Investors to look elsewhere following Energy East termination

Is the cancellation of this planned TransCanada pipeline, from Alberta to Québec and New Brunswick, a harbinger of fewer energy deals?
TransCanada President and CEO Russ Girling, second from left, announced the Energy East Pipeline in Calgary, Alberta, on August 1, 2013. On October 5, the company had a new announcement: it was pulling the plug. REUTERS/Todd Korol
TransCanada President and CEO Russ Girling, second from left, announced the Energy East Pipeline in Calgary, Alberta, on August 1, 2013. On October 5, the company had a new announcement: it was pulling the plug. REUTERS/Todd Korol

TRANSCANADA CORP.’S decision earlier this month to pull the plug on its $15.7-billion Energy East Pipeline will likely dampen the appetite for Canadian energy deals because it remains difficult to get the country’s oil to key markets overseas, say lawyers who work in the field.

Alberta oil producers still have limited ability to move their product off the BC coast to energy-hungry countries in the Asia Pacific region. Kinder Morgan Canada Co.’s Trans Mountain Pipeline System has moved oil from Edmonton to Burnaby, on the west coast of British Columbia, since 1953; today, around eight of 10 tankers leaving KMC’s terminal outside of Vancouver each day are heading to the US.

Kinder Morgan Canada would like to increase shipments to the Pacific Rim, according to a spokesperson, and hence the proposed (and federally approved) second and parallel pipeline that would transport diluted bitumen; but opposition to the project has put the brakes on it for now, at least.

The proposed Energy East Pipeline would have carried 1.1 billion barrels of oil a day in the other direction: 4,500 kilometres from Alberta to Québec and New Brunswick, to be refined and shipped across the Atlantic to Europe. As announced by TransCanada on October 5, that will not happen now.

The most obvious direct impact of the pipeline cancellation, says Don Greenfield, a partner at Bennett Jones LLP in Calgary, is that “it’s going to make deals involving oil production harder to do.” Canada remains hostage to a single export market, which means less competition, he adds; 99 per cent of our oil goes to the United States. “Having different export markets would allow Canadian producers to pick and choose where they send their production,” with sales prices presumably boosted by a healthy competition.

However, “When I talk to foreign companies with projects here [in Canada] to develop, they say one of their criteria in deciding whether to go ahead is, ‘Is there going to be an export pipeline built?’ If you’re sitting on the knife’s edge as to whether you want a project to go ahead or not, and you don’t see a pipeline being built, maybe you spend your money somewhere else in the world.”

Would that company then try to sell the asset if it decides not to develop it? “It could,” Greenfield says, “just to get whatever it can for the asset, then get out of town.”

Death of a pipeline

Energy East faced intense opposition from the start from the Québec government, First Nations and environmentalists. And it had a difficult time with the National Energy Board, the country’s federal energy regulator, especially when it was publicly disclosed that the NEB’s chair and vice-chair had met privately with a paid consultant for TransCanada, leaving the approval open to allegations of bias.

In its ensuing and rigorous assessment, the NEB broadened its normal scope of inquiry to add the impact of greenhouse gas (GHG) emissions, not just from building Energy East but from the increased production, including extracting the oil that passed through the pipeline, the emission involved in upgrading bitumen to synthetic crude, in refining it, and even from the final product being consumed. Many in the energy industry believe it was this assessment that caused the project to be cancelled.

Alicia Quesnel, an energy and M&A partner at Burnet, Duckworth & Palmer LLP in Calgary, has seen statistics on GHG emissions, and says the additional criteria for the assessment just didn’t make sense.

“For oil production and upgrading, the GHG emissions are about 12 per cent; oil transport –– which would be Energy East’s portion –– is O.7 per cent; refining is about 6.2 per cent; and transportation of the refined product, which is usually by truck or by barge, is about .5 per cent,” Quesnel says. “So, 82 per cent of the actual greenhouse gas emissions that result are from end use: cars, planes, factories, ships … . But the government was asking the pipeline, which represents 0.7 per cent of the GHG emissions, to bear the burden for all.”

In announcing the project’s termination last week, TransCanada president and CEO Russ Girling did not point to the NEB’s enhanced environmental standards. Rather, the statement was crafted so the decision might as easily be read as an economic one. When Energy East Pipeline was first announced in 2013, oil was selling at US $90 a barrel. Today, the price has slid to around US $50.

In a press release, Girling announced that after a “careful review of changed circumstances,” the company would be informing the NEB it would not be proceeding with the Energy East application.

So which is the real driver? “I think if you walk around here in Calgary, the federal government would be blamed, and some politicians from Québec,” says Greenfield, pointing in particular to Montréal Mayor Denis Coderre, who vehemently opposed the project from the start.

The future of investing in oil

So what lies ahead on the deal front? According to some energy lawyers, foreign energy investment going to other countries if Canadian producers can’t get their oil out to global markets.

“Capital is mobile,” says Evan Dixon, a partner at BD&P who was in-house legal counsel at Enbridge Pipelines for three years. Oil fields in Venezuela and Mexico produce the same type of heavy oil as do the Canadian oil sands, he says, but in the past these other countries have suffered from “underinvestment.”

While investing in Venezuela was difficult after former president Hugo Chávez placed limits on foreign ownership of Venezuelan oil in 2001, Mexico went the other way in denationalizing its energy sector in 2013 in order to attract foreign investment. This appears to be succeeding.

 “I understand that a number of companies have indicated that they believe this will result in accelerated growth in the country, and will be seeking to invest in opportunities in Mexico,” says Dixon. 

Quesnel says Brazil is another “hot market companies are investing in.” Companies that would also have looked at Canada? “Oh, yes.”

She describes the mood in the oil patch post-Energy East as one of resignation. “People are asking, ‘what’s next? How are we ever going to get another project built? How are we ever going to develop this country if we can’t even get a pipeline built when 70 per cent of the pipeline is already built, we’re just building another 30 per cent and changing it from a gas pipeline to a crude-oil pipeline? It’s mindboggling.”

In the meantime, observers are waiting to see if Kinder Morgan Canada Co.’s planned addition to its Trans Mountain Pipeline System from Edmonton to Burnaby, BC will go ahead. It is the only remaining hope, for now, of getting Canadian oil to larger global markets from a Canadian port.

While the Trans Mountain Pipeline Expansion Project has received all necessary federal approvals, seven First Nations, the cities of Burnaby and Vancouver, the Raincoast Conservation Foundation and the Living Oceans Society have been before the Federal Court of Appeal this month, arguing that the NEB’s approval process was flawed and that First Nations weren't adequately consulted.

A great many people will be watching the court decision very closely.