The Canadian government threw Alberta's oil sector a lifeline Tuesday in agreeing to buy the 890,000 b/d Trans Mountain pipeline project, an outlet to Asian markets that British Columbia appeared to block until the federal government's unexpected move.
Adds 590,000 b/d capacity to West Coast export markets
Alberta oil producers expect WCS discount to shrink
British Columbia premier says environmental risks remain
Alberta producers expect the outlet to shrink a steep discount for Western Canadian Select.
WCS has averaged at a $15.85/b discount to WTI so far in May, according to S&P Global Platts assessments, in from a $27/b discount in February, but out from a $9.76/b discount in May 2017.
"Today, almost 100% of our exports go to the United States," Tim McMillan, CEO of the Canadian Association of Petroleum Producers, told reporters Tuesday. "This will be our first meaningful optionality. It adds substantial capacity -- adding another 600,000 b/d will be very helpful in getting global prices for our crude."
McMillan said he expects the WCS/WTI differential to continue to fluctuate after Trans Mountain is expanded, but "in a more narrow band, and probably much closer to global prices."
Canada's finance and natural resources ministers announced that Ottawa would buy the existing 300,000 b/d Trans Mountain pipeline and 590,000 b/d expansion project from Kinder Morgan for C$4.5 billion (US$3.5 billion). They said the government took the unusual move of buying a private pipeline project to guarantee the resumption of work for the summer construction season.
"It is not, however, the intention of the Government of Canada to be a long-term owner of this project," the Finance Department said in a statement. "At the appropriate time, Canada will work with investors to transfer the project and related assets to a new owner or owners, in a way that ensures the project's construction and operation will proceed in a manner that protects the public interest."
The government said it expects to close on the deal in August, while Kinder Morgan Canada estimated late in the third quarter or early Q4.
PROVINCIAL FIGHT
Kinder Morgan had set a self-imposed May 31 deadline to decide whether to proceed with the 590,000 b/d expansion project it has been pursuing since 2012.
A recent spat between the Alberta and British Columbia provincial governments brought the issue to a head. After British Columbia announced an 18-month environmental study to delay the start of construction, Alberta retaliated with legislation giving it the right to stop the flowof crude and refined products on the existing Trans Mountain line.
The government and Kinder Morgan agreed to work together to find a third-party buyer for Trans Mountain by July 22, Kinder Morgan Canada CEO Steve Kean told analysts on a call Tuesday.
Kean said the government would fund restarted construction activity between now and the closing.
"We've agreed to a fair price for our shareholders, and we've found a way forward for this national interest project," he said.
Asked what would happen if no suitable third-party buyer is found, Kean said that would be up to the federal government.
McMillan of the producers group said that while the government is saving the project, the pipeline ultimately belongs back in the private sector.
"It's essential that it's operated by somebody that understands the pipeline business well," he said. "This will be a core piece of infrastructure for Canada. Knowing the pipeline business is going to be crucial for success."
POLITICAL UNCERTAINTY
British Columbia Premier John Horgan said in a press conference that he would continue to oppose the project, although it is not clear what legal challenges remain open to him.
"I'm concerned there could be catastrophic consequences of a diluted bitumen spill in British Columbia regardless of the owner of the pipeline, regardless of the owner of the rail cars," he said.
CAPP's McMillan said British Columbia's actions to block the pipeline have created political uncertainty for industries across the country. He said the federal government's extraordinary action Tuesday shows its firm commitment to see the pipeline get built.
McMillan predicted construction would start quickly, and timelines would be maintained.
"If the federal government wants this to be a success, they must ensure that the project doesn't incur overruns due to continued opposition from the BC government and organized activists," he said.
Asked whether the move sets an unrealistic precedent that future projects will expect to get bailed out by Ottawa, McMillan said "the situation shouldn't have come to this."
McMillan said CAPP continues to consider two other crude oil export pipelines as viable. The 525,000 b/d Northern Gateway and 1.1 million b/d Energy East pipelines to the west were canceled by the Liberal government in the face of political and stakeholder opposition.
"It is a call to Canada," McMillan said. "Let's get our house in order. Let's ensure that we have a system where we don't find ourself on the precipice of these major projects, that we have a clear and understandable regulatory system, that people follow the rule of the law, including provincial governments."
