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Following years of delay from court rulings as well as opposition from domestic and foreign and advocacy groups, could there be light at the end of the tunnel for the big 3 Canadian pipelines being built? James Hunter, Global Infrastructure Analyst, TD Asset Management, talks about the status of the pipelines and the implications for sector more broadly.
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- James, back in March, we received news that the Keystone XL pipeline would be constructed. But just weeks later, it hit a bit of a snag. And there've been a number of developments since that time. Can you kind of give us an update on what's happened so far? And why is this project so important?
- Yeah, it's been a very busy couple of months. Well, as you mentioned, back at the end of March, TC Energy, it announced the sanctioning of Keystone XL. And frankly, it was a big surprise to the market, because it'd be a huge project-- $12.5 billion taking Canadian oil from Alberta towards the US' Gulf Coast. And this would actually increase Canada's export pipeline capacity by 20%. So it would be a really important project. And in recognition of that, the government of Alberta is heavily in support of the project by investing equity and helping finance the construction.
But just a couple of weeks after the initial announcement, unfortunately, a judge in Montana, he blocked a permit relating to a river crossing. So that essentially halts construction for now. And so the initial excitement around Keystone XL, it's really worn off here. And I think the tough fight begins, which is a process that will play out over a number of years.
- Now, there's two other pipelines in addition to the Keystone XL pipeline. Can you remind us what are those, and how they're coming along?
- Right. So we have a nice table to summarize them. And the first is the Trans Mountain Expansion. That's owned by the government of Canada, and it would take oil from Edmonton towards Vancouver. Now, this has been opposed by the province of British Columbia for a number of years. But in January of this year, the Supreme Court of Canada dismissed the province's final appeal of the project. So construction is now moving ahead. It's not a done deal, because there's still some opposition from certain groups.
But the federal government is strongly in support of the pipeline, and it really hopes to have it built by 2022. And the other is Enbridge's Line 3 Replacement Project-- a little bit smaller, but, again, it would take Canadian oil from Alberta towards the Great Lakes in Wisconsin. And the Canadian section of the pipeline is actually complete. So we're just moving through the final stages of permitting in Minnesota. And that's expected to conclude this year with a pretty fast construction timeline for next year.
- Well, you mentioned some of the challenges to building these pipelines. Which project do you think ultimately gets built? And what would this mean for the sector?
- Yeah, I think it's going to be Line 3. And that's because we're mostly through the permitting process, and it just hasn't been as controversial as the other pipelines. That would be a positive impact for Enbridge's earnings profile, and I think it would really give the market confidence that they'll be able to increase the dividend over time, which is already quite juicy at about 7%. And I think the least likely pipeline to go ahead would be Keystone XL, and that's because its development has just become so highly politicized.
If we do get one pipeline built, it would be very good for the oil and gas producers, and that's because they don't have enough pipeline capacity to get their resources to market. The current shortage, which is about 250,000 barrels a day, it actually moves by rail. So getting just one of those pipelines built would right the imbalance, and it would lead to higher oil prices in Canada.
- From an investor point of view, why does it matter if these projects are built? What does this mean to the investor?
- Yeah, I think if we were to get some of the pipelines built, it would be very positive. And here's why-- not only would it give the oil and gas producers that much-needed market access, but it would allow them to pursue new growth projects with more confidence. And that, in turn, would allow Enbridge and TC Energy to grow their dividends, which are targeted for 5% and 7% in the long term. So you've got this symbiotic relationship where the producers would enjoy improved economics and the pipelines would be able to deliver good dividend growth to their investors.
- James, I just want to switch gears a little bit. What do the recent developments with OPEC and its allies have on the outcome of these projects?
- Yeah, commodity prices could go lower if OPEC's production cuts were unsustainable, in the face of unilateral production boosts by some of the member nations. But none of the projects we've discussed would really be at risk, even if oil prices fell back to, say, $20 a barrel. And I think that's because they're sorely needed by, and they're fully contracted from the producers. And continuing to move oil by rail, it's more expensive, and it's less safe than pipelines. So I think the impact from developments within OPEC is probably minimal.
- Given all these developments, what's the one key takeaway that investors should be aware of?
