Two developments which dominated the federal regulatory agenda in 2014 were first, new oil pipeline projects designed to access new markets primarily in Asia and Europe; and second, a large number of liquefied natural gas (LNG) projects designed to serve incremental markets in Asia and Europe.
Both developments reflect the fundamental change in Canada's traditional market for gas and oil. The advent of the shale revolution in the United States has had a significant impact on American demand for Canadian gas and oil.
The TransCanada PipeLines Limited (TCPL) transcontinental Mainline extending from the Alberta border through to Quebec City has experienced significant loss of throughputs to the US Midwest and Northeast markets, greatly increasing the per unit transportation toll for remaining shippers. Contentious regulatory proceedings extending from 2012 to the end of 2014 were triggered by various restructuring proposals intended to allow the pipeline to recover its potentially stranded costs (National Energy Board (NEB) RH-3-2011 Decision). This culminated in a decision released in December 2014 approving a Settlement between TransCanada and most of its major gas distribution customers. It established a framework to permit the construction of new pipeline capacity to enhance Canadian access to burgeoning Marcellus/Utica shale gas supplies in Pennsylvania and Ohio while providing the pipeline with the ability to recoup the majority of its remaining fixed costs. (RH-1-2014 Decision).
2) Oil Pipeline Project Developments
i) Energy East
This market access theme is reflected as well in the Energy East Pipeline Project proposal filed in late October 2014. Energy East proposes to transport close to one million barrels of crude oil and bitumen per day from Alberta's oilsands to marine ports located in Cacouna, Quebec and to St. John, New Brunswick. These tidewater destinations offer significant market diversification particularly for Canada's growing supplies of bitumen. Energy East proposes to commence deliveries as early as 2018. Large segments of the seriously underutilized gas Mainline across the Canadian Prairies and northern Ontario are proposed to be converted from gas to oil service reducing costs for gas shippers. Similarly, Energy East proposes to convert a large segment of pipeline between North Bay and Cornwall, Ontario (North Bay Shortcut NBSC), however, a dispute has arisen as the eastern Canadian gas distribution customers contend that the NBSC is fully utilized and still required for gas service. The regulatory hearings will determine the nature and extent of replacement capacity required and allocate the related cost amongst oil and gas shippers and TransCanada.
A very substantial amount of new pipeline construction also will be required from Cornwall, Ontario through Quebec and New Brunswick to a new marine terminal near Saint John. In addition to the commercial issues, the project also is expected to encounter significant opposition from anti-hydrocarbon activists, landowners and First Nations.
ii) Keystone XL
No discussion of Canadian oil pipeline developments would be complete without brief mention of the continuing saga of TransCanada's Keystone XL Pipeline, a project already approved in Canada but entering its sixth year of regulatory review in the United States. Keystone XL proposes to transport 830,000 barrels per day of crude oil and bitumen from Alberta and North Dakota to Gulf Coast and Midwest refineries.
By the end of 2014, TransCanada appeared to have met every legislative and regulatory requirement imposed for new pipeline construction in the United States. Nevertheless, by executive fiat, President Obama appears to have imposed, on an ad hoc basis, additional, substantive regulatory requirements for the Keystone XL project; criteria which do not appear in any laws enacted by the Congress; rules which do not apply to the construction pipelines to transport oil solely within the United States. Indeed, Congress has felt compelled to propose project specific legislation in order to approve this particular oil import pipeline. Whether legal or not under American law, these developments raise serious trade law concerns, potentially triggering government-to-government negotiations on the energy trade framework potentially reopening the North American Free Trade Agreement (NAFTA); and possibly triggering claims of a denial of national treatment under Chapter 11 of the NAFTA for which Keystone XL's remedy is the recovery of lost profits.
Most germane to the present discussion, however, is that the Keystone XL saga accentuates the urgent need for Canada to diversify its energy markets.
iii) Northern Gateway
The Northern Gateway Pipeline Project proposes construction of two pipelines that extend approximately 1,200 kilometers from the Alberta oilsands to a new marine terminal on the west coast of British Columbia near Kitimat. The crude export line is sized to transport 525,000 barrels a day, whereas the import diluent line is designed to import 193,000 barrels per day of condensate. A Joint Review Panel recommended approval of the project in December 2013 subject to more than 200 conditions. In mid-June 2014, the Federal Cabinet accepted those recommendations and directed the NEB to issue the related Certificates.
