Trevor Snapp/Bloomberg
Trevor Snapp/Bloomberg

Battle lines were drawn, a lot was said, changes were asked for and offered, and now we are heading into a year of big — and largely political — decisions on new oil pipelines and on foreign ownership of resources that could reset the goalposts for the Canadian energy sector.

When combined with big shifts underway within the sector itself — surging production of tight oil in the United States and Canada, new heavy oil refining capacity, volatile oil prices, continuing weakness in natural gas prices — 2013 could be full of bumps and sharp turns for Canadian oil and gas players and those who have a stake in them.

The most anticipated decision of the new year will take place in the United States. U.S. President Barack Obama is expected to decide whether to give a permit to an improved Keystone XL pipeline to transport some 900,000 barrels a day of oil between Alberta and the Gulf Coast, after initially rejecting it.

Proponent TransCanada Corp. expects a presidential permit by the end of March, but there’s no deadline.

“We do not anticipate concluding the review process before the first quarter of 2013,” a State Department official said in an interview.

A couple of other hurdles will have to be overcome before then. A new route through Nebraska would have to receive state backing, and the State Department would have to issue a favourable supplemental environmental impact assessment.

U.S. ambassador to Canada David Jacobson wouldn’t predict the outcome of the review process, but conveyed optimism during a recent visit to Calgary.

“Establishing energy independence in North America opens doors for the United States and Canada and what we haven’t done and what we don’t intend to do is to close doors,” he said.

If a permit is granted, TransCanada would ramp up construction immediately and anticipates starting to move oil in early 2015. President Obama approved this year the southern portion of Keystone XL between Cushing and the Gulf coast.

Also expected are Ottawa’s decisions around foreign investment, particularly by foreign state-owned enterprises (SOEs). Ottawa is reviewing a bid by China’s CNOOC Ltd. to purchase oil producer Nexen Inc., and a bid by Malaysia’s Petronas to purchase Progress Energy Resources Corp. It has promised to announce a framework on its approach to foreign investment at the same time as it announces its decision on Nexen.

A decision on the $15.1-billion CNOOC/Nexen deal was expected on Dec. 10, while a decision on the $6-billion Petronas/Progress is expected before the end of December. Neither of those timelines is firm.

Meanwhile, the uncertainty is holding back merger and acquisition activity.

“[The decisions] will provide the signal as to what degree foreign investment will be welcome and the foreign companies will decide from there what to do, and what they are prevented from doing — full takeovers, [joint ventures], minority interests, or whether there are other limits or rules,” said Mike Tims, chairman of Calgary-based investment dealer Peters & Co.

Once the guidelines are issued, there could be more activity in the oil sands: PetroChina is poised to move ahead with taking full control of the Dover oil sands project now co-owned with Athabasca Oil Corp.; Indian companies will try to gain a foothold; and in the natural gas side of the business Encana Corp. could lock up some joint-venture partners, while Exxon Mobil Corp. and its Canadian affiliate, Imperial Oil Ltd., may enter the race to export liquefied gas from the West Coast.

Exxon got the LNG ball rolling with its $3.1-billion purchase of Celtic Exploration, and Imperial then opted to take a half interest.

“Although ExxonMobil and Imperial are not showing their hand when it comes to a potential west coast LNG scheme, we believe detailed analysis has been undertaken,” RBC Capital Markets analyst Greg Pardy said in a report. “In this regard, Celtic’s natural gas reserves may be one piece of the puzzle, with the potential for JVs or further acquisitions in the Montney or Horn River down the road.”
Other big pipeline plans also cross big decision points in 2013 and they will go a long way to supplementing Keystone XL or becoming alternatives.

“We have so many resources, we don’t just need access to one of these markets, we need all of them,” Alberta Energy Minister Ken Hughes said in a recent speech in Calgary.

Plans to ship Alberta oil as far east as Saint John, N.B., are gaining momentum with the recent backing of several provincial premiers. Joe Oliver, Canada’s Natural Resources Minister, said the Eastern option would enable refineries to purchase Western Canadian oil at a considerably lower price, create jobs and possibly even reduce the price of fuel.

“There is the potential advantage that people see the direct economic advantage to them and build a broad national consensus about development,” he said.

TransCanada is expected to decide early in the new year whether to convert part of its gas Mainline to transport as much as one million barrels a day to Eastern Canadian points to oil transportation. With 80% of the pipeline already in the ground, the project could be ready to deliver oil in the next three or four years, following a regulatory review and one year to 18 months of construction.

Meanwhile, Enbridge is pushing ahead the reversal of its Line 9 from Sarnia to Montreal. It has received regulatory approval for the first part from Sarnia to Westover and it will seek regulatory approval for a larger, second phase from Westover to Montreal by the end of the year, with a ruling expected in 2013. The pipeline would be connected to Enbridge’s Mainline system and carry 300,000 barrels a day of Western Canadian oil to Eastern consumers by 2014.

Enbridge spokesman Graham White said public reaction in Eastern Canada has been largely positive, “and we hope it will continue.”

Enbridge will also hear by the end of 2013 whether its more controversial Northern Gateway project to pipe oil from the oil sands to the West Coast can go ahead. Regulators who are holding controversial hearings along the pipeline route through through northern British Columbia are scheduled to have a recommendation for the government on whether it’s in the national interest by the end of December 2013.

Meanwhile, changes within the business could start bringing relief from tight pipeline capacity and big Canadian oil price discounting.

Two major refineries are boosting their capacity to process heavy oils from Canada: BP PLC’s Whiting refinery near Chicago undertook expensive upgrades to process 260,000 barrels a day of heavy oil; Marathon Petroleum Corp.’s refinery in Detroit has retooled to process another 100,000 b/d.

“Marathon and BP will probably help the differentials as demand for heavy crude increases … then the whole heavy light picture should be compressed and help heavy crude producers over the next number of years,” said Stephen Fekete, managing consultant at Purvin & Gertz in Calgary.

Differentials could also get help with the completion of pipeline projects. The Seaway pipeline from Cushing to the Gulf Coast, 50% owned by Enbridge, is being expanded to carry 400,000 b/d early in 2013, and will further expand to 850,000 b/d by mid-2014.

The southern portion of TransCanada’s Keystone XL is expected to be in service in late 2013. Initial capacity will be 700,000 barrels per day, with the ability to expand to 830,000.

But until the pipeline system matches up with output from Canada and from light oil plays, depressed prices for Canadian oils are expected to continue and even cause production to be shut in and higher cost projects to be delayed.

Tight oil’s swelling volumes could further change the picture and put pressure on oil sands growth. Meanwhile, few are optimistic about a rebound of natural gas prices and 2013 could bring more pain for producers as shale plays keep inventories full and hedging contracts locked up during better times expire.

“While prices have lifted off the bottom, a major ‘structural’ increase in demand is probably needed to boost prices consistently back to US$5-6 (per million British thermal units,” Scotiabank economist Patricia Mohr said in a report. “LNG exports from B.C. and the U.S. Gulf will likely be the trigger for a major recovery in North American prices after 2015.”
Source: National Post

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