Nowadays, there are plenty of headlines about Canada’s two major pipeline companies, TransCanada Corporation (TSX:TRP)(NYSE:TRP) and Enbridge Inc. (TSX:ENB)(NYSE:ENB). Unfortunately, most of the stories concern controversial pipelines being held up by regulators.
Regarding TransCanada, I am of course referring to the Keystone XL pipeline, which would ship Alberta crude into the United States. Meanwhile Enbridge’s Northern Gateway pipeline would ship Alberta oil to the West Coast through British Columbia. Unfortunately for these companies, both pipeline proposals are in serious jeopardy and may never be built. This has made investors very nervous.
That said, there’s another opportunity that should not be ignored: the Bakken formation, most of which is located in North Dakota. We take a look below at why the Bakken is a perfect opportunity for the pipeline companies.
Plenty of growth ahead
Let’s face it. The future of the Canadian oil sands is very uncertain. It is a high-cost region, so if oil prices stay low, then production could suffer. In that scenario, the need for pipelines may fall short of expectations.
Bakken is a different story—although numbers vary, the formation is much lower in cost than the oil sands. To illustrate, according to Continental Resources Inc., the company can achieve a 20% return on investment in the Bakken with oil at US$50. So, we should see plenty of production from the formation for many years to come.
Less politically sensitive
Alberta’s energy patch has a number of things going against it. First of all, because it’s located in Canada, there’s little incentive for Americans to support it. To illustrate, we’ve heard President Obama claim that Keystone XL would only create about 300 permanent jobs. He has no reason to count all the jobs that would be created in Alberta.
Second, producing in the oil sands is very energy-intensive, making it a perfect target for environmentalists. The Bakken draws some opposition as well, but not nearly as much as the tar sands. So, if TransCanada and Enbridge want to build pipelines from this formation, they’re less likely to run into environmental opposition.
Rail is very dangerous
As of mid-2014, a little over 60% of Bakken crude was being shipped by rail, a reflection of just how little pipeline infrastructure there is in the region. This is incredibly dangerous because Bakken oil is highly flammable, much more so than Canadian crude. For example, the tragedy in Lac-Mégantic involved Bakken oil.
So, there is an incredible need for companies like TransCanada and Enbridge to build pipelines from the Bakken. Both of them are active in the area already, but in the long term, there should be plenty more opportunities. Shareholders should breathe a little easier.
