged 21 percent. TransCanada is little changed.
‘Delaying Growth’
“Next year could certainly be an inflection point,” said Jamie Bonham, who’s in charge of extractives research at NEI Investments, which oversees C$5.5 billion in assets. “There are several decisions coming, especially Northern Gateway and possibly Keystone, that may set the tone for how and how much Canadian oil is exported and could lead to some soul searching for both industry and government. The outcome of one of these projects being approved may have an impact on the others.”
“Today our nation is at a crossroads,” New Brunswick Premier David Alward said in Lake Louise. “The fundamental issue we face is whether we move forward. We don’t have the luxury of delaying these projects and delaying growth.”
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