April 2020 Vol. 75 No. 4
Features
Court Rulings Enhance Canadian Pipeline Outlook
By Jeff Awalt, Executive Editor
While the United States spent the past decade adding oil and gas pipeline capacity to meet growing demand, Canada has been stalemated by legal challenges ranging from disputes with environmental groups and Indigenous rightsholders to a virtual civil war over provincial and federal jurisdiction.
Two court rulings since the start of the year may go a long way toward breaking bottlenecks that have stalled pipeline construction and expansion projects in the past.
First, the Supreme Court of Canada unanimously ruled that the federal government has primary jurisdiction over pipelines across provinces, killing an effort by the provincial government of British Columbia to halt the Trans Mountain Expansion Project and block the delivery of crude oil from Alberta to the Pacific coast. This followed a positive ruling by the British Columbia Court of Appeal last May that the province doesn't have the right to impose environmental laws that could kill the Trans Mountain pipeline expansion.
Then, another challenge to Trans Mountain was shot down when Canada’s Federal Court of Appeal ruled that Ottawa carried out "reasonable" and "meaningful" consultations with Indigenous peoples affected by the project's construction before approving the pipeline for a second time.
In that case, the court said that, while the federal government has a constitutional duty to consult with Indigenous people, that does not mean they have the power to veto a project. "The failure to accommodate in any particular way, including by way of abandoning the Project, does not necessarily mean that there has been no meaningful consultation," the judges said.
The rulings were long-awaited victories for the pipeline industry, according to the Canadian Energy Pipeline Association (CEPA), which intervened on behalf of Trans Mountain and the industry.
“Those are two very powerful court decisions in Canada, and they are especially positive because they provided clarity on issues that had been kind of fuzzy over the past few years,” said CEPA President and CEO Chris Bloomer.
“They enable Trans Mountain to continue to go ahead, but they have broader implications on jurisdiction and consultation across the country for all kinds of infrastructure development,” Bloomer said.
More recently, indicative of its stance, the Supreme Court in early March declined to hear five more challenges to Trans Mountain from environmental and Indigenous groups.
The decisions are especially good news for Canadian crude oil producers, who have faced production curtailments and market constraints due to a shortage of pipeline capacity from Alberta. The situation has forced producers to rely more on crude oil shipments by rail, which recently became the target of blockades that shut down a significant portion of Canada’s railway system earlier this year.
Still, the delays have taken their toll on the costs and schedules of four major pipeline projects in Canada. They include three crude oil pipelines and one natural gas project:
Trans Mountain Expansion Project
Estimates have soared to C$12.6 billion from C$7.4 billion for the former Kinder Morgan project that was purchased by the Canadian government in 2018 for C$4.5 billion. Construction has continued in spite of the higher labor, steel and land costs that contributed to the new estimate.
“The economics of this pipeline remain strong, both for the owners and the shippers,” said Trans Mountain Corp. President Ian Anderson, who projects that estimated first-year earnings of C$1.5 billion before interest, taxes, depreciation and amortization will continue to grow annually.
The Trans Mountain expansion is essentially a twinning of the existing 715-mile (1,150-km) pipeline originating near Edmonton, Alberta and extending to Burnaby, BC. It includes more than 600 miles (980 km) of new 36-inch pipe and 120 miles (193 km) of reactivated pipeline, along with 12 new pump stations and 19 new storage tanks at existing terminals. It also includes the construction of three new berths at the Westridge Marine Terminal, where tanker traffic is projected to increase to 34 per month from one.
The expansion project will increase nominal capacity of the system to 890,000 bpd from 300,000. The expected in-service date is December 2022.
This is not the first expansion of the Trans Mountain line. In fact, since operation began in 1953, the capacity of the pipeline system has been increased numerous times, with the initial expansion in 1957. The most recent expansion project took place between 2006 and 2008 with the construction of 13 new pump stations and modifications to existing stations. Also during this time, the Anchor Loop project added 100 miles (160 km) of new pipe through Jasper National Park and Mount Robson Provincial Park between Hinton, Alberta and Hargreaves, BC.
Line 3 Replacement Project
The largest project in company history, Enbridge’s Line 3 Replacement Project will provide much-needed incremental capacity to support Canadian crude oil production growth and refinery demand in Canada and the United States.
Enbridge has begun commercial operation of the Canadian section of its Line 3 pipeline while continuing to work through the Minnesota regulatory process for the U.S. portion of the $9 billion replacement project.
Line fill of the 665-mile (1,070-km) Canadian segment of the Line 3 replacement pipeline was completed in mid-November,
and the replacement pipeline, which connects to the existing U.S. Line 3 at the Manitoba-U.S. border, started moving oil at the start of December.
It will run at about half its rated capacity of 760,000 bpd until the U.S. portion receives final approval and is constructed and brought onstream, spokesman David Coll said.
