What prospective Albertan pipelines mean for BC

If a new permit application by TransCanada for the Keystone XL pipeline from Hardisty, Alberta to Port Arthur, Texas does not get approved after the US 2012 presidential elections, attention will shift towards expanding the pipeline network westwards within Canada. If the project does get approved, well attention would still shift towards expanding the pipeline network westwards within Canada.

The Oilholic’s conjecture is that policy debate within Canada is already factoring in a westward expansion of pipelines eyeing exports via the Pacific Coast to China, Japan, India and beyond, whether the Keystone XL pipeline extension gets built or not. When US President Barack Obama did not grant approval to the original Keystone XL pipeline application earlier this year, Canadian Prime Minister Stephen Harper expressed his ‘disappointment’, had a candid conversation with Obama at an Asia Pacific leaders summit and then got on a plane to China.

He has also been to India on a high level mission in recent memory. At the 20th World Petroleum Congress in Doha last year, Indian officials listened intently to what was coming out of the Canadian camp. Canadian Association of Petroleum Producers (CAPP) has already noted increasing interest from Korean and other Asian players as well when it comes to buying in to both crude oil reserves and natural gas in Western Canada. Club it all together and a westward expansion is inevitable.

Central to a westward expansion is British Columbia (BC), the Canadian province neighbouring Alberta, which could become as important in terms of pipeline infrastructure as Alberta is in terms of the crude stuff itself. From the standpoint of a ‘crude’ analogy, the situation is a bit like South Sudan (which has all the resources) and Sudan (which has the infrastructure to bring the resource to market) with a good Canadian fortune of zero conflict or geopolitical flare-ups. Thankfully for Canada and the importers club, Albertans and British Columbians also get along a tad better than their Sudanese counterparts and what is Alberta’s gain could also be BC's gain.

Last year, over a meeting with the Oilholic in Calgary, Dave Collyer, President of CAPP, noted, “As our crude production grows we would like access to the wider crude oil markets. Historically those markets have almost entirely been in the US and we are optimistic that these would continue to grow. Unquestionably there is increasing interest in the Oil sands from overseas and market diversification to Asia is neither lost on Canadians nor is it a taboo subject for us.”

At present, there are five major pipelines that are directly connected to the Albertan supply hubs at Edmonton and Hardisty – Enbridge Mainline, Enbridge Alberta Clipper, Kinder Morgan Trans Mountain, Kinder Morgan Express, and of course the original TransCanada Keystone pipeline.

Of these, the Trans Mountain system transports crude to delivery points in BC, including the Westridge dock for offshore exports, and to a pipeline that provides deliveries to refineries in the US state of Washington. It is the only pipeline route to markets off the West coast and is currently operating as a common carrier pipeline where shippers nominate for space on the pipeline without a contract. Since May 2010, the pipeline has been in steady apportionment.

Excess demand for this space is expected to continue until there is additional capacity available to transport crude oil to the west coast for export according to CAPP. The available pipeline capacity depends on the amount of heavy crude oil transported. (For example, in 2010, about 27% of the volumes shipped were heavy crude oil).

So four more have been proposed via BC (see map above) – namely Enbridge Northern Gateway (from Bruderheim, Alberta to Kitimat, BC, Capacity: 525,000 barrels per day), Kinder Morgan TMX2 (from Edmonton, Alberta to Kamloops, BC, Capacity: 80,000 bpd), Kinder Morgan TMX3 (from Kamloops, BC to Sumas, BC, Capacity: 240,000 to 300,000 bpd) and Kinder Morgan TMX Northern Leg (Rearguard/Edmonton, Alberta to Kitimat, BC, Capacity: 400,000 bpd).

Given that it’s green BC in question, there already are legal impediments as well as a major bid to address the concerns of the Native Indian First Nations communities according to the Oilholic’s local feedback here. Environmental due diligence should be and is being taken seriously on the West Coast. Then there is the spectre of a socialist NDP provincial government or a hung parliament at the next elections in BC which could hamper activity and investment.