- I think that it's just, don't expect these pipelines to be built overnight. It takes a long time to go through the process. So you just have to be patient and focus on collecting your dividends while we wait for a more favorable outcome.
- James, thank you very much for your time.
- Thanks, Anthony. It's my pleasure.
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- Yeah, it's been a very busy couple of months. Well, as you mentioned, back at the end of March, TC Energy, it announced the sanctioning of Keystone XL. And frankly, it was a big surprise to the market, because it'd be a huge project-- $12.5 billion taking Canadian oil from Alberta towards the US' Gulf Coast. And this would actually increase Canada's export pipeline capacity by 20%. So it would be a really important project. And in recognition of that, the government of Alberta is heavily in support of the project by investing equity and helping finance the construction.
But just a couple of weeks after the initial announcement, unfortunately, a judge in Montana, he blocked a permit relating to a river crossing. So that essentially halts construction for now. And so the initial excitement around Keystone XL, it's really worn off here. And I think the tough fight begins, which is a process that will play out over a number of years.
- Now, there's two other pipelines in addition to the Keystone XL pipeline. Can you remind us what are those, and how they're coming along?
- Right. So we have a nice table to summarize them. And the first is the Trans Mountain Expansion. That's owned by the government of Canada, and it would take oil from Edmonton towards Vancouver. Now, this has been opposed by the province of British Columbia for a number of years. But in January of this year, the Supreme Court of Canada dismissed the province's final appeal of the project. So construction is now moving ahead. It's not a done deal, because there's still some opposition from certain groups.
But the federal government is strongly in support of the pipeline, and it really hopes to have it built by 2022. And the other is Enbridge's Line 3 Replacement Project-- a little bit smaller, but, again, it would take Canadian oil from Alberta towards the Great Lakes in Wisconsin. And the Canadian section of the pipeline is actually complete. So we're just moving through the final stages of permitting in Minnesota. And that's expected to conclude this year with a pretty fast construction timeline for next year.
- Well, you mentioned some of the challenges to building these pipelines. Which project do you think ultimately gets built? And what would this mean for the sector?
- Yeah, I think it's going to be Line 3. And that's because we're mostly through the permitting process, and it just hasn't been as controversial as the other pipelines. That would be a positive impact for Enbridge's earnings profile, and I think it would really give the market confidence that they'll be able to increase the dividend over time, which is already quite juicy at about 7%. And I think the least likely pipeline to go ahead would be Keystone XL, and that's because its development has just become so highly politicized.
If we do get one pipeline built, it would be very good for the oil and gas producers, and that's because they don't have enough pipeline capacity to get their resources to market. The current shortage, which is about 250,000 barrels a day, it actually moves by rail. So getting just one of those pipelines built would right the imbalance, and it would lead to higher oil prices in Canada.
- From an investor point of view, why does it matter if these projects are built? What does this mean to the investor?
- Yeah, I think if we were to get some of the pipelines built, it would be very positive. And here's why-- not only would it give the oil and gas producers that much-needed market access, but it would allow them to pursue new growth projects with more confidence. And that, in turn, would allow Enbridge and TC Energy to grow their dividends, which are targeted for 5% and 7% in the long term. So you've got this symbiotic relationship where the producers would enjoy improved economics and the pipelines would be able to deliver good dividend growth to their investors.
- James, I just want to switch gears a little bit. What do the recent developments with OPEC and its allies have on the outcome of these projects?
- Yeah, commodity prices could go lower if OPEC's production cuts were unsustainable, in the face of unilateral production boosts by some of the member nations. But none of the projects we've discussed would really be at risk, even if oil prices fell back to, say, $20 a barrel. And I think that's because they're sorely needed by, and they're fully contracted from the producers. And continuing to move oil by rail, it's more expensive, and it's less safe than pipelines. So I think the impact from developments within OPEC is probably minimal.
- Given all these developments, what's the one key takeaway that investors should be aware of?
- I think that it's just, don't expect these pipelines to be built overnight. It takes a long time to go through the process. So you just have to be patient and focus on collecting your dividends while we wait for a more favorable outcome.
- James, thank you very much for your time.
- Thanks, Anthony. It's my pleasure.
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