Pipe Dreams Deferred: A Look Back on How Major Canadian Pipeline Projects Fared in 2015 and Outlook for the Future

Courtesy of Stikeman Elliott. View original article here.

2015 was not been a banner year for major inter-provincial or international pipeline projects in Canada. Apart from Enbridge finally being granted leave to open its Line 9 Reversal Project, 2015 brought little progress to report on the market access front as most of the major projects were mired in various procedural delays. Despite plummeting oil and gas prices, no proponents cancelled their major oil pipeline projects, and access to tidewater remains crucial to the viability of Canada’s energy sector. In fact, with President Obama’s symbolic rejection of Keystone XL (an indiscreet indictment of the carbon footprint of Canada’s oil sands) and the ever-increasing reliance by the US on its domestic oil and gas, the issue of access to markets beyond the US is top of mind for oil and gas producers. Shell Canada, for example, cited lack of pipeline capacity as one of the reasons for its cancellation of the 80,000 bpd Carmon Creek oil sands project, which was in mid-construction and for which Shell took a $2-billion impairment charge.

Significantly, 2015 marks the end of the Harper era, which made market access a priority, but failed to deliver in a meaningful way. Arguably, Harper’s streamlining of the environmental assessment process through amendments to the Canadian Environmental Assessment Act and the National Energy Board Act, among others, only fuelled anti-pipeline fervour and increased provincial intervention. The election of the Liberal majority government will have implications for the development and permitting of federally-regulated pipelines. Prime Minister Trudeau’s mandate letters to his Ministers of Environment and Climate Change, Natural Resources, and Fisheries, Oceans and the Canadian Coast Guard reveal that (i) a review of Canada’s environmental assessment process to regain public trust is to be undertaken immediately; (ii) the National Energy Board (NEB) is to be modernized to ensure its composition reflects regional views and has sufficient expertise in fields such as environmental science, community development, and Indigenous traditional knowledge; and (iii) a moratorium on crude oil tanker traffic on British Columbia’s North Coast is to be formalized.

Alberta Premier Notley’s recent announcement of her Climate Leadership Plan (summarized in a previous post), which includes an absolute cap on carbon emissions from oil sands development of 100 Mt per annum and a performance-based carbon tax, will also have implications for the amount of pipeline capacity actually required. Though current emissions from the oil sands only total 70 Mt, leaving substantial room for growth in that sector, it is less growth than previously forecast and changes the assessment of the need for, and economics of, the major pipeline projects described below. Due to increased global oil supplies and significantly lower prices, in June of 2015, the Canadian Association of Petroleum Producers adjusted its previous forecast of production growth (the majority of which is from the oil sands) from 3.7 million bpd in 2014 up to 5.3 million bpd in 2030, which is down 1.1 million bpd from the forecast it had made the year before. Absent significant technological advancements in oil sands emissions management, the 100 MT cap (expected to be reached within the next decade) will bring those growth projections down further. The federal approach to meeting Canada’s commitments under the Paris Climate Agreement, to be negotiated with the provinces in the coming months, may also have impacts. So, while the lack of adequate pipeline infrastructure remains a pressing concern, the issue of how many pipelines are needed is a live one.

Developments over the course of 2015 on various major approved and proposed pipeline projects are outlined below. We also address potential impacts on these projects of policy changes to be implemented by the new Liberal government. In 2016, we will be watching how the interplay between climate change initiatives and market access issues evolves.

Trans Mountain Expansion

Kinder Morgan filed its application for approval of the $5.4 billion (now said to have ballooned to $6.8 billion) Trans Mountain Expansion Project with the NEB on December 16, 2013. Two years later, and with numerous procedural and physical hurdles behind it (the most recent of which, an entirely avoidable gaffe on the part of the Federal Conservatives), the project is in the final stretch of the NEB’s hearing process.

The project contemplates the twinning of the existing 1150 kilometre Trans Mountain pipeline from Edmonton, Alberta to Burnaby, B.C. to increase the capacity of the system from 300,000 bpd, to 890,000 bpd. The existing line would carry refined products, synthetic crude oil, light crude oil with capability for heavy crude oil, while the new line would carry heavier oils. The project also includes the expansion of the Westridge Marine Terminal in Burnaby to be expanded with three new berths that would increase the number of tankers to be loaded and to travel down the Burrard inlet from 5 to 34 per month.

We ought to have seen the completion of all procedural steps in the NEB’s process by the beginning of October 2015. In fact, the evidentiary record was already closed when the Governor in Council decided to appoint as a full-time board member of the NEB Mr. Steven Kelly who had been retained by and had presented evidence on behalf of Trans Mountain in the proceeding. What? Yes. To ensure public confidence in the impartiality of the NEB and the integrity of its hearing process, on August 21, 2015, the NEB ordered Mr. Kelly’s evidence stricken from the record and gave Trans Mountain until the end of September to file replacement evidence.

