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November 24, 2017 | The Keystone XL pipeline was approved this week

Hilliard MacBeth

Author of "When the Bubble Bursts: Surviving the Canadian Real Estate Crash"

This week Nebraska’s regulator made a decision approving the Keystone XL pipeline. The decision approved the line based on a new route, known as the “alternative mainline route”, not TransCanada’s “preferred” route. So this approval, although a key step, might mean a lengthy process of negotiations with different landowners on the new route and, possibly, additional environmental impact studies. The dotted green line on the map shows the “preferred” route, while the alternative route is east of that.

Source: TransCanada Corporation

Transcanada Pipelines (TRP) is the company leading this project which moves 830,000 barrels per day of Alberta crude oil through Nebraska to refineries in Texas at $8 billion in cost.

Keystone XL and Trans Mountain/Kinder Morgan expansion ($7.4 billion cost) are the two remaining pipeline proposals to move expanding production from Alberta oil sands to non-Canadian markets.

The Keystone expansion looks attractive because crude oil is already moving to the Gulf Coast by pipeline and railcars. It takes about 1,200 railcars per day to move the same amount as one pipeline with a capacity of 900,000 barrels per day.

But the Keystone XL expansion has a longer-term drawback. This concern is the fact that shale oil production from the Texas Permian Basin continues to grow, and production costs keep dropping. Alberta oil will have to compete with this new supply.

The U.S. imports about 7.8 million barrels of oil (2016 numbers), according to the EIA.

Canada enjoys a prime spot as lead supplier of crude to the U.S., shipping about 3.8 million barrels per day from Canada. The next biggest exporter is Saudi Arabia, at 1.1 million barrels per day.

U.S. companies produced about 8.9 million barrels per day domestically. Shale oil was 50% of that and shale oil production is growing rapidly.

According to the World Energy Outlook by the IEA, the U.S. is expected to grow shale oil production to 11.6 million barrels per day by 2025, more than double the current level. Since Texas shale oil is much closer to markets and tidewater, increased Texas production could displace some Canadian supply.

New incremental demand for crude oil will be in Asia, not North America, according to the IEA report. And there is one pipeline expansion proposed that would supply Asian buyers. The Trans Mountain expansion (TMEP), by Kinder Morgan Canada (symbol KML on TSX), would carry an additional 590,000 barrels per day by twinning the existing pipeline from Edmonton, Alberta to Burnaby, B.C. to load into tankers bound for Asia.

The TMEP expansion increases tanker traffic in the Vancouver area to one large tanker per day from five per month. The risk of a spill is the most serious concern expressed by those opposed to the expansion.

Many Albertans are hoping that this issue can be resolved to allow Alberta crude to move to new markets. Energy exports are worth about $7.8 billion every month. 75% of exports by value go to the United States while 65% of all imports come from there.

Canada’s largest export is energy and future revenue might depend on finding new markets, if the U.S. continues to increase its domestic oil production at current rates.

Canadians are watching this issue closely. Canada’s future economic well-being might depend on it.

Hilliard MacBeth

The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. The comments contained herein are general in nature and are not intended to be, nor should be construed to be, legal or tax advice to any particular individual. Accordingly, individuals should consult their own legal or tax advisors for advice with respect to the tax consequences to them, having regard to their own particular circumstances.. Richardson GMP Limited is a member of Canadian Investor Protection Fund. Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.

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November 24th, 2017

Posted In: Hilliard's Weekend Notebook

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