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Why the Northern Gateway ruling won't matter

As native groups, environmentalists and other stakeholders wait for the National Energy Board's ruling on the Northern Gateway pipeline, a consensus appears to be forming among industry players that approval of the controversial $6-billion project is not as important as it once was.

Analysts I've spoken to overwhelmingly expect the National Energy Board to at least conditionally approve the 1,200km oil sands artery in a ruling set to be released at NEB headquarters in Calgary on Thursday afternoon. The Enbridge (ENB-T) project would be the first link between Canada's oil sands and its west coast to be built in more than half a century and the plan is to start shipping more than half a million barrels of diluted bitumen to the coastal town of Kitimat by 2018.

"It feels to me that the sentiment on Gateway has improved dramatically over the past few months and I think that the project will get approval," said Chris Theal, CEO of Kootenay Capital, reflecting predictions BNN has received from AltaCorp Capital, Canoe Financial, RBC Capital Markets, FirstEnergy Capital, Raymond James and Brickburn Asset Management.

"But that doesn't mean the First Nations are on side, nor the province of Bring Cash," cautioned Dirk Lever, AltaCorp's managing director, referencing British Columbia's desire for a "fair share" of the economic benefits the pipeline will bring. Alberta and B.C. Premiers Alison Redford and Christy Clark struck a pact in early November that brought an end to several months of relations over the pipeline issue described by one of the two western leaders as "frosty".

However, a spokesperson for Premier Clark was quick to clarify the deal really just means B.C. will not pursue Alberta's royalties, but was free to hit up Enbridge or the producers who have signed up as shippers for more cash. Nearly two months later, no meetings have been arranged between B.C. government officials and the relevant industry players, at least none that either side has been willing to disclose.

OPTIONS AVAILABLE TO GATEWAY'S OPPOSITION

First Nations and environmentalist opposition to the project, though substantially reduced from its peak, remains high enough to ensure a 'yes' won't immediately lead to shovels in the ground. Ottawa will still need to rubber stamp the pipeline assuming the NEB signs off, at which point FirstEnergy Capital's Steven Paget expects opposition "will move to the courts and delay the start of construction."

RBC analyst Robert Kwan similarly warned clients in a note published Wednesday that opposition to the project remains "a major hurdle that could result in future legal challenges that could ultimately be a lengthy process."

"As such, we caution investors from viewing a conditional approval as a material positive for Enbridge's share price," Kwan wrote.

THE INDUSTRY HEDGES ITS BETS

Neither RBC nor FirstEnergy factor Northern Gateway into their estimates for Enbridge in terms of either spending plans or revenue projections. From the company's perspective, it has more than $30-billion worth of other projects in the hopper to keep it busy for the next decade or two and from a broader industry perspective, producers have spread their eggs around multiple baskets.

"Oil sands growth won't be affected by a yes or no decision [on Gateway]," said Koonenay's Theal. "Industry will find alternative ways to get more crude to market such as through [TransCanada's] Energy East, [Kinder Morgan's] Trans Mountain or rail. It just makes for wider discounts [that will last] longer."

Chris Cox, senior oil sands analyst at Raymond James, specifically mentioned Kinder Morgan's proposal to expand its 60-year-old Trans Mountain pipeline from a current capacity of 300,000 bpd to 890,000 bpd. The company filed for regulatory approval of the expansion, which on its own would be about 50,000 bpd larger than Gateway, just days ago on December 16.

"With the Trans Mountain expansion likely to come online sooner, the addition of Energy East and the rapid build-out of crude-by-rail capacity that I expect to see in 2014 and 2015, the 'need' for Gateway has become greatly diminished in my view," said Cox.

DOES IT ULTIMATELY MATTER IF NORTHERN GATEWAY IS REJECTED?

None of this means a 'no' decision on Gateway won't result in more pressure piling on another oil sands pipeline decision that is entirely out of Canadian hands.

"If we see this pipe submarine, it draws further emphasis on the necessity of Keystone XL, which is way out of our control," said Rafi Tahmazian, senior portfolio manager at Canoe Financial. "So if they kill Gateway, that would be very negative for our medium-term outlook for the sector."

Millions of additional barrels of bitumen are expected to be produced daily from the oil sands a decade from now (Imperial just filed for permission to build yet another new, 135,000 bpd facility on Wednesday morning barely a month after its Kearl mine broke past 100,000 bpd). Even though several methods of getting all those barrels to market remain on the table and Gateway represents just one, Tahmazian argues the current pipeline bottleneck is so severe that just the perception of it continuing would send economic shockwaves felt well beyond the oil patch.

"Having an exit strategy for the oil development program planned over the next several years is critical to the economy of Canada," he said. "Negative news on the pipes is negative for Canada."

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