Thursday 23 January 2014

2014 Top 5 POD Stories to Watch. Number 1: Oil Transportation

In this five part post I'll take a look at the five story lines that I expect will be the most interesting for me to follow in 2014.

Number 5: New Old Sources of Oil
Number 4: US Tight Oil
Number 3: Monetary Policy
Number 2: China

Number 1: Oil Transportation

Here's my Alberta bias. But around these parts 2014 could well shape up to be the year of the pipeline. While we probably won't get into any construction in this calender year, we might get some clarity on the Keystone XL, but also on Kinder Morgan's TransMountain expansion and Enbridge's Northern Gateway.

While the US production rebound has not helped Canadian producers, the potential (albeit very speculative) for a Mexican rebound might have the greatest impact.

The Keystone XL aims to deliver Alberta's Western Canadian Select to Gulf refineries equipped to handle it. However, Mexico's Mayan oil is a similarly heavy blend. With easier, cheaper, and less controversial access to the Gulf's refinery complex.

Thus, the importance of Kinder Morgan and Enbridge's push west to the Pacific Coast.

So what to watch for?

Kinder Morgan's timeline certainly extends well beyond 2014 with the NEB beginning it's 15 month review process upon Kinder's submission on Dec. 16th. But it's a pretty safe bet that the public relations battle will be waged throughout the year. If everything goes smoothly, and it won't, construction would start in 2016 with operations commencing in 2017.

Enbridge's Northern Gateway should provide some interesting developments to watch, but TransCanada's Keystone XL should provide the fireworks.

Northern Gateway:

On December 19th it was announced:
The Joint Review Panel (the Panel) for the proposed Enbridge Northern Gateway Project today recommended that the federal government approve the project, subject to 209 required conditions.  
Based on a scientific and precautionary approach to this complex review, the Panel found that the project, if built and operated in compliance with the conditions set out in its report, would be in the public interest.
This is a big hurdle passed. However the 209 conditions laid out by the Panel will give Enbridge alot to wade through before even getting to the five conditions laid out by the BC government which are vague enough to either expedite or hold up the process.

But what could ultimately derail this process? Beyond a material change in the economic landscape, it's hard for me to imagine anything beyond Enbridge failing to comply with the detailed 209 conditions holding this thing up.

2014 will test to see how strong the marriage of convenience is between green activists and first nations groups. My suspicion is the first nations groups will be 'persuaded' to the merits of the project and the green party will lose their most valuable argument.

I also suspect the BC government will accept the inevitability of this project and look to maximize their return. Perhaps tying their approval in with a refinery announcement to bolster the BC jobs and economic return.

Keystone XL:

The final Environmental Impact Statement is expected to be delivered at anytime now. The crux of this report comes down to one simple, and incredibly complex, question: will Keystone XL contribute significantly to climate change?

The semantic obfuscation that is bound to accompany a politically sensitive matter like this is frustrating, but understandable. This issue encapsulates a host of issue not wholly relevant to the economic and environmental merits of the pipeline itself.

- Will XL contribute to climate change?

Depends how you define terms. If you're moving oil from Alberta to Texas, pipeline is certainly the least bad option. I don't think that's controversial (if it was, you'd hear about it). Where this question gets muddled is when we try to estimate how much the XL aids in the development o the Oilsands. This is the question that Environmental Impact Statement will have wrestle with, and is the question that Obama has framed his eventual decision around (as outlined here). Anything beyond a no will be controversial, but how sensitive is the level that it does impact oil sands development?

- Alternatives?

Part in parcel with the first question is what impact a no will have on climate change and the environment at large. If we instead end up piping the oil to China does help the US? If oil by rail volumes continue to rise to offset this, will it help the US? Perhaps more importantly, how would a yes or no to XL impact 2014 mid-term elections (this article outlines the implications)?

- Implications

XL is now the flashpoint for pipelines going forward. And I can't quite figure out what the fallout will be with a yes or a no on other projects. It seems most likely to follow a economically counter-intuitive path where denial of XL enhances the economics of Kinder's expansion, Northern Gateway, and Energy East.

Alberta producers would have greater incentive to push any and all alternative pipeline projects, which would typically increase the probability of their approval. However, a no from Obama would likely be justified by the report showing a clear decrease in Oilsands development. Opposition to other projects will certainly be emboldened by this.

On the flip side a yes for XL enables industry types and opposition alike to face the fact that development will proceed at fullspeed regardless of western or eastern access. The economics of these projects will diminished relative to a non-XL world, but supporters would be able to appeal to more nationalistic interests by diversifying end users

- The Wildcard: Rail Safety Standards

The benefits in favor of oil by rail over pipelines were: it was relatively cheap to add incremental capacity, infrastructure existed, regulatory  less risk of a huge spill, and it enabled sellers to access a variety of markets (important in the fragmenting oil supply market).

After Lac Magnetic the perception of Rail safety was elevated to a central concern. Since then every small incident in Canada (herehere, and here) and more serious incidents in the US (here, and most recently here) have garnered increased scrutiny.

More regulations = more costs. More oil is moving around North American then ever before (US dated shown here by the EIA in July). Any incremental cost to this method of transportation filters back to E&P decisions as well as impacting refinery margins.

There is no way around this, if the economics of moving oil by rail diminish significantly, a no to pipelines will absolutely impact future oilsands development.

Changes have been made to Canadian oil by rail regulations (outlined here), but nothing major has changed in the US. Will they come down the road? I'd say that's pretty likely. Will they come well after Obama has weighed in on XL, again, I'd say that's pretty likely. But if what if they come first? What if the net back for those shipping oil by rail is chopped significantly?

These are items that would materially impact the impact of Keystone XL on the economics of oil sand developments.

What I'll be watching for:

- The biggie: The Final Environmental Assessment Report on Keystone XL. It can't really get hyped anymore. We'll probably get alot of hoopla surrounding the content on it's release followed by a nice long lull while it works it's way though the political system. Ultimately, a popular project with voters while the democrats attempt to maintain their control over the senate bodes well for this project. I'd expect the final report to be in a similar vain to the Supplementary Envionmental Impact Statement that found a no to XL doesn't materially impact Oil Sand development. Obama wants to say yes. This will give him adequate political cover.

- Northern Gateway: While anything beyond Ottawa's approval of the project, supported by NEB's support, would be shocking; the opposition will be front and center to take this thing to court. Whether we make any headway in 2014 is up in the air. In the not too distant future I would expect splintering among the opposition crowd with aboriginal interests breaking away from environmental groups in no longer opposing the project. Either way, we're looking at alot of "Harper is a petro dictator" and "How did you hippies get to this protest" type of rhetoric this summer. Sometimes entertaining, all the time useless.

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