Taking in to account all this, realistically speaking not much may start happening before 2015, but there is a growing belief within the province that happen it most likely will and the benefit to the provincial economy would manifold. To begin with jobs, direct construction related to the proposed pipelines and revenues spring to mind. Additionally, there is likely to be a decade long rise in service sector jobs in the province.

Then given that BC has a proven crown agency in Partnerships BC which since its inception has been building generally bankable infrastructure projects; an ancillary social infrastructure boom to cater to what would become a burgeoning Kitimat and Kamloops is also within the realm of possibility.

Over the last ten days the Oilholic has gathered the thoughts of legal professionals, financial advisers, provincial civil servants and last but certainly not the least the average British Columbian you’d run into in a bar or a Starbucks. The overriding emotion was one of positivity though everyone acknowledges the impediments.

Furthermore, many think the pipelines would assist in diversifying BC's economy which is largely reliant on tourism and timber to include yet another key sector without necessarily compromising its green credentials and a record of accommodating the First Nations Native Indian population. That’s all from Canada folks! Yours truly is off to Houston, Texas. Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Map: Proposed (in dotted lines) and existing pipelines to the West Coast of Canada © CAPP 2011.

Canada, India pitch to world & each other!

One country aims to be a leading producer (Canada) and one is projected to be a leading consumer or at least among them (India), so the Oilholic has clubbed them together for purposes of blogging about what officials from each country said and did here today at the 20th WPC.

Starting with Canada, its ministerial session complete with a RCMP officer on either side of the stage saw Serge DuPont, Deputy Minister, Natural Resources Canada and Cal Dallas, Alberta’s Minister of Intergovernmental, International and Aboriginal Affairs outline their country’s goals for its energy business with the session being moderated by Neil McCrank, Counsel at Borden Ladner Gervais LLP.

The Canadians maintained that in context of developing and investing in the oil sands – of which there is considerable interest here – the country’s energy strategy would be transparent, accountable and responsible both internally and internationally. They also outlined plans to support their industry, akin to many rival oil & gas exporting jurisdictions, via grants – chiefly the provincial government’s energy innovation fund.

This would, according to Deputy Minister DuPont, accompany developing renewable energy sources and a C$2 billion investment in carbon capture and storage. Canada indeed is open for business with foreign direct investment (FDI) welcomed albeit under strict investment guidelines. Proof is in the pudding – not even one top 10 international oil major worth its balance sheet has chosen to ignore projects in the Alberta oil sands.

The Oilholic is reasonably convinced after hearing the ministerial session, that when it comes to environmental concerns versus developing oil & gas projects who would you rather reason with – an open democracy like Canada or Chavez about Venezuela’s heavy oil? In light of recent events, one simply had to raise the Keystone XL question as the Oilholic did with Canadian Association of Petroleum Producers (CAPP) President Dave Collyer on a visit to Calgary earlier this year. After all, one wonders, what is the Canadian patience threshold when it comes to US exports given that new buyers are in town chiefly China, Korea and India.

“Well Canadians are a patient lot. The US remains a major export market for us. The delays associated with the Keystone XL project are frustrating but our medium term belief is that the construction of the pipeline would be approved,” said session moderator and member of the Canadian delegation Neil McCrank of BLG.

He also believes the new buyers in town can be happily accommodated with the oil sands seeing investments from China, South Korea and India (among others). “We acknowledge that there are difficulties in pulling a pipeline from Alberta via British Columbia to the Pacific coast as well – but we are working to resolve these issues as patiently, pragmatically and ethically as only Canadians can!” McCrank concludes.

There is certain truth in that. Despite being an oil producer, Canada does not have a national oil company (NOCs) to trumpet and shows no inclination to shun FDI in Alberta. One of the aforementioned investors, whether ethical or not, is India which has a ‘mere’ 14 NOCs all aching to explore and secure fresh oil reserves to help meet its burgeoning demand for oil.

Of the 14, some four are in the Fortune 500 and operate in 20 international jurisdictions; the loudest of these is ONGC Videsh Limited (or OVL) which among other countries is also looking at Canada as confirmed by both sides. India’s Minister for Petroleum & Natural Gas S. Jaipal Reddy sounded decidedly upbeat at the WPC, telling the world his country’s NOCs would make for robust project partners.

