Pipeline bottleneck looms, even with Trans Mountain approval.

BOTTLENECK LOOMS

CALGARY• Oil sands producers are likely to face a pipeline shortage in coming years, even amid growing optimism that a major pipeline could soon receive federal approval and ease industry’s pipeline constraints.

Calgary-based oil companies eagerly await Ottawa’s decision on Kinder Morgan’s proposed Trans Mountain pipeline, which would ship mostly heavy crude oil from Alberta to a port near Vancouver. The National Energy Board approved the proposal with 157 conditions in May, and the federal government is expected to announce a final decision before Dec. 19.

However, the construction of the pipeline would ultimately be cancelled out by the expected growth in oilsands production, which is estimated to increase significantly over the next four years as longawaited expansion projects come online.

“If we are running out of pipe capacity by the end of 2018 or early 2019 because there is that growth, then nothing really changes — we’re still running out of available pipeline capacity to deal with that oilsands growth,” said Martin King, the director of institutional research at GMP FirstEnergy.

The contentious politics surrounding pipelines has loomed over the Canadian energy sector for years, as fierce opposition to oilsands development hobbles major projects including Enbridge Inc.’s Northern Gateway and TransCanada Corp.’s Keystone XL. Those projects have either been delayed (Gateway) or outright rejected (Keystone), and neither now shows little chance of being commissioned.

Pipeline hopes are now tied to two projects: Trans Mountain and TransCanada’s Energy East, which would ship up to 1.1 million barrels per day from oilfields in Alberta and Saskatchewan to New Brunswick.

Final approval for both projects could potentially fall on Prime Minister Justin Trudeau, who is facing pressure from local stakeholders and environmental groups to reject the proposals. An NEB panel reviewing Energy East has been delayed, threatening the board’s aim to make a decision on the project by March 18, 2018.

As a result there has been speculation over whether Trudeau will choose one pipeline project over another — possibly as a way to appease both oil producers, who want better access to international markets, and environmental groups, who oppose oilsands expansion.

Alberta Premier Rachel Notley appeared to reinforce that speculation when, in a response to Trudeau’s recent plans to enforce a minimum carbon tax, her office said they wanted to see pipelines built “in one direction or another.” A spokesperson for the premier said the comments were only in reference to Trans Mountain, and “not in reference to a preference of one over the other.”

Industry groups and pro- ducers, for their part, have said they will need both projects in order to meet longterm supply expectations.

A recent report by Wood Mackenzie estimates oilsands production will reach 3.5 million bpd by 2020, up from around 2.5 million bpd today. The estimate is roughly in line with the International Energy Agency, which sees oilsands supply reaching 3.4 million bpd by 2021.

About 90 per cent of expected oilsands production will come from expansions to existing projects, said Stephen Kallir, a Calgary-based analyst with Wood Mackenzie.

“If you’re looking at projects that are going to be coming online by 2020, they’re almost all under construction,” he says.

“The only way that we wouldn’t be hitting that is if the project underperformed.”

The expansion of Trans Mountain would go a long way to absorbing that expected supply. Currently the pipeline is running at full capacity of 300,000 barrels per day.

The company hopes to twin the existing line to bring on another 590,000 bpd by the end of 2019, for a total capacity of 890,000 bpd.

Enbridge is also replacing some of the capacity on its Line 3 pipeline stretching from Alberta to the U.S. Midwest, which could bring as much as 370,000 bpd of capacity back online by 2019 according to analysts.

If oilsands growth continues after 2020, the lingering question for producers is whether Energy East will be commissioned in time to meet shippers’ demands.

But growth after 2020 remains highly uncertain, as oilsands players hesitate to invest new capital amid a tepid outlook for high-cost megaprojects.

“Once you get out past 2020 that’s where you can get much more variance,” he says.

A pipeline shortage would once again force more barrels to move by train, as producers have been building crude-by-rail capacity in anticipation of a shortage.

Afolabi Ogunnaike, a Houston-based analyst with Wood Mackenzie, said it costs between $13 and $16 per barrel to ship oil from Alberta to the Gulf Coast via train. In contrast, his firm’s early estimates suggest it would cost between $5 and $7 per barrel to reach Asian markets via the expanded Trans Mountain pipeline.