It wasn’t too long ago that WTI was $100 in July 2014, still $60 in July 2015, and there was the big need, momentum, and expectation for at least one of Canada’s three new heavy oil pipelines (Keystone XL, Trans Mountain expansion, and Energy East) to go ahead. A lot has changed since then, both on the negative (lower oil prices, new governments, major oil sands M&A) and on the positive (declining Mexico and Venezuela production, OPEC cuts). July has already started off with interesting news on these pipelines, and by the end July, we should start to see more of the picture filled in for these three pipelines on which way they are going, or not going. It may well turn out that one or none of these three high profile new pipelines end up going ahead, rather it may well be the lower profile expansion of Enbridge’s existing oil pipeline system to the Midwest and Gulf of Mexico. We still believe there will be additional takeaway pipeline capacity for Cdn heavy oil around 2020 or soon thereafter. One way or another, the picture should be clearer by the of July on the direction on these pipelines.
Cdn heavy oil remains well positioned for US refineries. We have written many times in our blogs and Energy Tidbits memos on why Cdn heavy oil being better positioned in 2017 and beyond. One recent example was our April 11, 2017 blog “Cdn Heavy Oil Differentials Are Narrow In 2017, Likely Also Beyond” [LINK]. No one disagrees that Cdn heavy oil is trapped and only has one export market right now – the US. But we believe the US is effectively trapped in its supply access. It primarily relies on Canada, Mexico, and Venezuela (to a smaller degree Colombia) for its heavy oil supply. We recognize that Cdn heavy oil differentials will be subject to volatility since there is only one end market right now – the US. But with the positive trend of continuing decline in Mexico and Venezuela, it makes it less likely to see Cdn heavy oil differentials blow out for any extended period or to the same $/bbl magnitude as seen in 2014. Prior to the OPEC cuts, Venezuela oil production was down 13% in 2016 from 2.325 million b/d to 2.021 million b/d in Dec 2016. Given Venezuela’s current cash crunch, we believe Venezuela would be cheating on their 1.972 million b/d quota as opposed to producing below that at 1.963 million b/d in May 2017. Mexico’s declining oil production is impacting its exports, which were below 1 million b/d for the first time since 1980. Mexico’s May oil exports were 0.958 million b/d, down 20.4% YoY from 1.204 million b/d in May 2016. The other supply win is from other OPEC cuts. We highlighted this in our Jan 11, 2017 blog “Narrowing Cdn Heavy Oil Differentials, Even Before OPEC Cuts Reduce Deliveries To US” [LINK]. This theme was reinforced in Valero’s June 27 US sellside presentation, when in the Q&A, mgmt. replied on the tight heavy oil differentials and said “yeah. I think certainly, while the OPEC cuts remain intact, you will see fairly narrow quality discounts on the crude.”
Energy East: The July 8 Le Devoir Desjardins story reminds that the big challenge ahead to get social license approval in Quebec. There is still a long way to go for the NEB hearings on Energy East and there is no determined schedule for such hearings. The next NEB step is that the public has until July 31 to “share” ideas on how the NEB “should carry out the Energy East hearing”. Then the next step is on their timeline is “the Hearing Panel will seek the public’s input on whether or not the applications are complete”. However, this weekend reminded us of the challenge it will be to get Energy East thru Quebec. As we have said before, we expect significant social and political resistance to Energy East pipeline thru Quebec, especially with Quebec municipal elections in Nov 2017 and a Quebec provincial election in Oct 2018. The story that got attention today was the Le Devoir July 8 story “Desjardins finance Trans Mountain avant de décréter un moratoire sur les projets de pipeline” [LINK]. Our concern is that the Desjardins comments on their moratorium on financing pipelines is reflective of the views on heavy oil and pipelines based on their perspective as a cooperative financial institution with stakeholders throughout Quebec. Le Devoir reported “Spokesperson Jacques Bouchard subsequently contacted Le Devoir on Friday afternoon to announce that Desjardins Group has decided to declare a “moratorium” on the financing of any new pipeline project, but without naming a specific project. However, this moratorium excludes the commitment already made for the Kinder Morgan project, which is due to start construction in September. According to him, the decision to declare a moratorium was made “in the last few days”. It must enable Desjardins to “assess” this type of situation, with the aim of setting up “this fall” a “plan to coordinate the financing of pipeline projects”. “From the moment we have a harmonized global policy, we can move forward,” he added, without further clarification”. Le Devoir also reported “Desjardins is “sensitive” to the controversy surrounding this type of project “and has been firmly committed to the transition to a low-carbon economy for several years”. This story is not directly linked to Energy East, but we worry that their actions are reflective of the views of their cooperative stakeholders across Quebec. If so, it just makes us think the social protest against Energy East will be an even bigger fight than expected. If its still looks to be moving ahead in 2019, it will be interesting to see this plays out in leadup to Canada’s Oct 2019 national elections.