The NEB currently has a legislated time limit of 15 months from the date it determines an application is complete to issue a recommendation to the Governor in Council. It can, however, exclude a period from its legislated 15-month time limit, which it announced it was doing for the second time in its review of this project from September 17, 2015 until January 8, 2016 in order to facilitate further process steps to address the replacement evidence. The NEB heard oral argument from Trans Mountain on December 17, 2015 and will hear from intervenors between January 18 and February 12, 2016. In light of the excluded period, the NEB must now release its recommendation report to the Governor in Council by May 20, 2016 instead of January 26, 2016. In the intervening period, the City of Burnaby’s continued attempts to impede Trans Mountain’s progress through judicial intervention have failed. Most recently, the BC Supreme Court dismissed the City’s application for declarations that the NEB did not have constitutional jurisdiction to order that Burnaby’s bylaws were inoperative to the extent that they conflicted with Trans Mountain’s ability to complete environmental studies permitted under the NEB Act. Burnaby will appeal.

Notwithstanding that Prime Minister Trudeau has been openly critical of the process pursuant to which the Trans Mountain Expansion Project is currently being reviewed, his new Minister of Natural Resources, Jim Carr, has confirmed that the federal government’s review of this project will continue despite its intention to review the federal environmental assessment legislation and the manner in which the NEB conducts such reviews. Assuming issuance of the Certificate of Public Convenience and Necessity, Kinder Morgan projects that the Trans Mountain Expansion could be in service in late 2018, though the recent extension in the review process suggests an in-service date no sooner than early 2019.

Energy East

The Energy East Pipeline is TransCanada’s $12 billion project comprised of a proposed 4,600 kilometre pipeline to carry 1.1 million barrels of crude oil per day from Alberta and Saskatchewan to refineries in Eastern Canada (Montreal, Levis and St. John). The project entails converting 3000 kilometres of an existing natural gas pipeline to oil service between Saskatchewan and Ontario, and building new pipeline segments in Alberta, Saskatchewan, Manitoba, Eastern Ontario, Quebec and New Brunswick to connect with the converted pipe.

TransCanada filed its application with the NEB on October 30, 2014, but in April 2015, advised the NEB that it would not be proceeding with its planned marine terminal in Cacouna, Quebec and would instead be undertaking analysis and consultation to assess the viability of other siting options for a marine terminal and oil storage facility. It has since filed an amendment to its application to address this change on December 17, 2015. Accordingly, well after a year since the filing of the application, the NEB has not yet even been in a position to make a determination as to the completeness of the application. It is, however, already hearing oral traditional evidence from Aboriginal intervenors on the assumption that most of this evidence would not change as a result of any project amendments.

As in the case of the Trans Mountain Expansion project, the federal government has confirmed that the review of Energy East will continue despite the imminent review of environmental assessment and NEB processes. Though the oil and gas industry is reeling from the regulatory uncertainty brought about first by the election of an NDP majority in Alberta and then by the Liberal majority federally, Energy East stands to benefit from the changing political tides. The Premiers of both Quebec and Ontario have both been vocally critical of this project, releasing their 7 “conditions” for approval of the project in late 2014. Among their concerns, public safety and risks to the environment were prominent. In addition to matters of spill prevention, both provinces have expressed concerns in respect of climate change and the desire to see assessed the impacts of the project on upstream and downstream carbon emissions (as opposed to those emissions directly caused by the construction and operation of the pipeline, as is the current scope of the NEB’s assessment).

That both Premier Notley and Prime Minister Trudeau are climate change stalwarts, and meaningful regulation of carbon emissions from the oil sands is now underway, is certain to assist with the “social licence” barriers this project has been facing to date. Both Premiers Couillard and Wynne appear to have received Premier Notley’s Climate Leadership Plan with enthusiasm. In addition to the absolute cap on emissions from the oil sands, Premier Notley has endorsed a performance-based carbon pricing scheme that shares features with the scheme in place in Quebec and that is being developed in Ontario.

There is justifiable optimism that Energy East will be approved and built within a reasonable timeframe. In fact, the odds of it being approved may well have improved with the rejection of Keystone XL. Energy East’s economic benefits for Canada are unmistakable, especially as it moves Canadian oil rather than imports from Venezuela and other countries through Canadian refineries in the East. From an environmental perspective, it also benefits from 3000 kilometres of existing right of way and unutilized Mainline capacity. If approved, TransCanada anticipates that Energy East could be in service in Q4 of 2020.

Northern Gateway

The Northern Gateway project was approved subject to 209 conditions when in June 2014, the Federal Cabinet accepted the Joint Review Panel’s recommendation and ordered that the National Energy Board issue Certificates of Public Convenience and Necessity. Since the Joint Review Panel issued its report in December 2013, Enbridge has been hard at work on two fronts (i) addressing the 209 conditions; and (ii) defending against 18 proceedings before the Federal Court of Appeal. Eleven of these proceedings were commenced by First Nations challenging, among other things, the adequacy of consultation and whether the Crown met its duty to consult with and accommodate First Nations’ interests. The remainder were commenced by environmental groups challenging the adequacy of the environmental assessment of the project. These appeals and applications for judicial review were heard jointly in a one week hearing before the Federal Court of Appeal in early October 2015, and a decision is anticipated in early 2016.

