No Promises For Energy East Pipeline

BMI View : TransCanada's ambitious Energy East Pipeline has a long and arduous road ahead of it. Canada's notoriously complex and slow regulatory approval process will ensure that construction of the project will remain far from certai n for some time. A s such , we will not be factoring its development into our forecast for oil and gas pipelines infrastructure industry value, or o ur outlook for oil production and crude exports .

Despite the recent hype surrounding TransCanada 's latest proposal - the CAD12bn Energy East pipeline - we believe this project remains a significant distance from progressing. The 4,500km pipeline, which is hoped to open up oil sands crude in Western Canada to new demand markets via the east of the country, is likely to be hugely controversial with environmentalists, First Nations populations and Québécois.

The pipeline would transport crude from Hardisty in Alberta to St John in New Brunswick, where a new deepwater port will be constructed at the existing Canaport site. The pipeline would have spurs to additional export terminals, in Saskatchewan and in Quebec. The project involves the construction of new pipeline, predominantly in Quebec and New Brunswick, and in parts of Alberta, and would connect to an existing, under-utilised gas pipeline which currently runs through Saskatchewan, Manitoba and Ontario, which would be converted to transport crude. The pipeline would have a daily capacity of 1.1mn barrels.

Treading The Line
Energy East Pipeline, Estimated Route

BMI View : TransCanada's ambitious Energy East Pipeline has a long and arduous road ahead of it. Canada's notoriously complex and slow regulatory approval process will ensure that construction of the project will remain far from certai n for some time. A s such , we will not be factoring its development into our forecast for oil and gas pipelines infrastructure industry value, or o ur outlook for oil production and crude exports .

Despite the recent hype surrounding TransCanada 's latest proposal - the CAD12bn Energy East pipeline - we believe this project remains a significant distance from progressing. The 4,500km pipeline, which is hoped to open up oil sands crude in Western Canada to new demand markets via the east of the country, is likely to be hugely controversial with environmentalists, First Nations populations and Québécois.

The pipeline would transport crude from Hardisty in Alberta to St John in New Brunswick, where a new deepwater port will be constructed at the existing Canaport site. The pipeline would have spurs to additional export terminals, in Saskatchewan and in Quebec. The project involves the construction of new pipeline, predominantly in Quebec and New Brunswick, and in parts of Alberta, and would connect to an existing, under-utilised gas pipeline which currently runs through Saskatchewan, Manitoba and Ontario, which would be converted to transport crude. The pipeline would have a daily capacity of 1.1mn barrels.

Treading The Line
Energy East Pipeline, Estimated Route

Facing A Tough Crowd

Construction is hoped to start in 2016 and take three years. It is estimated to create 7,729 jobs at its peak, according to a report published by Deloitte & Touche. The jobs figures have been questioned, especially given accusations of inflated employment figures attached to TransCanada's Keystone XL pipeline proposal. The report also notes the significant tax benefits the pipeline will generate, equal to CAD3bn, during the development and construction period.

These figures are hoped to help sell the project in a country where new pipelines are controversial. Insufficient tax revenue was a contributing factor to the rejection of Enbridge's Northern Gateway pipeline in June 2013. Environmental and safety concerns were also a factor, and will be high on the agenda for the Energy East assessment, especially in the wake of the devastating Lac-Mégantic rail crash in August 2013. For this reason, approval in Quebec, necessary for the project to progress, could be tricky to secure; although opening up significant new pipeline capacity would help to reduce reliance on rail for crude transportation. We also anticipate difficulty in acquiring First Nations approval, with indigenous populations having the right to refuse the project crossing their land. 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.

The construction of the pipeline is not just opposed for environmental reasons by those whose land it crosses, but also raises concerns over the boost it provides to production from oil sands. Critics argue that the pipeline would help to unlock greater oil sands production, which in itself is highly controversial.

The complexity of the regulatory environment, the level of opposition, and the number of interested parties needing to agree makes approval of pipelines difficult. The sheer length of the Energy East Project will mean it has an especially difficult route ahead.

Pipeline Blockages Weigh Down Share Price
Enbridge, TransCanada and S&P TSX, Relative Performance As Of 01/01/2013, %

Potential Implications

Given the hur dles ahead for the Energy East p ipeline, we will refrain from factoring the project into our outlook for both the infrastructure and oil sectors in Canada. If approved , the impact would be felt in the following ways:

  • Upside potential for our forecast for oil and gas pipelines infrastructure industry value: Currently we are forecasting average real growth of 4.7% between 2014 and 2018, factoring in only partial realisation of major pipeline projects. If this CAD12bn project moves forward, it would provide a significant boost to industry growth, and filter through to greater infrastructure and overall construction sector growth.

  • Unlocking western Canadian crude production: Oil production in Western Canada's oil sands has been constrained by a lack of export capacity, weighing heavily on prices. By providing 1.1mn b/d of transport capacity, this pipeline would help to reduce the price differential on Western Canadian Select (WCS), and therefore provide greater impetus for production growth.

  • Improve Canadian oil trade balance: The pipeline would transport crude from Western Canada to the east, where it is hoped to be used in domestic refineries and loaded onto tankers for export. It is hoped that providing locally sourced crude, which will still likely be sold at a discount, would drive demand for western Canadian crude at refineries on the east coast, replacing existing import demand and therefore improving energy security. In addition, potential export markets are being explored, including Europe and Asia.

Transport Bottleneck
WCS, Brent & WTI Price Benchmarks

Read the full article

This article is tagged to:
Sector: Oil & Gas, Infrastructure
Geography: Canada
×

Enter your details to read the full article

By submitting this form you are acknowledging that you have read and understood our Privacy Policy.