Over a period of the last 12 months, the Oilholic notes that Indian NOCs have invested in admirably strategic terms but overseas forays have also seen them in Syria and Sudan which is politically unpalatable for some but perhaps ‘fair game’ for India in its quest for security of supply. Canada – should Indian NOCs increase their exposure in Alberta – would be interesting from a geopolitical standpoint given China’s overt stance on being a Canadian partner too.

However, the only open quotes in terms of overseas forays from Indian officials came regarding investment in Russia and FSU republics. A high powered Russo-Indian delegation met on the sidelines of the 20th WPC to discuss possible investment by Indian NOCs in the Sakhalin project. Separately, officials from ONGC and GAIL told the Oilholic they were keen in buying a stake in Kazakhstan’s Kashagan oilfield, which is thought to contain between 9 to 16 billion barrels of oil, and join the consortium under the North Caspian Sea Production Sharing Agreement which sees stakes by seven companies – Eni (16.81%), Shell (16.81%), Total (16.81%), ExxonMobil (16.81%), KazMunayGas (16.81%), ConocoPhillips (8.4%) and Inpex (7.56%).

However the rumoured seller – ConocoPhillips – quashed all rumours and instead said it was actually checking out material prospects in Kazakhstan itself. It also detailed its plans for Canada and shale plays. That’s all for the moment folks. Keep reading, keep it ‘crude’!

© Gaurav Sharma 2011. Photo 1: Canadian Ministerial session at the 20th Petroleum Congress (Seated L to R: Neil McCrank, BLG, Cal Dallas, Alberta Goverment, Serge DuPont, Canada's Deputy Minister, Natural Resources. Photo 2: Indian Ministerial session (Seated third from right: India’s Minister for Petroleum & Natural Gas S. Jaipal Reddy) © Gaurav Sharma 2011.

Why Keystone XL’s delay is not such a bad thing!

Over the last fortnight the Oilholic has been examining the fallout from the US government’s announcement delaying a decision on the proposed Keystone XL pipeline and its decision to explore alternative routes for it from Alberta, Canada to Texas, USA (See map. Click image to enlarge).

To begin with, it gave Canadian Prime Minister Stephen Harper an opportunity trumpet his country's new-found assertiveness in the energy sphere. A mere three days after the US State department announced the delay, Harper told President Obama, whom he met at the Asia Pacific Economic Co-operation forum in Hawaii, that his government was working to forcefully advance a trade strategy that looks towards the Asia Pacific.

Harper had strong language for the President and told reporters that since the project will now be delayed for over a year, Canada must (also) look elsewhere. "This highlights why Canada must increase its efforts to ensure it can supply its energy outside the United States and into Asia in particular. And that in the meantime, Canada will step up its efforts in that regard and I communicated that clearly to the president,” he said.

Of course, this version differs significantly from what the White House said but it gives you a flavour of the frustration being felt in Canada. The Canadian Association of Petroleum Producers (CAPP) says the US government’s decision was disappointing given the three years of extensive analysis already completed and after the US government’s own environmental impact assessment determined the proposed Keystone XL pipeline routing would not have an undue environmental impact.

CAPP President Dave Collyer, whom the Oilholic met back in March, said, “Keystone XL is not about America using more oil, it’s about the source of America’s oil – Canada or elsewhere. It’s also about common economic and geopolitical interests between Canada and the US. While the Keystone delay is unfortunate, we respect the United States regulatory process and remain optimistic the pipeline will be approved on its strong environmental, economic and energy security merits.”

CAPP also seeks to look at the positives and maintains that Canadian oil sands production will not be impacted in the near term and other alternatives are being pursued to ensure market access over the medium term. Simply put, delaying Keystone XL will motivate exploration of other markets for Canadian crude oil products as the Canadian PM has quite clearly stated.

Moving beyond the geopolitical scenario, ratings agency Moody's feels the Keystone XL delay is credit positive for TransCanada Pipelines (TCPL) – the project saga’s chief protagonist – although it does not change TCPL's A3 Senior Unsecured rating or stable outlook given the relative size of the Keystone XL project to TCPL's existing businesses.

