An open or shut case

Enbridge predicts Northern Gateway decision before deadline to start construction

GARY PARK

For Petroleum News

Enbridge is within months of a crux decision on its decade-long battle to build the Northern Gateway pipeline and open a Pacific Rim market for oil sands crude from Alberta.

Chief Executive Officer Al Monaco told analysts earlier in December “it’s probably going to be in the latter half of 2016, if I had to make a guess.” Currently, Enbridge has only until 2016 to start construction.

Otherwise he provided no clear hints on whether Enbridge will: 1) Sanction the C$7.9 billion venture, setting the stage for a heavyweight legal showdown; 2) Try relocating the tanker port from Kitimat on the northern British Columbia coast; 3) Abandon the project altogether; 4) Launch a new, creative alternative.

Although Northern Gateway was conditionally approved by the previous Canadian government under Stephen Harper, Prime Minister Justin Trudeau has called for a ban on tanker traffic off the north coast.

Monaco said Trudeau and Natural Resources Minister Jim Carr have signaled “their openness to listen; they have talked about the importance of Canada securing markets, so all we can say at this point is that we are looking forward to engaging federal staff on this.”

Winning over First Nations

“We have 28 aboriginal partners that are keen to invest in the project (as 10 percent equity partners) alongside us so we will be working with them ... and hopefully we will have some good discussions with all levels of government,” Monaco said.

He said Enbridge will speak with British Columbia’s provincial and municipal governments and local communities to ensure people have a full understanding of the project, which is designed to export 525,000 barrels per day of crude bitumen, mostly to Asia, and import 193,000 bpd of condensate to thin bitumen and facilitate pipeline shipments.

Monaco said the slump in oil prices has lowered production in Alberta, meaning his company should be able to serve its customers without Northern Gateway for the next little while.

“So, in a way, timing (of Northern Gateway) isn’t too concerning for us. We continue to work on the kind of things we need as far as communities, First Nations and governments” are concerned.

Belief in project dwindles

Analysts seldom bother to raise questions on conference calls, while contracting and engineering firms have turned their attention elsewhere and Enbridge has yet to report that any of the 209 conditions attached by the National Energy Board and federal government have been resolved, although it has filed progress reports on 15 of the items.

Some take the view that Enbridge is reluctant to admit to shareholders that its investment of about C$500 million in Northern Gateway should be written off.

The gloomy external mood was captured by Steve Williams, chief executive officer of Suncor Energy - a contracted shipper on the pipeline - who said Northern Gateway is “not executable” in its current form, arguing that more negotiations are needed with First Nations.

More hope for Energy East

“It is a complicated and long pipeline, but I think you’ve got to say that’s probably where betting money would be at the moment,” he said.

Laura Lau, a senior vice president with Brompton Funds, told the Globe and Mail that oil producers started seriously looking for other shipping options three years ago and, at this point, probably “see a higher probability in Energy East. A lot of pipe (including a natural gas pipeline to Ontario which would be converted to carry crude) is in the ground. And it is made-in-Canada. It is almost like a nation-building exercise.”

Although the Alberta government’s role in Northern Gateway decision-making is limited, Premier Rachel Notley said during the provincial election campaign last spring that a New Democratic Party administration would scrap provincial support for the project, saying it is not worth risking political capital.

Legislation to ban tankers

Robert Hage, a senior fellow at the University of Ottawa’s Graduate School of Public and International Affairs, told the Globe and Mail that a law would need to cover Dixon Entrance, Hecate Strait and Queen Charlotte Sound to be effective - a possibility that would raise the ire of the United States, while a “mariner’s notice” would not have the force of law.

He said the government would be better off taking a broader look at how Canada can get oil and LNG to offshore markets, giving priority to including First Nations.

Gaetan Caron, a former chairman of the National Energy Board, said Northern Gateway could be a small, yet vital part of the Trudeau government’s pledge to achieve reconciliation with indigenous people. Such an agreement could see the pipeline go ahead, he said.

Also in the works is a court challenge by one First Nations group which the Federal Court of Canada is expected to rule on early in 2016.

Taking a bullish view

Oil traders say refineries in Eastern Canada have started tapping into cheaper oil produced in Western Canada and the U.S. Bakken now that Enbridge’s Line 9 reversal and expansion has started commercial shipments.

The first 60,000 barrels per day on the 300,000 bpd system reached their destination at Quebec refineries operated by Suncor Energy and Valero Energy, both of which have said they hope to rely on 100 percent North American crude once Line 9 ramps up to full capacity late this year.

The landlocked North American crudes typically sell at a discount to waterborne supplies, which have been the almost exclusive source of feedstock over many years for the refineries.

The new shipping option has redirected some crude that used to go to the trading hub at Cushing, Oklahoma, the largest storage point on Enbridge’s Spearhead pipeline, which connects Illinois with Cushing.

Guy Jarvis, Enbridge’s president of liquids pipelines, told analysts Line 9 is in operation, giving shippers the ability to use their contracts as they choose.

Chief Executive Officer Al Monaco said his company is confident it can continue to build on the 50 percent increase in its dividends over the past two years because it has a strong liquids outlook and C$25 billion in secured capital in execution that provides low-risk cash flow growth.

He also said Enbridge is largely insulated from low commodity prices in the near- to medium-term because less than 3 percent of its business is subject to direct commodity price exposure and 95 percent of cash flow is underpinned by strong commercial contracts.

Monaco said oil sands projects under construction are expected to provide 800,000 bpd of incremental growth out of Western Canada through 2019, putting pressure on pipeline capacity out of Alberta.

“Even in a bearish case there is 500,000 bpd shortage of (pipeline capacity out of Alberta) by 2021 and in any scenario our liquids systems are competitively positioned because our tolls are the most economical to key markets,” he said.

—GARY PARK