Canada's liberal government does an about-face on oil pipelines: Fuel for Thought

Leave it to a liberal government backed by environmentalists to approve the first Canadian pipelines in several years, to help rejuvenate an oil industry thirsty to find more outlets for its crude oil.

Without mincing words, the federal natural resources minister James Carr had said repeatedly that the new government in Ottawa was not elected to be a cheerleader for the oil sands industry by approving new export pipelines.

But within a little more than a year of taking office, two new pipelines were approved that will together provide 970,000 b/d of additional crude oil export capacity from Alberta.

It turns out that for Prime Minister Justin Trudeau, the pipelines are a matter of safety, as well providing some collateral good in the form of more money for government coffers.

In Trudeau's words: "We have not been and will not be swayed by political arguments, be they local, regional or national. If the pipelines are not built, diluted bitumen would be forced into more tank cars and that would be more dangerous for communities and higher in terms of greenhouse gas emissions than modern pipelines would be."

His reference was to an expansion of Kinder Morgan's Trans Mountain pipeline which runs from Edmonton, Alberta to Burnaby in British Columbia, and one that would see capacity on the line increase to 890,000 b/d from the current 300,000 b/d.

The other pipeline was the Enbridge-backed Line 3 that will see a full replacement of the old line with new pipeline and also double its capacity from 380,000 b/d to 760,000 b/d by installing new booster pump stations. Line 3 runs from Hardisty, Alberta to Superior, Wisconsin and both the pipeline projects are due to be completed by end-2019.

Those new lines are unlikely to help investment into oil sands producers, at least for this year, as Canadians turn to shorter-cycle investments in tight oil, NGLs and natural gas.

In terms of capex, oil industry spending in 2017 is expected to be up 40% from 2016, but spending on oil sands is expected to be down 20% next year, according to ARC Financial's Peter Tertzakian.

Producers widen scope

An expansion of the Trans Mountain pipeline will open up for the first time in the past 30 years a new market and also break the long-standing logjam of unfavorable WTI and Western Canadian Select differentials that has forced Alberta's producers to leave millions of dollars on the table.

Competitive pricing will be a major impetus for Western Canadian grades to reach refineries in China that are being configured to run on heavy grades, said Afolabi Ogunnaike, senior analyst for Americas refining and oil markets with Wood Mackenzie.

Compared with a cost of $8.5/b for transporting oil via pipeline from Hardisty to the US Gulf Coast, the cost for shipments on the Trans Mountain line could be $6/b to $8/b depending on the tariff to be charged by Kinder Morgan, he said.

The crude would then have a shorter and cheaper trip to Asia than through the Panama Canal or around the Cape of Good Hope.

PetroChina, CNOOC and Sinopec will have a viable option now to send commercial volumes of their equity crude from Alberta's oil sands projects back home.

As an anchor customer for Trans Mountain Expansion, Cenovus has already indicated it will have much greater flexibility to access additional markets where demand for heavy oil is strong and pricing is likely higher over the longer term.

Putting crude oil into pipelines instead of rail cars will also support Western Canada's growing NGL business, as heavy oil producers will no longer need to import as much light oil from the US and can instead use locally produced NGLs as diluent for its heavy crude production and transportation.

Predictably, not everyone is happy with Trudeau's "about-face" on the pipelines.

"With this announcement, Prime Minister Trudeau has broken his climate commitments, broken his commitments to indigenous rights and has declared war on British Columbia ... if he wanted to bring Standing Rock-like protests to Canada, Trudeau has succeeded," said Mike Hudema, a prominent Greenpeace campaigner in Canada.

Finally for Canada, the politicians and oil industry are on the same page, but now the hard part begins of getting the rest of Trudeau's constituents on board. If not, the forecasts of how much the pipelines will benefit the country and industry will remain another failed year-end prediction.