In a note to clients on Nov 11, the agency noted that the announcement was likely to cause a material delay in the potential construction of that pipeline, which will actually benefit TCPL's liquidity, leverage and free cash flow, providing the company with a greater financial cushion with which to undertake the project if and when it is fully approved.

Moody's also does not expect the Company to undertake share buybacks with the funds not invested in Keystone XL due to the approval delay. TCPL's liquidity will improve as the construction delay will defer over $5 billion of additional capex (compared to TCPL's total assets of approximately $46 billion).

Furthermore, 75% of additional costs associated with the delay or rerouting is expected to be largely borne by the shippers rather than TCPL. Moody's expects the shippers to agree to a project delay, but that is not certain.

“While the delay may reduce TCPL's growth prospects in the medium term, that is not a major influence in the Company's credit rating. Should the project ultimately be cancelled, Moody's expects that the pipe, which is the largest component of the $1.9 billion that TCPL has already invested in the project and which is already reflected in the company's financial statements, would be repurposed to other projects that would presumably generate additional cash to TCPL over the medium term,” it concludes.

Since then, the US state of Nebraska and TCPL have agreed to find a new route for the stalled pipeline that would ensure it does not pass through environmentally sensitive lands in the state. The deal with Nebraska would see the state fund new studies to find a route that would avoid the Sandhills region and the Ogallala aquifer.

However, the deal will not alter the timeline for a US Federal review, according to the State Department. That means, as the Oilholic noted earlier, the Obama Administration will not have to deal with the issue until after the 2012 election. While that’s smart politics, its dumb energy economics. Right now it appears that the Canadians have less to lose than the Americans.

Moving away from Keystone XL, the crude markets began the week with a bang as the ICE Brent forward month futures contract climbed over US$3 to US$109 per barrel but the rise across the pond was more muted with WTI ending the day at US$98.20 unable to hold on to earlier gains. Jack Pollard, analyst at Sucden Financial Research, feels that Middle-Eastern tensions provided significant support to the upside momentum.

“Yesterday we had the first day of Egyptian elections, with the final vote not due until early to middle January and the interim prospect of further violence could maintain volatility. Furthermore, the pressure on Syria increased even further with some suggesting a no-fly zone could be in the offing,” he said.

However, the Oilholic and Pollard are in agreement that the main market driver emanated from Iran. “Ever since the IAEA report on November 8th we have seen the possibility of supply disruptions contribute to crude oil price’s resilience relative to the rest of the commodity complex. On Monday, we heard reports that Iran’s government had officially voted in favour of revising down their diplomatic relations with the UK, ejecting the ambassador. Should the situation escalate further, the potential for upside could increase significantly, disproportionately so for Brent,” Pollard concludes.

© Gaurav Sharma 2011. Map: All proposals of Canadian & US Crude Oil Pipelines © CAPP (Click map to enlarge)

Keystone XL, politics & the King’s Speech

Even before the original Keystone cross-border pipeline project aimed at bringing Canadian crude oil to the doorstep of US refineries had been completed, calls were growing for an extension. The original pipeline which links Hardisty (Alberta, Canada) to Cushing (Oklahoma) and Patoka (Illinois) became operational in June 2010, just as another, albeit atypical US-Canadian tussle was brewing.

The extension project – Keystone XL first proposed in 2008, again starting from Hardisty but with a different route and an extension to Houston and Port Arthur (Texas) is still stuck in the quagmire of US politics, environmental reticence, planning laws and bituminous mix of the Canadian oil sands.

The need for extension is exactly what formed the basis of the original Keystone project – Canada is already the biggest supplier of crude oil to the US; and it is only logical that its share should rise and in all likelihood will rise. Keystone XL according to one of its sponsors – TransCanada – would have the capacity to raise the existing capacity by 591,000 barrels per day though the initial dispatch proposal is more likely to be in the range of 510,000 barrels.

Having visited both the proposed ends of the pipeline in Alberta and Texas, the Oilholic finds the sense of frustration only too palpable more so because infrastructural challenges and the merits (or otherwise) of the extension project are not being talked about. To begin with the project has a loud ‘fan’ club and an equally boisterous ‘ban’ club. Since it is a cross-border project, US secretary of State Hillary Clinton has to play the role of referee.

