Canadian Prime Minister Justin Trudeau approved pipeline proposals by Kinder Morgan Inc. and Enbridge Inc., while rejecting a third, saying the decisions balance environmental protection with expanded market access for the nation’s resources.
Trudeau approved with conditions both Kinder Morgan’s Trans Mountain and Enbridge’s Line 3 pipelines, projects aimed at expanding crude oil shipments to the U.S. and opening new markets in Asia. However, citing excessive environmental risks, he rejected a separate proposal from Enbridge and pledged to enact an oil tanker ban next year on the nation’s northwestern Pacific coast.
“We believe that responsible resource development can go hand in hand with strong environmental protections,” Trudeau told reporters in Ottawa on Tuesday. “The fact is oil sands production is going to increase in the coming years. Because we are at capacity in terms of existing pipelines, that means more oil is going to be transported by rail in the coming years if we don’t build new pipelines.”
While the two new lines will face continued opposition from environmental groups and local politicians, the approvals represent a potential boost to Canada’s oil patch, which has suffered from falling oil prices and a looming transportation bottleneck. The lack of pipeline capacity to Canada’s coastal regions means the country sells almost all of its crude to the U.S., where production has surged over the past decade. Increasing constraints on the existing network have forced oil onto more expensive rail cars.
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“Getting oil to tidewater is critical for this country,” said Tim Pickering, founder and chief investment officer of Auspice Capital Advisors Ltd. in Calgary. “Right now, it’s just ridiculous. We are selling oil at such a great discount because we have one buyer for our oil.”
The bottlenecks have depressed prices for the country’s crude: Heavy Western Canadian Select traded discount to West Texas Intermediate futures was $15.75 a barrel Tuesday, the widest since Feb. 1, data compiled by Bloomberg show.
“This is certainly constructive for Canadian crudes,” said Michael Tran, a commodities strategist with RBC Capital Markets LLC in New York. “The game changer here for Canada is Trans Mountain because it gives access to new markets.”
Kinder Morgan shares climbed as much as 2.9 percent to $22.02 after Trudeau’s announcement, extending the company’s year-to-date gain of more than 40 percent. For Kinder, the Trans Mountain expansion is the company’s biggest pending project, accounting for about 40 percent of the company’s $13 billion backlog of future investments.
Trudeau’s Liberal Party swept to power last year on pledges to spur energy sector development and increase environmental protection — a delicate balance. Environmental measures have included tougher interim pipeline rules, a minimum price on carbon, more funding for marine protection, the phase-out of coal power and adding a panel to review the country’s energy regulator.
“Regardless of the decision we took today, people were going to be upset,” Trudeau said.
Those objections began immediately and could still spell legal challenges ahead for those projects that were approved.
“I am profoundly disappointed with today’s decision,” Vancouver Mayor Gregor Robertson said in a statement. “Vancouver will continue to raise concerns about Kinder Morgan’s massive expansion that could bring seven times the number of oil tankers to our waters.”
Enbridge’s Northern Gateway project, which Trudeau quashed Tuesday, provides a cautionary tale. The pipeline had already been approved once by the previous government in 2014, only to be halted by a court ruling before being rejected by Trudeau.
The capacity of existing pipelines out of the region is 4 million barrels a day, while crude output is expected to rise about 5 percent to more than 4 million barrels a day in 2017, according to the Canadian Association of Petroleum Producers. Companies including Cenovus Energy Inc. and Canadian Natural Resources Ltd. are set to add about 390,000 barrels a day of capacity by the end of next year, according to company statements and JuneWarren-Nickle’s Energy Group’s Summer 2016 Oil Sands Quarterly.
Currently, the pipelines out of Western Canada are able to handle crude volumes but that will soon change, Kevin Birn, a director at IHS Energy in Calgary, said by phone Tuesday.
“Right now the system seems able to balance, but the volumes we expect will overtake the pipeline system in the next several years,” forcing increased volumes of crude onto rail cars, said Birn.