Canadian Oil Producers Can’t Enjoy Hearing This

The dream of exporting energy to the world dealt a blow by BC’s provincial government.

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The Motley Fool

All that is standing between the Canadian oil sands and a growing market of 2.5 billion people is the province of British Columbia. This however is proving to be a significant obstacle.

It was announced on Friday that the province’s Environment Minister said that unless a better spill response plan was in place, a major pipeline proposal stood next to zero chance of being approved.

The province argued “it is not clear from the evidence that Northern Gateway will in fact be able to respond effectively to spills either from the pipeline itself, or from tankers transporting diluted bitumen from the proposed Kitimat terminal”.

While some might see this as damaging decision to Enbridge (TSX:ENB,NYSE:SU), the company proposing the Northern Gateway line, I can’t help but feel for the oil sands producers that continue to have their hopes dashed at the hands of government officials in both Canada and the United States.

For over a year now, companies like the sands’ largest bitumen producer, Suncor (TSX:SU), have been teased with the prospect of having greater access to the Gulf of Mexico via the Keystone XL pipeline. That free-flowing future is still far from a certainty.

Then Kinder Morgan Energy Partners (NYSE:KMP) and Enbridge came along to try and alleviate the obvious bottleneck with a proposal for one million barrels per day of additional takeaway capacity, only to have these projects delayed as well.

Growth in numbers

How does an increase of nearly 375% in takeaway capacity leading directly to the West Coast and access to burgeoning Asian markets like China and India sound?

That’s exactly what the Trans Mountain Pipeline expansion and the Northern Gateway pipeline would offer. Many view Kinder Morgan’s expansion proposal as the most likely to be approved due to the fact that current infrastructure is already in place and would “simply” be added to in order to nearly triple the carrying capacity from 300,000 barrels per day (bpd) to 890,000.

Why is the takeaway capacity necessary?

Look no further than the price chart of Canadian oil compared to other benchmark prices around the globe. While the discount to West Texas Intermediate (WTI) has tightened from its five year high of $41 per barrel last December, it still stood at $19.65 on May 31st.

Producers place a lot of the blame on the limited access to market as one of the key reasons for this disparity. Without increasing the avenues through which this oil can reach demand centres, the price oil sands producers receive for their product will continue to be weighed down. Looking forward, expected growth in production by 1.3 million bpd by 2018 (IEA) will likely only come to fruition if the Canadian government accommodates the pipeline plans.

Increased production? But from where?

Major projects are coming to a head for a couple of the most notable producers in the oil sands region, and the growth expected would add tremendous value for Canadians if infrastructure allows for them to reach expectations. On April 27th, Imperial Oil (TSX:IMO) announced that its Kearl oil sands project began operations.  By 2020, the company expects to have 600,000 bpd flowing from Kearl – or the approximate expansion capacity of the Trans Mountain pipeline.

Not to be outdone, Suncor, the company responsible for first tapping the oil sands, has two projects which aren’t producing yet in its Fort Hills and Joslyn mines. Together, these two would add around 264,000 bpd. While these projects are still up for board approval, the company expects oil sands growth of 7.7 – 17% in 2013.

Will either of these companies be able to realize their full potential without any or all of the three proposed lines? That remains to be seen, but my money is on it being highly unlikely.

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This post was authored by contributor Taylor Muckerman. 

Fool contributor Taylor Muckerman has no position in any stocks mentioned at this time.  The Motley Fool has no position in any stocks mentioned at this time.      

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

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