Canada’s Oil Crisis Is Far From Over

Canada has vowed to build the Trans Mountain Expansion project in order to move more oil out of the country, but a lot of hurdles remain.

In May, the Canadian government agreed to pay Kinder Morgan $3.5 billion for the existing Trans Mountain line, plus the proposed expansion project. The decision by Kinder Morgan to sell the project, plus the uncertainty surrounding the takeover by the Canadian government, will almost certainly push back the start date for the pipeline until 2021 at least.

"Pipeline construction is a seasonal activity during summer to the fall [June to August] in Western Canada and failure to start work on the main infrastructure works will also drive up expansion costs," Chris Bloomer, president of the Canadian Energy Pipeline Association, told S&P Global Platts.

The extraordinary intervention from the government demonstrates how desperate Prime Minister Justin Trudeau and Alberta’s oil industry are in their mission to build more pipeline capacity. Canada’s pipelines are at full capacity, which means that even “minor events can prompt significant volatility” in the prices that Canadian oil producers can fetch when selling their oil, Scotiabank said in a note.

Western Canada Select (WCS) has been trading at an enormous discount relative to WTI, which in turn is trading at its own discount to Brent crude. WCS is $18 per barrel below WTI, and nearly $30 per barrel below Brent.

Kinder Morgan’s threat to permanently scrap the project was a “near-death” experience for the federal government, former TransCanada executive Dennis McConaghy said at the Global Petroleum Show last week, according to S&P Global Platts. The cancellation of the Trans Mountain Expansion would have essentially led to permanent discounts for WCS.

Even with the government rescue, it won’t be smooth sailing for the Trans Mountain Expansion. Kinder Morgan was recently upgraded by Wells Fargo after it sold off the project to the Canadian government, evidence that Wall Street thinks the pipeline was not good for shareholders. The bank said that the sale of the embattled pipeline removed an overhang of uncertainty while also providing a jolt of cash for the company.

It remains to be seen how quickly the Trans Mountain Expansion progresses, but the fortunes of Canada’s oil industry hang in the balance. Pipeline projects like Trans Mountain Expansion and Keystone XL won’t be completed until “early next decade” under the “rosiest outlook,” according to a recent note from Scotiabank. The Canadian government intends to place the project under a crown corporation, which will then build the project for around C$7.4 billion before selling back to the private sector, Scotiabank says.

Meanwhile, the most likely pipeline project to move forward is Enbridge’s Line 3 replacement, which overhauls an existing line that is aging and in need of repair and operates well below capacity. The pipeline runs from Alberta to Minnesota and Wisconsin, servicing Midwest refineries. The replacement would more than double the existing throughput to 915,000 bpd, up from just 390,000 bpd currently.

However, the project still needs approval from Minnesota regulators, which began deliberations on Monday and are expected to wrap up next week. Because of the public outcry over Keystone XL and the Trans Mountain Expansion, which played major roles in adding years of delays in both projects, Enbridge is trying to downplay the significance of what it is trying to do.

“The biggest issue here is we have a critical piece of infrastructure that needs to be replaced,” Al Monaco, CEO of Enbridge, told the Star Tribune. “It’s just like we would replace a road, a bridge, a transmission line, a power plant.” But, just like Keystone XL and Trans Mountain, the communities that lie in the project’s path argue the project poses a threat to water quality, in addition to other environmental damage.

If the project is approved, environmental groups and indigenous communities promise a rerun of the Dakota Access protests that received worldwide attention two years ago. “It will be more than that,” said Winona LaDuke, head of Honor the Earth, a Minnesota-based indigenous environmental activist group, according to the Star Tribune. “I am welcoming water protectors across the world to come to Minnesota this summer.”

The Line 3 won’t begin operations until the end of 2019 at the very earliest, but any delays – whether from permitting, protests or any other reason – would push the start date into 2020 at least.

The Canadian government bailed out the Trans Mountain Expansion project, but Alberta’s pipeline woes are not going away anytime soon.

By Nick Cunningham of Oilprice.com