Analysis: Foes fight Canadian oil pipeline to rich Asia market
*Enbridge’s Northern Gateway project would diversify markets for growing output*
CALGARY - Canadian oil producers have never felt the need for a pipeline across the Rocky Mountains to the Pacific Ocean more keenly, as a glut of landlocked crude is sold at unprecedented discounts versus seaborne rivals.
Trouble is, opposition has never been greater.
With U.S. Gulf crudes fetching $25 US (all figures in U.S. dollars) more per barrel than oil trapped in the interior, producers in Canada’s oilsands and the Bakken Shale are not reaping the full rewards of this year’s rally, even though outright heavy crude prices above $60 a barrel are more than enough to keep them well in the black.
Enbridge Inc.‘s long-discussed $5.5-billion Northern Gateway pipeline to the West Coast from Alberta would help solve the problem, giving producers direct access to the booming Asian market and relieving pressure on filled-up pipelines and topped-off storage tanks in the U.S. Midwest.
There’s a big hurdle, however. Opposition is growing louder among natives, green groups and even Canadian celebrities to a project they say risks dire environmental consequences due to increased tanker traffic and rapid oilsands development.
Those objections were highlighted on Wednesday after the Yinka Dene Alliance, comprising five First Nations whose lands make up about a quarter of the proposed right-of-way, rejected a package of financial incentives from Enbridge.
“We won’t trade the safety of our rivers, lands and fish that are our lifeblood,” said Chief Jackie Thomas of Saik’uz First Nation.
Enbridge (TSX:ENB) filed its application for Northern Gateway with the National Energy Board last May and expects the regulatory process to last through 2012. The line, which would run 1,172 km (728 miles) to Kitimat, British Columbia, from near Edmonton, Alberta, would start up in 2016.
Some call that target date optimistic at best.
“Honestly, from my perspective, it’s nothing that I would even consider at this point putting into my financial model,” said Lanny Pendill, energy analyst at Edward Jones.
“There are still substantial hurdles from an environmental standpoint and just the huge opposition that we’re seeing from the aboriginal community.”
Opposition crescendoed last summer after the BP Gulf of Mexico oil spill and a rupture of one of Enbridge’s own pipelines, which spilled 20,000 barrels of oil in Michigan.
From a market perspective, the concept of Gateway - or other plans including an expansion of Kinder Morgan’s Trans Mountain system, or even rail shipments to the coast - is simple. Producers are less captive to the machinations of refineries and storage hubs in one country, the United States.
Their oil would get loaded onto tankers and compete with Middle Eastern and other crudes in Asian markets.
“What would happen is new markets for the product would open up, further demand would open up and you would see a tightening of price differentials, so you’re going to get better pricing for your product,” says MEG vice-president John Rogers, vice-president of producer MEG Energy Corp. and an oilsands industry veteran.
MEG supports all three West Coast proposals. Expanding markets is good not only for MEG but for Canadians and Albertans overall, as higher crude prices mean increased government revenues through taxes and royalties, he said.
CHINESE TIES
Canada is the United States’ top foreign oil supplier. Nearly all its exports, nearly two million barrels a day, flow there.
An equally controversial plan would increase that by about half a million barrels a day through TransCanada Corp’s Keystone XL pipeline to the Gulf Coast, but that project hit a hurdle on Tuesday when the company said necessary approval from the U.S. State Department would be delayed.
Oilsands production is expected to double to 2.9 million barrels a day in the next nine years, the industry projects.
Canada, stung by spillover from the U.S. housing crisis and recession, wants to diversify trade throughout the economy. China offers some of the richest opportunities.
Meanwhile, Chinese companies have scooped up billions of dollars of oilsands holdings to secure resources to fuel a growing economy. MEG was an early beneficiary, getting an sizable investment from state-owned CNOOC Ltd.
Another state enterprise, Sinopec Corp., is chipping in some funding for Gateway’s regulatory and early development costs. Last year, it bought a nine per cent stake in the Syncrude Canada oilsands project for $4.65 billion.
“The bottom line is we have to seriously consider expanding our markets,” Canadian Natural Resources Minister Christian Paradis said. “We have huge market opportunities. When we see what’s going on in China, we can be a major player there.”
Producers are making good coin today, Rogers said, even with heavy oil discounts widening since summer due to outages and restrictions on Enbridge’s pipelines to the United States.
With U.S. benchmark West Texas Intermediate at above $85 a barrel, western Canadian heavy crude is selling for $60-$65 a barrel, covering costs and leaving a healthy profit.
Upgraded synthetic oil now sells for more than WTI due to the outage of Canadian Natural Resources Ltd’s Horizon oilsands plant following a fire in January.
However, Brent fetches around $15 more than WTI, due to a glut of supply at the Cushing, Oklahoma, storage hub, the world’s largest, much of it from Canada.
“You’d get more aligned with the rest of the world prices and trade closer to Brent than WTI. It could be 20 cents, it could be five bucks - who knows?” FirstEnergy Capital Corp analyst Martin King said. “But there would be at least be a little more influence from international price markers.”
The line is designed to carry a range of supply, from conventional light to synthetic to bitumen mixed with diluent. The project includes an adjacent condensate line running east.
Meanwhile, a recent assessment of Keystone XL done by energy consultants EnSys for the U.S. Department of Energy showed the costs of shipping crude to Asia from Alberta by 2020 would be $2.81 a barrel cheaper than piping it to Texas.
‘IT’S ABOUT THE ENVIRONMENT, STUPID’
But native groups, such as the Yinka Dene Alliance, Coastal First Nations and Union of BC Indian Chiefs, and green organizations want the proposal scrapped. They oppose the idea of more coastal tanker traffic, intrusion on aboriginal lands and an expansion of oilsands development in Alberta.
The UBCIC made its opposition official 10 months ago, fearing governments and courts would protect corporate interests over aboriginal title and rights to lands.
It also criticizes what it believes to be insufficient consultation by industry.
“Quite simply: it’s about the environment, stupid,” UBCIC Grand Chief Stewart Phillips said.
Canadian native groups have gained increasing power when it comes to regulatory approvals for energy and mining projects. Their efforts have gotten a boost as Canadian celebrities such as actress Neve Campbell and rocker Randy Bachman have signed on to their cause.
Indeed, as a joint review panel and the National Energy Board took five years to vet the Mackenzie gas pipeline in the Far North, much of the deliberation centered on the socioeconomic impact on native people and their surrounding lands.
As a sweetener, Enbridge is offering aboriginal communities a 10 per cent ownership stake in the line at no cost as well as one per cent of its pre-tax earnings for a community trust.
Pat Daniel, Enbridge’s chief executive, said the offer has been “well-received”, but he is under no illusions - as the Yinke Dene’s rejection on Wednesday highlighted.
“When I speak to the fact that the offering has been well-received I’m speaking to what I consider to be the response from the majority of those First Nations groups along the way,” Daniel said last week.
“That does not mean that everyone is wildly embracing the concept of the Gateway pipeline project even in light of the equity offering and the economic benefits and jobs and opportunities associated with it.”
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