ESG focus puts brakes on North America pipelines

INCREASINGLY INHOSPITABLE

After a remarkable period of pipeline expansion, primarily in the United States over the past decade, North America is expected to become an increasingly inhospitable place for new projects, according to a new report.

While the upturn in crude oil prices, recovering oil demand and a surge in natural gas development for power generation will drive pipeline construction globally in the next few years, development of new pipelines in North America will be relatively subdued, says the report by Westwood Global Energy Group analysts Ben Wilby and Arindam Das.

Globally, pipelines planned and spending on pipeline construction is set to rise US$45 billion in 2021, 10 per cent more than 2020, but still lower than the near-US$60 billion spent in 2019, according to the London, U.K.based consultancy.

“Overall pipeline capex however, is forecast to be lower than the previous five-year period, predominantly due to a reduction in North American installation levels,” Wilby and Das said in the report. “Asia, Eastern Europe & FSU (former Soviet Union) and the Middle East are key to the realization of forecast activity levels and associated spend.”

Canada's pipeline capital expenditures will reach US$6 billion this year, before falling to $4.7 billion in 2022 and $1.5 billion by 2023, Westwood estimates show. In terms of miles, Canada will account for 23 per cent of all North American pipeline installations until 2025.

The findings may not come as a huge surprise as virtually every major North American crude oil pipeline has faced pressure from local activists and environmental groups over the past decade.

The cancellation of TC Energy Corp.'s 1,947-kilometre Keystone XL pipeline by U.S. President Biden earlier this year has already cast a gloom over energy infrastructure spending across the continent, while Enbridge Inc.'s Alberta-to-Ontario Line 5 also faces regulatory delays. TC Energy has filed a lawsuit against the U.S. government under NAFTA rules, while Enbridge is in mediation with the state of Michigan, which is opposed to the project.

“The pendulum has swung towards a lot more focus on ESG (environmental, social and governance), and a lot more focus on transition and to the extent it is right now a significant consideration in North America,” Das said in an interview.

Several other obstacles also hover on the horizon that suggest there are more downside risks to the forecast, especially in North America.

“Chief among these are geopolitics, focus on climate change and the increasing momentum of the energy transition particularly in the western hemisphere,” Westwood noted in its report. “There exists the potential risk of reduced appetite from financiers and lenders to project finance fossil fuel projects going forward. This has led to increased delays (and subsequently increased costs) on several projects as well as cancellations.”

The decline in North American pipeline capex is also a reflection of prospects of lower production. The U.S. Department of Energy expects U.S. oil output to decline to 11.1 million barrels per day this year, compared to 11.3 million bpd last year, while many analysts believe U.S. shale basins may not be able to repeat their rapid growth of the past decade.

The U.S. Bureau of Transportation Statistics show that since Keystone XL was first proposed in 2008 the U.S. has built 51,139 miles of oil pipelines, including 33,000 miles of crude pipelines. That's equivalent to 28 Keystone XLs.

And while none of the big projects — Energy East, Northern Gateway and Keystone XL — as approved, Canadian companies still managed to build nearly 11,000 kilometres of liquids pipelines between 2010-19, their most active construction period in more than seven decades, according to the Canadian Energy Pipeline Association.

“The Canadian growth trajectory was always underpinned by U.S. demand, and to the extent net zero and the ambition Biden is laying down are well underway to be achieved in the next 10-15 years, what you start to see is that demand for energy in the U.S. also starts to shift,” Das said. “And in that case, if demand profile starts to shift, the requirement for the demand for oil starts to change.”

IHS Markit expects Canadian oilsands production to reach 3.6 million bpd by 2030, compared to its previous estimate of 3.8 million bpd. Heavy oil production stood at 2.48 million bpd in March, according to the Canada Energy Regulator.

“Even prior to the pandemic, IHS Markit expected the coming decade to be one of sustained-but-slower growth for the oilsands, with transportation constraints such as a lack of adequate pipeline capacity and the resulting sense of price insecurity in Western Canada weighing on new largescale incremental investments,” the energy research firm said.

Canada's pipeline capacity stands at around 4 million bpd. Enbridge's Alberta-to-Minnesota Line 3 has a capacity of 370,000 bpd, while the Alberta-to-British Columbia Trans Mountain conduit will add 590,000 bpd to capacity.

If Enbridge Line 3 and Trans Mountain pipeline, as well as other announced smaller expansion projects are able to proceed, pipeline export capacity may be adequate to keep the market in balance. However, the absence of Keystone XL leaves little room to absorb any disruption to the system and could contribute to price volatility.

While private sector funding — and appetite — for financing new pipelines may be drying up in Canada, provincial and federal governments have stepped up to fill the gap.

The International Institute for Sustainable Development estimates that provincial and federal governments in Canada bankrolled three uncompleted pipeline projects in the country.

“We found at least eight different types of financial support measures provided for Trans Mountain, two for Keystone XL, and two for Coastal GasLink,” according to an IISD report published earlier this month.

“Cumulatively, Canadian governments have provided over $23 billion in government support since 2018. Of this, over $11 billion is in loans, and at least $10 billion is loan guarantees or liabilities. Over $10 billion in government support to pipelines was provided after the COVID-19 pandemic hit.”

The Institute said that it crunched the number afters filing access to information requests, and the final figure is “likely an understatement.”