Trans Mountain Expansion Onstream Late 2017, Northern Gateway Not Till 2025: Wood Mac

From the Daily Oil Bulletin

By: Pat Roche

In Canada’s four-way bitumen pipeline race, Trans Mountain will finish first, Northern Gateway will finish last and either Keystone XL or Energy East won’t get built.

After prefacing his remarks with the caveat that no one knows what will happen, this was how Wood Mackenzie analyst Michael Wojciechowski predicted the race will finish.

“Everybody needs to have a base case and this is our base case. Certainly open to debate and discussion,” the Houston-based energy analyst told a press briefing in Calgary on Friday. “But there are other scenarios that may be … equally as plausible.”

Trans Mountain first out the gate

The British-based global consultancy expects Kinder Morgan’s expansion of the existing Trans Mountain pipeline across the Rockies to be in service first because the route follows an existing right-of-way.

However, Wojciechowski cautioned this doesn’t guarantee successful negotiations with First Nations or clear the way for construction of an export terminal on the West Coast.

“Those are still challenges to be overcome. But in our view, we see that that could come to market in late 2017,” he said.

Keystone approval in 2015

After about seven years of waiting, TransCanada Corporation’s proposed Keystone XL pipeline connecting Alberta bitumen with the U.S. Gulf Coast will get U.S. presidential approval in 2015, Wood Mac believes.

“[In] our base case, we see Keystone XL being passed in the new year, past the midterm elections,” Wojciechowski said. “And from that approval, about a ... 2 1/2- to three-year process to build that pipeline and get that up and operational.”

(According to Wikipedia, U.S. elections are being held throughout 2014, with general elections scheduled for November. During this midterm election year, all 435 seats in the House of Representatives and 33 of the 100 seats in the Senate will be contested.)

The curse of being last

If Trans Mountain and Keystone XL proceed first, that will delay Enbridge Inc.’s proposed Northern Gateway pipeline to the West Coast until the middle of next decade, Wojciechowski said.

Northern Gateway received federal Cabinet approval on June 17 with 209 conditions. Immediately after the announcement Enbridge president Al Monaco said that while Northern Gateway could possibly be in service by late 2018, it could be later than that, depending on a number of things that could happen over the next 12 to 15 months (DOB, June 18, 2014).

Wood Mac’s prediction that Northern Gateway will be built last is based on its assumption that Trans Mountain and Keystone XL will be built first, and that the combined capacity of those two pipelines will meet Alberta’s bitumen export needs till about 2025.

“The market doesn’t need it until the middle of the next decade,” Wojciechowski said of the outlook for Northern Gateway if Trans Mountain and Keystone XL are built first.

Securing shipper commitments is one of the 209 conditions for Northern Gateway, he said, adding that if Trans Mountain and Keystone proceed, Enbridge will be hard pressed to find the extra barrels needed for Northern Gateway to go ahead before about 2025.

Such a scenario — pipeline capacity temporarily exceeding shipper needs — would be a welcome reversal of fortune for Alberta’s bitumen producers after several years of inadequate capacity.

“If you get two [bitumen export pipelines built] before the end of the decade, you’re going to outstrip supply and have more takeaway capacity than there is barrels to fill that capacity. That’s when things become a little bit more interesting,” Wojciechowski said.

“That’s when differentials should really recover. That’s when competition will re-enter the market.”

Asked on Friday to respond to the Wood Mac scenario that Northern Gateway won’t come onstream till about 2025, Enbridge neither agreed nor disagreed with the prediction.

“The business case for Northern Gateway is predicated upon accessing the highest margin markets in the world to yield higher returns to our shippers,” the company said in an emailed statement. “Canada lacks access to these international markets and Northern Gateway seeks to provide that option for our shippers for the betterment of our customers, the various levels of governments and all Canadians. Northern Gateway continues to have strong commercial support for the project. Our funding partners, along with Enbridge, have provided significant investments to see the project through the regulatory process.”

Energy East: either/or

Where does this leave TransCanada’s proposed Energy East pipeline to central Canada and New Brunswick?

Here’s how Wojciechowski believes TransCanada is thinking as it awaits a U.S. decision on Keystone XL: “If they’re not getting a ‘yes,’ then they’re going to assume a ‘no’ and continue to progress another alternative — in this case, Energy East. If they get a decision on Keystone XL, then they’ll know very clearly what they’re going to do here. But if they don’t get Keystone XL, they’ll put all of their resources into an Energy East option.”

So if Keystone XL gets the green light — as Wood Mac expects, then Energy East will be shelved, he believes.

That said, Wood Mac believes Energy East has some advantages over the other three pipelines.

“It’s the project probably with the clearest path to completion — whether it’s ... regulatory approvals or First Nations discussions,” Wojciechowski said.

Also boosting Energy East’s fortunes, he said, are its planned use of vast stretches of existing pipeline, and the fact that the route is entirely within Canada, and hence will avoid the U.S. regulatory quagmire that immobilized Keystone XL.

“And if you think about [Energy East] on a cost basis, it’s actually fairly cost effective,” Wojciechowski said.

But compared with Keystone XL, Energy East isn’t the most economic option, he said. That's because Energy East shippers who want to reach the U.S. Gulf Coast would be saddled with the extra $2-to-$3-a-bbl cost of putting their oil on an international tanker.

“So it’s the one that you can see the clearest path for. But it’s not the most economically optimum path to the market. And that’s where Keystone XL — the bullet line straight to the Gulf Coast — achieves an efficiency that Energy East can’t,” Wojciechowski said.

Costs per mile

Based on capital costs per mile, Energy East would be the cheapest of the four proposed pipelines while Northern Gateway would be most expensive, he said.

Wojciechowski cited the rising cost of construction and the fact that Energy East will use a lot of repurposed existing pipeline.

He said Enbridge’s original Alberta Clipper and TransCanada’s Keystone base projects were built for roughly $3 million per mile, but Enbridge’s Line 3 construction is about $7 million per mile.

The cost to complete Keystone XL — from Hardesty to Nebraska and connecting to the southern portion that’s already built — is estimated at about $4.5 million to $5 million a mile, he said.

Looking at the two West Coast options, he said Kinder Morgan’s Trans Mountain expansion along an existing right-of-way is about $8.5 million per mile while Enbridge’s Northern Gateway is almost $11 million.

Comparing Keystone XL and Energy East, Wojciechowski said Keystone XL is still the most economical way to get to the U.S. Gulf Coast because there’s no need to connect with waterborne tankers. But he said Energy East would give shippers the option of reaching Europe, or even Asia once the Panama Canal expansion is finished.

“So it’s not the worst idea,” he said of Energy East. “It’s just that in the grand scheme of optimizing economies, it’s not the most optimum.”


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