A pattern seems to be emerging. A group of 14 US senators here and 39 there with their counterparts across the border would write to her explaining the merits only for environmental groups, whom I found to be very well funded – rather than the little guys they claim to be – launching a counter representation. That has been the drill since Clinton took office.

One US senator told me, “If we can’t trust the Canadians in this geopolitical climate then who can we trust. Go examine it yourself.” On the other hand, an environmental group which tries to get tourists to boycott Alberta because of its oil sands business tried its best to convince me not to land in Calgary. I did so anyway, not being a tourist in any case.

Since 2008, TransCanada has held nearly 100 open houses and public meetings along the pipeline route; given hundreds of hours of testimony to local, state and federal officials and submitted thousands of pages of information to government agencies in response to questions. The environmentalists did not tell me, but no prizes for guessing who did and with proof. This is the kind of salvo being traded.

Send fools on a fool’s errand!

It is not that TransCanda, its partner ConocoPhillips and their American and Canadian support base know something we do not. It is a fact that for some years yet – and even in light of falling gasoline consumption levels – the US would remain the world’s largest importer of crude oil. China should surpass it, but this will not happen overnight.

The opponents of oil sands have gotten the narrative engrained in a wider debate on the environment and the energy mix. Going forward, they view Keystone XL and other incremental pipeline projects in the US as perpetuating reliance on crude oil and are opposing the project on that basis.

Given the current geopolitical climate, environmental groups in California and British Columbia impressed upon this blogger that stunting Alberta’s oil sands – hitherto the second largest proven oil reserve after Saudi Arabia’s Ghawar extraction zone – would somehow send American oilholics to an early bath and force a green age. This is a load of nonsense.

Au contraire, it will increase US dependency on Middle Eastern oil and spike the price. Agreed the connection is neither simple nor linear – but foreign supply will rise not fall. Keystone XL brings this crude foreign product from a friendly source.

Everyone in Alberta admits work needs to be done by the industry to meet environmental concerns. However, a 'wells to wheels' analysis of CO2 emissions, most notably by IHS CERA and many North American institutions has confirmed that oil sands crude is only 5 to 15 per cent ‘dirtier’ than US sweet crude mix.

The figure compares favourably with Nigerian, Mexican and Venezuelan crude which the US already imports. So branding Canadian crude as dirty and holding up Keystone XL on this basis is a bit rich coming from the US. Keystone XL increases US access to Canadian crude. Who would the Americans rather buy from Canada or Venezuela? Surveys suggest the former.

The pragmatists at CAPP

Over a meeting in Calgary, Dave Collyer, President of Canadian Association of Petroleum Producers (CAPP) told the Oilholic that they have always viewed Keystone XL as an opportunity to link up Western Canada to the US Gulf coast market, to replace production that would otherwise be imported by the US from overseas sources most notably Venezuela and Mexico where production is declining according to available data. There are also noticeable political impediments in case of the former.

“We don’t see this pipeline extension as incremental supply into that orbit, rather a replacement of existing production through a relatively straightforward pipeline project, akin to many other pipeline projects and extensions that have been built into the US,” Collyer said.

Energy infrastructure players, market commentators and CAPP make another valid point – why are we not debating scope of the Keystone XL project and its economic impact and focussing on the crude stuff it would deliver across the border? CAPP for its part takes a very pragmatic line.

“Do we think there is legitimacy in the argument that is being made against Keystone? No (for the most part) but the reality is that there has to be due consideration in the US. I would assume the US State Department is in a position where it has no alternative but to employ an abundance of caution to ensure that all due processes are met. What frustrates Canadians and Americans alike is the length of time that it has taken. However, at the end of the day when we get that approval and it is a robust one which withstands a strict level of scrutiny then it’s a good thing,” Collyer said.

T I M B E R!

Canadians and Americans first started bickering about timber, another Canadian resource needed in the US, about taxation, ethics, alleged subsidies and all the rest of it way back in 1981. Thirty years later, not much has changed as they are still at it. But these days it barely makes the local news in Canada each time the Americans take some reactive action or the other against the timber industry. Reason – since 2003 there has been another buyer in town – China.