Northern Gateway consists of two pipelines that would run 1,178 kilometres from Bruderheim, Alberta to a marine terminal in Kitimat, B.C. One pipeline would take 525,000 bpd of Alberta oil to the west coast for export; the other, would bring 193,000 bpd of much-needed condensate back to Alberta to dilute the bitumen for transport. The election of a Liberal majority does not bode well for the future of this project. Prime Minister Trudeau vociferously opposed Northern Gateway in the lead up to his election, and vowed that it would not be built if he was elected. Since being elected, Prime Minister Trudeau’s strategy to block Northern Gateway appears to lie in mandating a number of his ministers to formalize a moratorium on crude oil tanker traffic on British Columbia’s North Coast, including the Dixon Entrance, Hecate Strait, and Queen Charlotte Sound. Since you cannot get from Kitimat to Pacific Rim markets without cruising down the Hecate Strait, the moratorium would leave Northern Gateway stranded.

Prime Minister Trudeau, who campaigned hard on a message of renewed partnership with Canada’s indigenous peoples, will please the coastal First Nations with such a moratorium, but what of the almost 30 First Nations that have signed on as equity partners with Northern Gateway entitled to a 10% share in the profits of the project? Enbridge, was quick to remind the federal government of this issue, stating that it was confident that the government would be consulting with its aboriginal equity partners on the impact the moratorium would have on their communities before proceeding. Having already spent over $500 million on this project, neither Enbridge nor its aboriginal equity partners are likely to go quietly should the moratorium proceed. There will inevitably be lawsuits and taxpayer money funding the obstruction of market access.

Enbridge’s CEO has announced that a decision on whether to build the Northern Gateway pipeline system may come in late 2016, but that timing is no longer too concerning to Enbridge.

Keystone XL

The final (?) nail in Keystone XL’s coffin came on November 6, 2015: a resounding and not unexpected “no” from President Obama. Presidential Permit denied. President Obama stated that shipping “dirtier oil” into the US would “not increase America’s energy security”, and approving the project would have “undercut” America’s global leadership on climate change.

Initially proposed in 2005, TransCanada’s Keystone XL project was an 1897 kilometre crude oil pipeline beginning in Hardisty, Alberta and extending south to Steele City, Nebraska. It would have delivered up to 830,000 barrels of WCSB and Bakken oil per day to Gulf Coast and Midwest refineries. The US State Department began its (first) review of the project in September of 2008. President Obama’s rejection of the project seven years later had very little to do with its merits or its environmental impacts, and much to do with climate politics (particularly US domestic climate politics). Indeed, one could be forgiven for tuning in late to President Obama’s announcement and mistaking it for a pre-Paris Climate Conference pep rally, as most of the speech was dedicated to extolling America’s virtues as “a global leader when it comes to taking serious action to fight climate change.”

How President Obama came to the conclusion that Keystone XL would not increase America’s energy security is entirely murky. While domestic oil production in the US has grown significantly, the US will continue to rely on substantial imports for the foreseeable future. A reduction in imports from Canada necessarily means an increase in imports from OPEC countries. Such a result seems antithetical to energy security; but then, this decision was not about energy security. It was about President Obama’s global image on the issue of climate change, an issue he appears to have chosen as the swan song of his presidency. Whether Alberta’s bitumen will actually remain in the ground as a result of his decision, or whether greater emissions will arise from increased rail transport while other pipeline projects seeking access to tidewater navigate the regulatory process, is unclear at this time.

TransCanada has stated that it remains committed to building Keystone XL and is reviewing its options to potentially file a new application for a Presidential Permit. Apparently, it was also reviewing what legal recourse it may have in light of President Obama’s decision, which it has called arbitrary and unjustified. On January 6, 2016, TransCanada served a notice of intent to submit a claim to arbitration under Chapter 11 of NAFTA, seeking damages of over US$ 15 Billion arising from the alleged United States’ breach of its NAFTA obligations. TransCanada contemporaneously filed an action for declaratory relief in the US District Court in Houston, alleging that the President’s actions in denying the permit are null and void as they exceed the powers vested in the President and Executive Branch by Article II of the US Constitution. The powers instead, TransCanada argues, are vested in the US Congress, which regulates international commerce and previously passed a bipartisan bill to approve the project.

The most interesting development to watch for on this file in 2016 will be the result of the November 8th US Presidential Election. TransCanada’s filing of claims against the US may signal an unwillingness to resurrect the project, but it does not foreclose TransCanada’s ability to reapply in the future. Both Hilary Clinton and Bernie Sanders oppose Keystone XL, but the Republican candidates support it. Unless the next president is a Republican, TransCanada will have another long and expensive road ahead of it as NAFTA claims do not resolve themselves either quickly or cheaply. As the past seven years have demonstrated, however, endurance is certainly not something TransCanada can be accused of lacking.

Courtesy of Stikeman Elliott. View original article here.