Enbridge has operated Line 3 since 1968, with the Canadian portion of the pipeline stretching from Hardisty, Alberta, to Gretna, Manitoba, and the U.S. portion delivering oil to Superior, Wisconsin. Plans to replace the aging pipeline have been in the making since 2013.
Enbridge hopes to bring the U.S. segment online during 2020, but the timing is uncertain, as Minnesota utility regulators ordered further study in October on the potential impact of oil spills from Line 3 on the Lake Superior watershed.
Keystone XL Pipeline
Some pre-construction activities have resumed for the Keystone XL Pipeline in Canada, Montana and South Dakota, and TC Energy says officially that it is “in the process of refining its mainline construction schedule with plans to start construction in 2020.” But the contentious project remains one of the industry’s all-time great enigmas.
Even as it prepared to start construction, TC expressed doubts about the viability of the $8 billion project, which would carry 830,000 bpd of crude oil from Hardisty, Alberta to Steele City, Nebraska. As recently as February – the month TC previously said it would start mobilizing heavy construction equipment – CFO Don Marchand was unwilling to fully commit to the long-delayed project.
“This is a very compelling project with benefits for many parties if we can get this done,” Marchand said. “If we can get comfort that the risk-reward proposition is attractive to us, we will proceed. If we can’t line all that up, the project will stay where it is.”
Keystone XL – the proposed fourth and final leg of the 2,700-mile (4,300-km) Keystone Pipeline System – would expand the system’s delivery of Canadian and U.S. crude oil supplies to markets around North America.
CEO Russ Girling said nearly all of the U.S. right of way has been acquired, and the project was still a “go” at this issue’s publication deadline, when markets had become even less certain due to the globally spreading novel Coronavirus Covid-19.
If construction proceeds as planned this year, the 36-inch crude oil pipeline is expected to begin operations sometime in 2022, providing interconnects to Gulf Coast refineries that prefer the type of heavy crude that western Canada produces.
Coastal GasLink
Despite its importance, the 416-mile (670-km) construction of the Coastal GasLink project seemed to be flying below radar in comparison with other projects – that is, until Indigenous and climate activists across Canada took up the cause of Wet'suwet'en hereditary chiefs, who opposed the natural gas line, leading to some of the most disruptive protests that Canada has ever faced over pipeline construction.
Protesters in Canada blocked train lines, Vancouver's port entrance and at least one highway in February after police dismantled a rail barricade in southern Ontario and arrested 10 Indigenous protesters. As the demonstrations continued, CN Rail – the nation’s largest rail line – shut down its western freight routes and temporarily laid off 1,000 employees as the government struggled to resolve the matter.
After three days of talks, Indigenous affairs ministers from British Columbia and Prime Minister Justin Trudeau’s government said they reached an agreement on March 1 that would address future land rights disputes but allow pipeline construction to resume.
The Coastal GasLink project involves the construction and operation of a 48-inch diameter pipeline from near the community of Groundbirch, in northeastern British Columbia, to the LNG Canada Export Terminal near Kitimat. From there, the gas will be shipped to Asian markets, providing an opportunity for cleaner energy in areas where coal-fired electricity is commonly used.
Coastal GasLink selected four prime contractors to construct the pipeline — Surerus Murphy Joint Venture, SA Energy Group, Macro Spiecapag Joint Venture and Pacific Atlantic Pipeline Construction Inc.
Preliminary construction began in 2019, with clearing, development of access roads, site preparation for laydown areas and workforce accommodations after final routing was approved in May. In-service is expected in 2023.
Market Outlook
“These projects are going ahead, and they will be delivering product within a few years. So that’s a great outcome,” Bloomer said. “That doesn’t mean that we’re not going to have activism that is going to be used to obstruct and delay these projects, potentially, on a broad array of issues. But legally and regulatory-wise, these projects are moving forward.”
Canada’s oil producing region will continue to struggle with a pipeline capacity shortage for the roughly 2–3 years it takes to bring those projects online. There also are hopes for additional pipeline construction that may support increased oil and gas production as new export markets come into play.
Within Canada, natural gas will be critical to support growing demand for electricity generation, and new LNG facilities are expected to create more demand. The gas produced for those power plants and LNG projects will yield increasing volumes of natural gas liquids, and that is projected to spur more petrochemical development in Alberta.
CEPA’s Bloomer foresees a bright future for Canadian pipeline construction and a positive outlook for oil and gas exports to
and through the United States, with particularly strong upside for Canadian crude.
“A lot of export infrastructure is growing along the Gulf Coast, with VLCC tanker ports being constructed in and around Houston and Corpus Christi, for example,” he said. “I think the Gulf Coast is going to figure very prominently for Canadian oil in the future.” •
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