Energy Infrastructure Cancelled but Not Forgotten: Pipeline Resurrections

Canada may have narrowly dodged US import tariffs for now, but it doesn’t seem like we are out of the woods yet. The interesting result of these discussions around trade wars has been the increased transparency on Canada's reliance on the US for our energy trade. While many pipeline projects have been proposed in the past, they have been met by opposition from a number of fronts. This domestic energy confrontational sentiment may be abating after the realization that our negotiating position has weak footing and Canada needs options to deliver market value on the world stage. 

While TMX and LNG Canada are steps in the right direction for global access, the relative scale of tidewater export capacity pales in comparison to our full natural resource potential. While more and more observers look at Canada's positioning and what options there may be for infrastructure development, the potential to revitalize old projects is finding its way into conversations. Some projects create local demand and others provide access to alternative markets, but the motivation behind these capital projects has been to diversify the customer base, provide better realized pricing for our resources and improve Canada's economic wealth and prosperity.

Time to Pivot
Canada produces 5.1mmbbl/d of oil and exports 3.9mmbbl/d to the US. With the threats of tariffs on US imports potentially being absorbed in Canada and threatening national economic well-being, many Canadians are evaluating options to access international markets and revisiting projects that were previously denied.

The Second Coming of Pipelines
While the Canadian government approved the Trans Mountain Expansion project back in 2016, the announcement coincided with the denial of permits for Northern Gateway and Energy East. Enbridge formally announced Northern Gateway in 2006 and planned to move 525 mbbl/d of oil from Alberta to an export terminal in Kitimat, BC, providing marine transport to reach foreign markets in Asia. Energy East was a TC Energy project that would potentially ship 1.1 mmbbl/d of Alberta oil to eastern provinces for domestic refining into end-use fuels or tidewater exports. TC Energy, now South Bow, was also the developer behind Keystone XL, which met a similar fate but at the hands of the previous US Administration. Despite KXL increasing transport capacity to the US, it was intended to improve Canadian barrel economics and GDP growth. There are a number of other projects that deserve an honourable mention, but these are the high-profile projects that are garnering headlines.

Adjusting Risk in Pipeline Politics
We have seen major infrastructure projects run into challenges, ballooning budgets and growing opposition. While historically the risk of any given project was carried by one entity, we are seeing a trend of risk-sharing through joint venture structures that is spreading risk across both strategic and financial partners. Many of the large infrastructure developers have narrowed their risk tolerances and capital budgets, despite an abundance of capital opportunities in the backlog. We suspect the projects are still best handled by the large entities with experience and access to low-cost capital; however, partnerships will be vital to ensure appropriate risk thresholds are maintained to not overstrain any one balance sheet.

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