The Trans Mountain pipeline expansion project would lay 715 miles of new pipeline from Alberta’s oil sands to the coast of British Columbia
The Canadian Press
Canada’s oil industry may have just been given a lifeline. On June 18, Prime Minister Trudeau approved construction of the controversial Trans Mountain pipeline expansion project that will triple existing capacity from 300,000 to 890,000 barrels per day (bpd). The 715-mile transport system will span from Alberta’s oil sands to the coast of British Columbia and could begin shipping crude oil as early as 2022, assuming no significant regulatory or legal setbacks – but this is a big assumption. The Canadian government bought the project from its owner, Kinder Morgan Inc. (NYSE:KMI), last year to ensure construction moved forward following continuous legal delays.
Yet, the politically embattled Trudeau will play monkey in the middle between the pro-oil province of Alberta and the environmentalist British Columbia and Canada’s indigenous First Nations. With an IPSOS poll indicating that Trudeau’s support sits around 30 percent – less than Trump’s – the pipeline approval is seen by some as an attempt to “buy” Albertan votes and undecideds for the October elections.
A Depressed Energy Industry
The Trans Mountain pipeline approval comes at a tough time for Canada’s oil industry. Despite boasting the world’s third-largest crude reserves at 170 billion barrels, Canada is in the midst of a multi-year supply glut caused by a lack of pipeline capacity – forcing Western Canada to sell its oil at extremely discounted prices.
Weak petroleum prices have led to an estimated $20 billion in revenue loss to producers. To compensate for the lack of mid-stream capacity, Canada has been increasing its crude-by-rail transportation, reaching an average of 231,000 bpd in May. This is a common practice when pipelines are not available. However, rail is a more inefficient, more dangerous, and more environmentally harmful method to transport oil– a fact that pipeline protestors often ignore.
Last year, the Canadian government stepped in when prices for Western Canadian Select crashed to a 50% discount of American oil benchmark West Texas Intermediate (WTI) – issuing production cuts for oil companies in the Alberta province in an effort to bring up prices for Canadian heavy crude. As of June, production was at 3.71 million bpd and will remain at this level through July. While production cuts have proven to be successful, it is not a sustainable mechanism, as it deters investment in the industry. IHS Markit forecasts a slowdown in Canadian oil sands production, from more than 150,000 bpd in the last 10 years to less than 100,000 bpd in the coming decade.
Source: Canadian Association of Petroleum Producers
Global demand for heavy crude has grown tighter caused by supply disruptions in Venezuela, U.S. sanctions on Venezuelan oil imports, and planned OPEC supply cuts. U.S. Gulf Coast refineries, already Canada’s key energy partner, have increased imports of heavy Canadian crude to compensate for the loss of Venezuelan imports. Canada could benefit from its abundant oil production amid the tightening crude oil market, but only if it could address the transportation bottlenecks and price uncertainty.
Impact of the expansion project
The expansion of the Trans Mountain pipeline, while contested by many environmentalist groups, is critical for getting Albertan heavy crude to markets beyond its biggest customer – the United States – who bought 10.7 million barrels in 2018 at a price tag of $855 million (China took 6.3 million barrels worth $442 million). With further delays plaguing the Keystone XL Pipeline and the Enbridge’s Line 3, the Trans Mountain expansion project is the only hope for added pipeline capacity in the near future.
The conundrum the Canadian oil industry now faces is building a pipeline that may not be commercially viable – but nevertheless is necessary for relieving the painful oil glut. Without additional pipeline capacity, Canadian oil producers will continue to struggle in this depressed market amid growing transportation costs.
Furthermore, extraction and refining of Canada’s heavy bituminous oil sands is expensive, and brings with it additional environmental concerns in a world that is turning towards cleaner energy sources. For this reason, investors have withdrawn from Canadian oil production – including some major oil companies such as Royal Dutch Shell (NYSE:RDS-A) and Marathon Oil Corporation (NYSE:MRO).
Federal Green Party Leader Elizabeth May (right) and NDP MP Kennedy Stewart (left) stand with protesters before they were arrested outside Kinder Morgan’s facility in Burnaby, B.C., on Friday March 23, 2018.
THE CANADIAN PRESS/Darryl Dyck)
Trudeau has promised he will work with environmental groups, indigenous groups and the government of British Columbia to ensure the pipeline is safely built and environmental concerns are addressed. However, hurdles still remain. There are some 156 mandatory measures that must all be met for the project to move ahead. The likelihood of a legal battle is high – but that is nothing new for the industry.
The Trans Mountain expansion project has some significant obstacles to manage before shovels hit the dirt. But one successful pipeline project is hardly sufficient to solve the industry’s chronic bottleneck problem. Without regulatory policies that facilitate pipeline infrastructure and assuage the lack of confidence in the market, Canada’s oil industry will continue to lag behind – slowing the country’s economic growth in the process.
With assistance from Natasha Orehowsky
