Analysts don’t like Gateway’s chances
TRANSPORTATION ISSUES HAMPER OIL PRODUCERS
Enbridge Inc.’s Northern Gateway has the least chance of being approved among the pipelines being proposed in the country, according to analysts.
“We see Northern Gateway as the most vulnerable,” Samir Kayande, vice-president at ITG Investments, said during a panel discussion on the Financial Post website this week.
“[TransCanada’s Corp.’s] Energy East and TMX [Kinder Morgan Inc.’s Trans Mountain] are most likely [with TMX benefiting from having built the loop through Jasper before the opposition to pipelines really built],” said Andrew Leach, associate professor at the University of Alberta, who participated in the discussion.
“Both have [at least partial] existing rights-of-way and so are starting from a better place. Look to Clipper expansion and possibly Keystone expansion as well.”
Responding to the panellists’ comments, Todd Nogier, Northern Gateway’s spokesman, said there is “growing openness to the project.”
Canadian oil producers are hamstrung by a number of crude transportation proposals stuck in the regulatory review and opposition from First Nations and environmental groups.
Despite five years of regulatory scrutiny, TransCanada’s Keystone XL has failed to secure a permit from the U.S. government, while hearings for Enbridge’s Line 9 expansion to ship oil from Western Canada to Eastern refineries were recently disrupted in Toronto and Montreal as opposition to eastern pipelines grows.
But despite market access challenges, the industry has shown resilience and leaned heavily on rail to get crude to market. Canadian crude discounts have narrowed from a high of US$40 per barrel last year to about US$24.36 on average this year — but a considerable gap is expected to persist.
Lance Mortlock, Ernst & Young LLP’s oil and gas practice leader who also participated in the panel discussion, does not believe that a rejection of the Keystone XL pipeline would slow down Canadian oil production.
“Given we have other options on the table in terms of Northern Gateway, crude by rail and the West-to-East Pipeline, it would be unlikely,” Mr. Mortlock said.
While Canadian Pacific Railway Ltd. and larger rival Canadian National Railway Co. saw strong third-quarter earnings that beat analysts’ estimates, an infrastructure designed to have rail move mega volumes “is leaving a lot of money on the table,” Mr. Kayande said.
“Rail will fill in during the pipeline egress gaps over the next few years, and will always have a role in moving oil to locations not served by pipelines.…
“The bottom line is that we forecast activity to remain, but profitability could suffer. At some point, lower profitability will reduce activity, but we are not near that point yet.”
There are advantages to both rail and pipelines, Mr. Leach said, noting rail economics are significantly better for bitumen, especially if condensates remain at sustained high prices relative to light oil.
“Flexibility of rail, elimination of your dependence on diluent in the same way, etc., provide advantages in particular as the North American crude market adjusts to new production and demand realities.”
While CP and CN have increased oil shipments multifold, spills have increased at an alarming rate, too.
“Trains are, generally speaking, safe for transporting products as long as they are properly regulated and controlled, but I agree that spill frequencies tend to be higher for rail compared to pipelines; but volume released during those spills are less,” Mr. Mortlock said.
Estimated costs of shipping oilsands to the U.S. Gulf Coast by rail range from US$15.5 to US$31 per barrel, compared to around US$7 per barrel by pipeline, the E analyst said.
A rejection of KXL would mean that transportation costs would be higher than they would be with the pipeline in place, Mr. Leach said.
“Rail mitigates some of the cost increases, especially for bitumen projects, but you’re going to see some increase.
“Long-term impact would depend on how likely producers view the other projects’ chances of approval.”