91天堂原創

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. 鈥淓verything has changed in the last few years,鈥� says Andrew Leach, a Business Professor at the University of Alberta specialising in energy and the environment. 鈥淭he pipelines have become a proxy for the oilsands. We have seen it with Keystone XL, and it is part of the opposition to Gateway.鈥�

Key stonewalled

The Gulf Coast market remains the elusive prize. The region is host to more than 8聽million聽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聽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聽bpd of bitumen to a marine terminal in Kitimat, British Columbia (BC), and on to markets in the energy-thirsty Asia Pacific region. 鈥淔rom a purely economic perspective, when you ask what the closest access to world oil prices is, exporting it to the West Coast makes sense,鈥� 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 鈥渘ation-building鈥� attempt to link Canada鈥檚 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$聽3.8聽billion to double capacity on the 300 000聽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. 鈥淎 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,鈥� says Leach. 鈥淭MX has the ROW, but there will still be significant challenges associated with the expansion. The social license is now much costlier.鈥�

Producers are also looking east to Ontario, Montreal and New Brunswick for new markets. Eastern Canada refineries have a capacity of 1.2聽million聽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鈥檚 240 000聽bpd Line 9, which flows west from Quebec to Sarnia, could be reversed with relatively little expense. In addition to Suncor鈥檚 134 000聽bpd Montreal refinery, Irving Oil has been experimenting with rail-delivered batches of oilsands feedstock at its 300 000聽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. 鈥淭he 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,鈥� says Leach. 鈥淵ou can definitely have a shorter process and higher quality.鈥�

The ever-shifting marketplace increases the risk of stranding costly pipeline assets. 鈥淲hen 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,鈥� says Leach. 鈥淭hen, 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. 91天堂原創 gas prices were only US$聽12/1000聽ft³, and North American gas was heading towards US$聽20. But by 2008, it had been turned on its head. It is amazing how prices and demand have flip-flopped.鈥�

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$聽2/1000聽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$聽865聽million to Shell鈥檚 Quest project. Starting in 2015, Quest will capture more than 1聽million tpy of CO₂ from Shell鈥檚 Scotford upgrader near Edmonton. It will then be transported 65聽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鈥檚 decision to shut in 500聽million聽ft³/d of US production, Encana slashed output by 600聽million聽ft³/d. 鈥淚t is abundantly clear that a continued reduction of drilling activity will be required to restore market balance,鈥� said Encana Chief Executive Randy Eresman.

Industry associations are working to reduce regulatory creep. 鈥淲e are supporters of the whole concept of one project, one review,鈥� says Phillipe Reicher, Vice President of Communications for the Canadian Energy Pipeline Association (CEPA). 鈥淲e hope to see the elimination of replication between the Canadian Environmental Assessment Agency and the National Energy Board.鈥� (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$聽2.3聽billion, does not need presidential approval. The line is expected to be in service by mid-2013, with the full 830 000聽bpd Keystone XL system functioning by 2015. TransCanada estimates the capital cost of Keystone XL and related laterals at US$聽7.6聽billion.

Many challenges remain. 鈥淭hird party damage is a significant issue,鈥� says Reicher. 鈥淔or 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.鈥�

The viability of Canada鈥檚 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$聽3.2聽billion. The deal, which saw Pembina鈥檚 extensive Alberta pipeline gathering system combine with Provident鈥檚 NGL gathering, extraction and storage system, gives the new company a market capitalisation of Cdn$聽7.9聽billion, making it Canada鈥檚 third largest pipeline company, behind Enbridge, at Cdn$聽26.6聽billion, and TransCanada, at Cdn$聽29.2聽billion. 鈥淭here is the potential for M&A all over North America because of the shifting nature of production,鈥� says Leach. 鈥淎 small company may have an ROW that suddenly becomes quite valuable. So much is happening right now; it is very difficult to predict.鈥�

This is an abridged version of the full article from Gordon聽Cope, which was published in the June 2012 issue of 91天堂原創 Pipelines, available for subscribers to .

Read the article online at: /business-news/11062012/gordon_cope_looks_at_oil_and_gas_pipeline_regulations_in_canada/