Pipeline Delays To Temper Growth

BMI View: Enbridge has reported delays in receiving permission for the expansion of the Alberta Clipper pipeline, intended to carry crude from Canada's oil sands to US markets. While we believe that the project will likely ultimately be approved, combined with other midstream project delays, the potential for further setbacks to the project only underpins our view that infrastructure bottlenecks are likely to weigh on Canadian liquids growth.

Enbridge has reported that the US State Department is taking longer than expected in reviewing an expansion to the Alberta Clipper pipeline. The pipeline runs from Hardisty, Alberta to Superior, Wisconsin and currently carries 450,000b/d of Canadian heavy crude to the US market, though planned expansions would nearly double its capacity. Specifically, the first stage of Enbridge's expansion plans include increasing capacity on the line by 120,000b/d (to 570,000b/d), while a second phase would see the pipeline carry up to 800,000b/d by 2015.

While the project will likely still win approval eventually, we note that delays to the US-bound pipeline, combined with significant impediments to bringing online other takeaway capacity from the Canada's heavy oil sands have driven down the price of Western Canadian Select (WCS). With less attractive project economics for the country's crude development, this underpins our admittedly more conservative average 1.7% y-o-y liquids growth forecast over the next decade. Indeed, even despite the country's huge resource potential, we believe that industry interest could wane if not enough is done to ensure that there is a route to market for Canadian oil.

Takeaway Capacity Planned…Execution Uncertain
Pipelines Planned For Western Canada, '000b/d

Pipeline Delays To Temper Growth

BMI View: Enbridge has reported delays in receiving permission for the expansion of the Alberta Clipper pipeline, intended to carry crude from Canada's oil sands to US markets. While we believe that the project will likely ultimately be approved, combined with other midstream project delays, the potential for further setbacks to the project only underpins our view that infrastructure bottlenecks are likely to weigh on Canadian liquids growth.

Enbridge has reported that the US State Department is taking longer than expected in reviewing an expansion to the Alberta Clipper pipeline. The pipeline runs from Hardisty, Alberta to Superior, Wisconsin and currently carries 450,000b/d of Canadian heavy crude to the US market, though planned expansions would nearly double its capacity. Specifically, the first stage of Enbridge's expansion plans include increasing capacity on the line by 120,000b/d (to 570,000b/d), while a second phase would see the pipeline carry up to 800,000b/d by 2015.

While the project will likely still win approval eventually, we note that delays to the US-bound pipeline, combined with significant impediments to bringing online other takeaway capacity from the Canada's heavy oil sands have driven down the price of Western Canadian Select (WCS). With less attractive project economics for the country's crude development, this underpins our admittedly more conservative average 1.7% y-o-y liquids growth forecast over the next decade. Indeed, even despite the country's huge resource potential, we believe that industry interest could wane if not enough is done to ensure that there is a route to market for Canadian oil.

Bottlenecks Threatening Crude Output Growth

As the Alberta Clipper crosses the US border it requires a US presidential permit for the expansion to proceed. However, while Enbridge had initially stated that it expected to get the approval it needed in time to start pumping extra oil by mid-2014, the company now reports though that the permit is likely to take longer to be granted. While in this case State Department officials have indicated that the delay is 'procedural', not 'political', and the company can mitigate the impact in the short term, if prolonged, this delay will exacerbate infrastructure bottlenecks in Canada.

Takeaway Capacity Planned…Execution Uncertain
Pipelines Planned For Western Canada, '000b/d

Indeed, as previously highlighted, we see Canada, and specifically Alberta, as facing crucial midstream constraints to the growth of its oil sands production ( see 'Midstream Infrastructure Still the Missing Link', January 14). Moreover, while there have been a number of projects planned to boost takeaway capacity, including the Energy East pipeline, Northern Gateway and an expansion to Kinder Morgan's Trans Mountain pipeline, we continue to anticipate significant domestic opposition, suggesting potential for delays. Not only has there been pushback from environmentalists to the projects, but companies have also struggled in acquiring First Nations approval.

First Nations populations have traditionally been opposed to new pipelines, and have been a major factor in the rejection of projects in the west of the country. At this stage, more than 40 First Nations have applied to participate in the National Energy Board hearing on the Trans Mountain pipeline. Moreover, even for a project like Enbridge's Northern Gateway pipeline, planned to connect Alberta to Kitimat on the Pacific Coast, and which received conditional approval from the country's National Energy Board, the outlook is far from certain. For example, the Gitga'at First Nation has filed a court challenge to the federal review panel's recommendation.

This difficulty in bringing online cross-Canadian pipelines is only exacerbated by delays in approval for takeaway capacity from the Alberta oil sands to the US market. Most notably, the Keystone XL pipeline has faced five years of delays. While our core view is that the Keystone XL pipeline will get approved, even if it receives the nod from the US now, it will not be completed until mid-2016 ( see 'Keystone XL Inching Toward Approval', February 4).

Trading At A Discount
WTI, WCS & Maya Crude Blends, US$/bbl

In recent quarters, this infrastructure deficit has been reflected by an increasingly stark divergence between the price at which WCS and WTI trade. Some of this is due to the differences in crude grades - WCS is much heavier and sourer crude than WTI. However, we believe that the sharp increase in the spread between the two is also a reflection of the fact that while midstream infrastructure has improved noticeably from Cushing, allowing WTI to begin to trade at a less substantial discount to international prices, Canadian oil pipeline capacity is still insufficient.

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