Rolling the dice

Building a pipeline in Canada used to be a relatively simple wager. Petroleum companies discovered new sources of hydrocarbons, consumers clamoured for energy, and midstream companies built a line between the two. Over the last several decades, hundreds of thousands of miles of pipe have been laid across North America, creating an integrated system that delivers fuel efficiently and reliably.

Unfortunately, the odds do not add up any more; politics, environmental concerns and cultural sensitivities now make building a pipeline a big-stakes gamble. “Everything has changed in the last few years,” says Andrew Leach, a Business Professor at the University of Alberta specialising in energy and the environment. “The pipelines have become a proxy for the oilsands. We have seen it with Keystone XL, and it is part of the opposition to Gateway.”

Key stonewalled

The Gulf Coast market remains the elusive prize. The region is host to more than 8 million bpd of refinery capacity, much of it capable of handling heavy oilsands crude. Starting in 2010, TransCanada proposed the Keystone XL, a 1700 mile pipeline that would transport up to 800 000 bpd directly from Alberta to the Gulf Coast. Environmental critics and Hollywood stars picketed the White House, and Nebraska state officials voiced concerns that the line might contaminate the Ogallala aquifer and damage the ecologically sensitive Sand Hills region. Because the project crosses an international boundary, President Obama has the power to delay the project, and did so in late 2011, pushing back any decision until after the federal elections in November 2012.

As an alternative outlet, Enbridge is promoting the Northern Gateway pipeline, which would transport 525 000 bpd of bitumen to a marine terminal in Kitimat, British Columbia (BC), and on to markets in the energy-thirsty Asia Pacific region. “From a purely economic perspective, when you ask what the closest access to world oil prices is, exporting it to the West Coast makes sense,” says Leach.

Northern Gateway has also drawn the wrath of environmental and aboriginal groups concerned with oil spills on land and water, and the joint review panel (JRP) has registered 4300 interveners who wish to testify. The federal government has come out strongly in favour of the project, and vowed to avoid the regulatory approval nightmare that stalled the Mackenzie Valley gas pipeline for decades. Natural Resources Minister Joe Oliver said in an interview that the “nation-building” attempt to link Canada’s vast oilsands resources to Asian markets cannot be stopped by protesters using civil disobedience.

In the meantime, Kinder Morgan, which operates Trans Mountain, the only pipeline currently carrying crude from Alberta to the West Coast (terminating in Vancouver), plans to spend Cdn$ 3.8 billion to double capacity on the 300 000 bpd line. Civic and Aboriginal leaders along the route have raised concerns that the expansion will lead to increased potential for spills and greater traffic along West Coast marine passages. While the expansion of the Trans Mountain line (TMX) will follow existing ROWs, the company must apply for regulatory approval; it plans to consult with First Nations and affected communities prior to the work. “A year ago, you could have surveyed BC residents and asked them what volume of oilsands production is being shipped out of Alberta through BC, and many of them would have said zero,” says Leach. “TMX has the ROW, but there will still be significant challenges associated with the expansion. The social license is now much costlier.”

Producers are also looking east to Ontario, Montreal and New Brunswick for new markets. Eastern Canada refineries have a capacity of 1.2 million bpd. Currently, crude pipelines from Alberta supply only the refinery hub located near Sarnia, Ontario; refineries east of there receive their feedstock from Africa and the Middle East. Now, with high discounts on oilsands production, these refineries are eyeing the West to supply a greater share of the pie. Enbridge’s 240 000 bpd Line 9, which flows west from Quebec to Sarnia, could be reversed with relatively little expense. In addition to Suncor’s 134 000 bpd Montreal refinery, Irving Oil has been experimenting with rail-delivered batches of oilsands feedstock at its 300 000 bpd refinery in St John, New Brunswick. Although no formal application has been made, Enbridge is engaged in feasibility discussions with refiners and the NEB to see if the project is viable.

Problems

Time frames for regulatory review are getting longer and longer. “The regulatory process is in a spiral right now where the length of the process is equated with the quality of the process, and this is not necessarily true,” says Leach. “You can definitely have a shorter process and higher quality.”

