In a devastating blow to the prospects of the Trans Mountain expansion pipeline – and thus, to the entire Canadian oil sands industry – a Canadian court ruled that the federal government failed to adequately consult with First Nations affected by the project. The ruling throws the entire project into doubt.
It’s the latest setback to Canada’s oil sands industry, which ahs been struggling for a decade to build a single large-scale pipeline to move oil from Alberta to the international market. Keystone XL still sits in limbo, ten years after its original proposal, despite support from both the U.S. and Canadian governments. The graveyard of abandoned pipeline proposals has grown over the years, and could yet claim another victim.
“The Trudeau government failed in its rhetoric about reconciliation with First Nations' and this court decision shows that,” a spokesperson for Squamish Nation said in a statement. “This decision reinforces our belief that the Trans Mountain Expansion Project must not proceed, and we tell the Prime Minister to start listening and put an end to this type of relationship. It is time for Prime Minister Trudeau to do the right thing.”
While the saga of Keystone XL has made international headlines and dragged on for years, the Trans Mountain expansion was supposed to be an easier lift. The project would be built as a twin line along the existing pipeline, reducing the environmental impact.
But it still has faced stiffed resistance on multiple fronts. The provincial government in British Columbia has aggressively opposed the project, which contributed to the near-decision by its owner, Kinder Morgan (TSX: KML), to entirely scrap the project. In May, at the eleventh hour, unable to assuage the concerns of the American pipeline corporation, the desperate government of Prime Minister Justin Trudeau decided to nationalize the project, buying it off of Kinder Morgan’s hands at a hefty price.
But the project’s fortunes have hardly improved since. The uncertainty over the political standoff with British Columbia has not been resolved, and there are lingering questions about the timeline for construction and the ultimate price tag.
However, the real blow came on Thursday, when a Federal Court of Appeal ruled that the National Energy Board (NEB) failed to consider the tanker traffic that would spring up on the coast of British Columbia once the Trans Mountain expansion was completed. The tanker traffic would negatively impact First Nations tribes in the region, a fact that was not adequately considered by the federal government.
As a result, the court ruled that the NEB has to go back to the beginning and assess the project’s impact. “The big takeaway is the duty to consult (indigenous people) is still the most important step in any major project,” Andrew Leach, associate professor of business economics at University of Alberta, told Reuters. Prime Minister Trudeau has preached reconciliation with First Nations, but at the same time, he has aggressively supported pipelines that impact their lands.
On the same day as the court ruling, Kinder Morgan’s shareholders voted overwhelmingly to approve the sale of the Trans Mountain expansion project to the Canadian government for C$4.5 billion. Surely, they are relieved to be rid of the beleaguered project.
The prospects for the pipeline are now highly uncertain, to say the least. The Canadian government can go back and consult with First Nations, requiring a lengthy review, or it can appeal to the Supreme Court, also a time-consuming process.
Keystone XL was also hit with a legal setback recently. A U.S. federal judge ordered the U.S. State Department in August to conduct a new environmental review since the project only obtained a permit in Nebraska for an alternative route, not the route upon which the State Department based its review.
Without pipeline alternatives, rail will continue pick up some of the slack. New data from the Canadian government finds that crude-by-rail exports from Canada jumped 45 percent in June, year-on-year, and are up 31 percent in the first six months of 2018, compared to the same period in 2017.
Meanwhile, Alberta will continue to suffer from steep discounts for its heavy oil, ensuring that Canada’s oil producers feel the impact of the midstream failures. Western Canada Select (WCS), a benchmark tracking heavy oil in Alberta, has been trading far below WTI for the past year. Part of the discount is related to quality differences and transportation costs, but the yawning gap between what Alberta producers fetch for their oil compared to prices that producers south of the border receive is stunning. The discount is now back above $30 per barrel relative to WTI.
Without any solution on the horizon, the hefty discounts will continue. For now, the only resolution in the relatively near future is Enbridge’s Line 3 replacement, which will add a few hundred thousand barrels per day of capacity if and when it is completed. That project is slated to come online in late 2019. But Canadian pipelines tend to suffer from unforeseen delays.
By Nick Cunningham of Oilprice.com