In 2010, timber sales from Canada to China (and Japan to a lesser extent) exceed those to the US. Over the last half-decade timber exports from the province of British Columbia alone to China rose 10 times over on an annualised basis. Moral of the story, the US is not the only player in town whatever the natural resource. Canadians feel a sense of frustration with the US, and rightly so according to Scott Rusty Miller, managing partner of Ogilvy Renault (soon to be part of Norton Rose) in Calgary.

“We are close to the US, we are secure and we have scruples. Our industry is more open to outside scrutiny and environmental standards than perhaps many or in fact any other country the US imports crude oil from – yet there are these legal impediments. Scrutiny is fine. It’s imperative in this business, but not to such an extent that it starts frustrating a project,” Miller noted.

Ask anyone at CAPP or any Toronto-based market analyst if Canada could look elsewhere – you would get an answer back with a smile; only the Americans probably would not join them. The Oilholic asked Collyer if Americans should fear such moves.

His reply was, “As our crude production grows we would like access to the wider crude oil markets. Historically those markets have almost entirely been in the US and we are optimistic that these would continue to grow. Unquestionably there is increasing interest in the Oil sands from overseas and market diversification to Asia is neither lost on Canadians nor is it a taboo subject for us.”

CAPP has noted increasing interest from Chinese, Korean and other Asian players when it comes to buying in to both crude oil reserves and natural gas in Western Canada. Interest alone does not create a market – but backed up by infrastructure at both ends, it strengthens the relationship between markets Canadians have traditionally not looked at. All of this shifts emphasis on Canadian West coast exports.

“Is it going to be straightforward to get a pipeline to the West coast – we’ll all acknowledge that it’s not. For instance, Enbridge has its challenges with the Gateway pipeline. There is an interest in having an alternative market. There are drivers in trying to pursue that and I would say collectively this raises the “fear” you mention and with some factual basis. However, the US has been a great market and should continue to be a great market...while some caution is warranted,” he concluded.

The King’s speech

We’re not talking about Bertie, (King George VI of England) but Barack (The King of gasoline consumers and the US President). On March 30th, the King rose and told his audience at Georgetown University that he would be targeting a one-third reduction in US crude imports by 2025.

“I set this goal knowing that we’re still going to have to import some oil. And when it comes to the oil we import from other nations, obviously we have got to look at neighbours like Canada and Mexico that are stable, steady and reliable sources,” he added. While I am reliably informed that the speech was not picked up by Chinese state television, the Canadian press went into overdrive. The Globe and Mail, the country’s leading newspaper, declared “Obama signals new reliance on oil sands.”

Shares of Canadian oil and service companies rose the next day on the Toronto Exchange, even gas producers benefited and 'pro-Keystone XL' American senators queued up on networks to de facto say “We love you, we told you so.” Beyond the hyped response, there is a solid reason. Keystone XL bridges both markets – a friendly producer to a friendly consumer with wide ranging economic benefits.

According to Miller, “Refining capacity exists down south. Some refineries on the US Gulf coast could be upgraded at a much lower cost compared to building new infrastructure. There are economic opportunities for both sides courtesy this project – we are not just talking jobs, but an improvement of the regional macro scenario. Furthermore, however short or long, it could be a shot in the arm for the much beleaguered and low-margin haunted refining business.”

The pipeline could also help Canadians export surplus crude using US ports in the Gulf and tax benefits could accrue not just at the Texan end but along the route as well. That the oil sands are in Canada is a geological stroke of luck, given the unpredictability of OPEC and Russian supplies. The US State Department says it will conclude its review of Keystone XL later this year. Subjecting this project to scrutiny is imperative, but bludgeoning it with impediments would be ‘crudely’ unwise.

This post contains excerpts from an article written by the Oilholic for UK's Infrastructure Journal. While the author retains serial rights, the copyright is shared with the publication in question.

Gaurav Sharma 2011 © Gaurav Sharma and Infrastructure Journal 2011. Map: All proposals of Canadian & US Crude Oil Pipelines © CAPP (Click map to enlarge)