The ever-shifting marketplace increases the risk of stranding costly pipeline assets. “When the regulatory agencies were examining Alberta Clipper and the Keystone pipelines a few years ago, there was no notion of an oversupply into the Midwest PADD II region,” says Leach. “Then, along came the recession and stagnant fuel demand in the US. When LNG was first proposed for Kitimat (in the mid-2000s), the pitch was to install an import terminal. World gas prices were only US$ 12/1000 ft³, and North American gas was heading towards US$ 20. But by 2008, it had been turned on its head. It is amazing how prices and demand have flip-flopped.”

One of the greatest problems currently facing the Canadian oilpatch is the persistent, low price for natural gas. Shale gas production near major consumption centres has glutted the US market; Canadian gas, sitting at the end of the supply chain, has seen local prices dip under Cdn$ 2/1000 ft³.

The petroleum sector is moving to address these major challenges. Producers are working with government to develop carbon capture and sequestration, or CCS. A CCS system captures carbon at an oilsands upgrader then transports it by pipeline to a geologically appropriate basin where it can be permanently injected underground. Several programmes are under way to prove the commercial viability of CCS. The governments of Alberta and Canada recently contributed Cdn$ 865 million to Shell’s Quest project. Starting in 2015, Quest will capture more than 1 million tpy of CO₂ from Shell’s Scotford upgrader near Edmonton. It will then be transported 65 km and injected underground into an oil reservoir as part of an enhanced oil recovery (EOR) project.

CAPP, working in conjunction with industry and regulatory authorities, has announced a new fracking operation guideline for all natural gas explorers in Canada. The new rules include the public disclosure of all additives, the development of environmentally-sound frack fluids, baseline groundwater testing, improved wellbore construction and quality assurance, and better water source management and re-use.

Producers are also shutting in gas wells in order to bring supply back in alignment with demand. Following Chesapeake Energy’s decision to shut in 500 million ft³/d of US production, Encana slashed output by 600 million ft³/d. “It is abundantly clear that a continued reduction of drilling activity will be required to restore market balance,” said Encana Chief Executive Randy Eresman.

Industry associations are working to reduce regulatory creep. “We are supporters of the whole concept of one project, one review,” says Phillipe Reicher, Vice President of Communications for the Canadian Energy Pipeline Association (CEPA). “We hope to see the elimination of replication between the Canadian Environmental Assessment Agency and the National Energy Board.” (In late March, the federal government made a point to reduce regulatory red tape during its annual budget announcement).

In late February, TransCanada served notice that it would work with the state of Nebraska to find an alternative route that detoured around the ecologically sensitive Sand Hills region and Ogallala reservoir. In addition, the company announced that it would proceed with the portion of the Keystone XL project that ran from the Cushing, Oklahoma hub to the Gulf Coast in Texas. The Gulf Coast Project, which is expected to cost US$ 2.3 billion, does not need presidential approval. The line is expected to be in service by mid-2013, with the full 830 000 bpd Keystone XL system functioning by 2015. TransCanada estimates the capital cost of Keystone XL and related laterals at US$ 7.6 billion.

Many challenges remain. “Third party damage is a significant issue,” says Reicher. “For several years now, the US has had a call-811 number available nationally, and it has significantly reduced hits on lines. In Canada, we have a hodge-podge of 1-800 numbers, and it is not nearly as effective. CEPA and other utility organisations have requested that the CRTC (Canadian Radio and Television Commission) review a national 811 number for Canada. Also, we would like to see legislation making it mandatory for anyone digging near a pipeline to call. In addition, there are no penalties for damaging a pipeline, and we would like to see a system of fines for repeat offenders.”

The viability of Canada’s transportation network, and the fact that it serves several expanding plays, has focused attention on the value of publicly traded companies. In January, Pembina Pipeline acquired Provident Energy for Cdn$ 3.2 billion. The deal, which saw Pembina’s extensive Alberta pipeline gathering system combine with Provident’s NGL gathering, extraction and storage system, gives the new company a market capitalisation of Cdn$ 7.9 billion, making it Canada’s third largest pipeline company, behind Enbridge, at Cdn$ 26.6 billion, and TransCanada, at Cdn$ 29.2 billion. “There is the potential for M&A all over North America because of the shifting nature of production,” says Leach. “A small company may have an ROW that suddenly becomes quite valuable. So much is happening right now; it is very difficult to predict.”

This is an abridged version of the full article from Gordon Cope, which was published in the June 2012 issue of World Pipelines, available for subscribers to download now.

Read the article online at: https://www.worldpipelines.com/business-news/11062012/gordon_cope_looks_at_oil_and_gas_pipeline_regulations_in_canada/