Trans Mountain: After July 18, BC NDP will be pushed to reveal how they plan to try to stop Trans Mountain. The BC NDP party takes over government on July 18. We don’t know if then Premier Horgan plans to give minister mandate letters (as Trudeau did) on that day, but there should be a different level of questioning the NDP once they are in government on “how” they plan to try to stop Trans Mountain. Trans Mountain was a major point in the BC NDP/Greens signed 10-pg deal “2017 Confidence and Supply Agreement between the BC Green Caucus and the BC New Democrat Caucus” [LINK]. Pg 5 of the agreement says “Immediately employ every tool available to the new government to stop the expansion of the Kinder Morgan pipeline, the seven-fold increase in tanker traffic on our coast, and the transportation of raw bitumen through our province.” We should get some indication from the BC NDP after July 18 of specific actions, which could at least define the added risk of getting BC NDP on side for Trans Mountain. It isn’t clear what they can do to stop this federally approved project, but, at a minimum, we would expect the BC NDP and other opponents of Trans Mountain to take a page from the US playbook on Keystone XL – delay and throw up every roadblock possible.
Keystone XL: We are supposed to see where TransCanada is on shipper commitment, likely on July 28. Keystone Xl got a big boost with Trump’s early executive order support at the federal level, but TransCanada (TRP) continues to work thru all other approvals at state levels. However, July is even more important as we are supposed to see clarification on the level of shipper commitment TRP has for Keystone XL. In the May 5, 2017 Q1 earnings call, mgmt was positive on their anticipated shipper commitment, and replied “so the net results of this is we do anticipate to have contractual support similar to what we enjoyed previously, albeit amongst the different shipper group”. Mgmt. was asked on the status of the key work streams for Keystone XL Mgmt replied that one primary work stream is to secure “commercial support for Keystone XL”, and “In regard to the shipping contracts, we’re making progress with our existing shipping group, as well as new entrants, as they work through their analysis and the documentation. A lot has changed since we were first denied the permits here in 2015 in regard to crude oil pricing and supply and various competitive alternatives, so they continue to work through that and I anticipate it will take a couple of months yet before we sum up our commercial support”. We expect analysts to follow up on Keystone XL shipper commitments when TRP releases Q2/17 results on July 28. It was a positive from the Q1 call for mgmt. guiding to a shipper commitment update this summer, especially in light of the big changes happening at the time that we would have expected to have an impact on shipper commitment decisions. Oil prices have softened, major oil sands/heavy oil M&A likely saw the departure of some key shippers, and the start up of the Dakota Access pipeline might have impacted potential shippers from the North Dakota Bakken on Keystone XL. With these big changes, it will be a strong positive to the outlook for Cdn oil sands/heavy oil if TRP can step forward on July 28 with a statement confirming that they have been able to secure a high level of shipper commitment to the project
Enbridge: No new news expected this month on its expansion plans of “pipe in the round”. There hasn’t really been any changes to Enbridge’s ability to expand/modify its system to increase takeaway capacity by >500,000 b/d. These expansion plans are lower profile likely because it isn’t one new pipeline, rather it is modifications and expansions of existing “pipe in the ground”. Having pipe in the ground doesn’t exempt Enbridge from getting social licenses for their projects, but it is has to be a major competitive advantage vs getting social license for a new pipeline. At its recent June 8 Mid Year Investor Update Meeting [LINK], Enbridge reviewed it expansion plans that would increase Western Canada takeaway by >500,000 b/d in 2019 to the US. The Enbridge expansion would see increased barrels to the key US Midwest and Gulf of Mexico refineries. Part of their outlined plan is to stop deliveries of 100,000 b/d North Dakota oil to the Cromer, Manitoba point, which means that they can replace those barrels with Cdn heavy oil barrels to the US. Another key part is Enbridge’s ability to expand Flanagan South/Seaway by 250,000 b/d to the Gulf of Mexico. In addition to the expansion of 250,000 b/d, Enbridge’s ability to increase takeaway out of Alberta will allow it to move another ~100,000 b/d of capacity on Flanagan South/Seaway that isn’t being utilized because of apportionment in western Canada.
Enbridge Mainline – Potential Future Expansions
This weekend’s Le Devoir story was focused on Trans Mountain, but it has July started off as a month to provide clarity on how there will be increasing heavy oil pipeline capacity out of Alberta. We expect an even greater focus (and clarity) on heavy oil pipelines after the BC NDP take over government on July 18 and TRP reports on July 28. We believe the US heavy oil supply/demand dynamics are positive for Cdn heavy oil, especially with the declining Mexico and Venezuela heavy oil production. It is why we have been positive on Cdn heavy oil and why we believe there will be increasing pipeline capacity for heavy oil out of western Canada either from the one of the three high profile heavy oil pipeline projects – Keystone XL, Trans Mountain and Energy East, or from the lower profile Enbridge system expansion. Regardless, by the end of July, we should have much more clarity on the direction for each of these major potential heavy oil pipeline projects.