As with most federal energy projects in the current environment, a multiplicity of lawsuits were filed by anti-hydrocarbon activists, First Nations and some local interests. Given Enbridge's commitment to further consultation with First Nations; the need to satisfy the extensive conditions attached to the Certificate; and the time required to resolve the outstanding legal challenges, it is unlikely that the project's scheduled 2018 startup will be maintained.
iv) Trans Mountain Expansion
The Trans Mountain Expansion Pipeline Project is an approximately 1,200 kilometre pipeline from Edmonton, Alberta to the Westridge Marine oil terminal in Burnaby, British Columbia. It would twin the existing Trans Mountain pipeline increasing the system's capacity by approximately 590,000 barrels per day. Like Northern Gateway, the marine component of the project would involve a substantial increase in marine export traffic with tankers dispatching roughly on a daily basis to markets principally in the Far East. While the regulatory process began in April 2014, application deficiencies required extension of the review such that it is unlikely that the NEB's recommendation to the Federal Cabinet will be available until January 2016. Legal challenges have already been issued (at least one of which has been rejected) which suggest that the planned in-service in 2018 may prove optimistic.
v) Enbridge Line 9 Re-reversal
In 1976, Enbridge constructed its Line 9 pipeline from southwestern Ontario near Sarnia to the Montreal, Quebec petrochemical and refinery complex to expand the market for Canadian crude. When, almost 20 years later, the pricing of North Sea supplies proved more attractive, Line 9 was reversed to transport oil to refiners in Quebec, Ontario and New York. With the shale oil revolution significantly increasing production of midcontinent supply, a re- reversal was proposed with Ontario and Quebec refiners contracting for approximately 300,000 barrels per day shipped (again) from west to east. Despite significant disruption of the regulatory hearings by anti-hydrocarbon activist groups in Montreal and Toronto, the NEB approved the re-reversal in March 2014. Concerns about the adequacy of new shutoff valves near watercourses, however, led to a delay in a planned in-service date of November 2014. In February, 2015, the NEB approved the new valve locations. It is expected Line 9 will commence service by June 2015.
3) Liquefied Natural Gas (LNG) Export Projects
With respect to natural gas, prolific shale gas production across Canada and the United States have spurred many new LNG export proposals. Oil-based LNG pricing in Asian and European markets also became increasingly attractive relative to gas prices available in oversupplied North American markets.
By the end of 2014, the NEB had approved (mostly) 25 year LNG export licences for over a dozen projects with startup dates ranging between roughly 2018 and 2022. All but two of those projects are located on the west coast of British Columbia; the exceptions being two LNG projects proposed on the Oregon coast for which long term export licences were obtained for the overland export of Canadian gas by existing pipelines to the proposed LNG plants. Additional LNG export applications have also been filed with the NEB
The Board's general reasoning is that these large scale projects (many involving 2-3 bcf/d of gas supply although several smaller scale projects were also approved) represented the demand required to spur exploitation of the vast shale gas resources located primarily in the Montney region of BC and Alberta. A combined federal and provincial gas supply study had determined that the Montney gas resources alone represented well over a hundred years of gas demand. The magnitude of the known shale gas resource also substantially reduces exploration risk. The real impediment to its exploitation, therefore, is the absence of demand. In effect, shale gas exploitation more closely resembles a manufacturing process. The Board also assumed that only a few of the many LNG export proposals would survive the commercial realities of developing and financing these multibillion dollar projects.
As at the date of writing, only a few of the proposed LNG plants and related gas transmission pipeline projects had been approved by provincial authorities. Commercial uncertainties and protracted First Nation opposition (though of a somewhat lesser intensity than to oil pipelines) continue to challenge the planned in-service dates.
Two LNG export proposals were also filed with the NEB involving sites in Nova Scotia. Both rely to a significant extent on US shale gas. The US Department of Energy's more restrictive approach to LNG exports will need to be reconciled with Canada's more flexible policy. Two Quebec based LNG proposals (one involving GNL Quebec in the upper reaches of the Saguenay River) were also filed with the NEB, relying upon Canadian gas supplies sourced at Dawn, Ontario, and via the Eastern Ontario Triangle segment of the TransCanada system.
The loss of Canada's traditional export markets in the US Midwest and the US Northeast to their US shale gas competitors renders it imperative that these alternative markets are secured on a timely basis. Though the level of opposition to these projects has been less than for the oil pipeline proposals, it nevertheless exists. The intense state of global competition in developing incremental LNG supply does not afford Canadian LNG developers the luxury of time. In addition, the recent dramatic drop in oil prices on LNG prices also challenges the economics of these new greenfield developments which must compete with recently approved US projects, most of which have the advantage of utilizing existing LNG import sites and pipeline infrastructure.
For both Canadian gas and oil producers incremental market access remains a priority. In 2015, as it was in 2014, the Canadian regulatory agenda will continue to be dominated by the many industry initiatives to diversify reliance on Canada's single traditional market in the United States.