Canada’s struggling oil and gas sector gets a break as Ottawa gives the go ahead for the expansion of the Trans Mountain Pipeline. Will this bring the much needed relief to the Canadian oil patch? Kim Parlee speaks with Michael O’Brien, portfolio manager at TD Asset Management.
- Hello, and welcome to the show. It was in the headlines that Trans Mountain Pipeline is a go. Ottawa says construction of a $7.4 billion pipeline that connects Alberta's oil patch to the BC coast is likely to begin this year.
Much welcome news to the oil and gas sector, but will there be more legal snags coming that could cause more delays? More on this with Michael O'Brien. He's Portfolio Manager at TD Asset Management. Great to have you here. Let's cut to the chase. How material is this for the sector, for the province, and for the country?
- Well, I think it's a really important milestone. You know, this is-- the Trans Mountain expansion is one of the key pieces of the puzzle in terms of solving this market access issue for Western Canadian oil. So nobody should mistake the fact this is an important step forward. But I think the reaction of the markets today where most of the Canadian energy space was flat to down, that's a good reminder that I think investors are well aware this is just one step in the journey. It's going to be a long road to go before this comes into service.
KIM PARLEE: It's interesting when the announcement came out, the Prime Minister made a point of saying approved and construction beginning this construction season. And yet that wasn't enough to move the markets, either.
MICHAEL O'BRIEN: Well, I appreciate his optimism. But I think what you're seeing is there are a lot of investors who are very jaded, had very difficult heart wrenching experiences watching not just this pipeline but a whole slew of pipeline projects suffer setback after setback. So I think we're kind of in a wait and see mode, or a show me mode, or a I'll believe it when I see it mode. I think that's what you saw today.
- I want to divorce the politics out of this, because I mean, people feel very strongly on both sides of this. But if we just look at the mechanics of the politics, not the spirit of the politics, you've got a pipeline approval coming. You've got Bill C-69 and C-48 also coming. These things do not all work together, or do they? I mean, what does that tell you?
- Well, you want to take the politics out of it. But I think this is very much politics in the sense that the Trudeau government, they have a number of constituencies they're trying to keep happy. And so on the one hand, there'll be a number of natural constituents of the Trudeau government to be disappointed in the decision. So I think if you can turn around with C-48 and C-69, which are much more focused on protecting environment, it's a bit of an offset to show the balance that they're trying to demonstrate they're bringing to this.
KIM PARLEE: If-- for people who haven't followed this as closely as I know you have, does this mean all the oil gets out of Alberta to the coast and we're all good now?
MICHAEL O'BRIEN: It's an important step forward, but it's only one piece of the puzzle. And there's a long timeline between here and there.
KIM PARLEE: Yeah.
MICHAEL O'BRIEN: So that's the important thing to realize. We're talking about an incremental 590,000 barrels a day of market access for Western Canada. That's very material. To put it in context, there's about 4 million barrels of pipeline capacity today. We're talking about a 15% increase. So this is a really important step forward.
But the reality is there's going to be a lot of noise along the way. There's certainly going to be legal challenges and whatnot. And so between here and 2022 or 2023, there will certainly be some bumps in the road.
- What-- so the railcar capacity, obviously, is staying. I mean, there's politics around this but just in terms of that there's the need to get that capacity to get it out. And there's more pipelines, obviously, that need to come in place to really get this to a point where the producers will feel optimistic about actually producing more so they can get it out.
MICHAEL O'BRIEN: You're exactly right. So like I said, this is a very important first step. What we've got is a situation where the optimist will say we have a line of sight. Within three years, assuming that this project does get completed, and assuming that Enbridge is able to get line three across the finish line, and a few other projects, you could have up to a million barrels of incremental pipeline capacity available for Western Canadian producers in three years. That would be sufficient to allow these companies to start growing again, to start investing in projects again. And ultimately, that'll bring back the investor.
KIM PARLEE: What does this mean for-- two more questions-- the investor, first off. I mean, Canada, there's been a Canadian discount, I'd say, for the past. And while we've heard about capital fleeing, because they're just not sure what's happening with big infrastructure projects.
Do you think this is enough to kind of pique interest again? I mean, I know there's probably a bit of a show me attitude on this.
- Well, I think what it does-- it's not so much that it's an instant catalyst for a re-rating today. I think it does put a lot of support under where we are today. It puts a bit of a floor under it. It's a first step in rebuilding confidence.
KIM PARLEE: We're taking a look right now at Western Canadian Select, the discount, excuse me, not the actual price. What does this do for that?
MICHAEL O'BRIEN: So the Western-- the WCS discount has actually been very well behaved recently. It's sort of in the $14 range today. Ultimately, if you get these pipelines in place in two or three years time, what that does is that anchors that differential in say, $12 to $15 range, which historically is where it's been when we've had sufficient pipeline access.
The problem is getting from here to there, it's going to be kind of a finely balanced situation where you're really going to need those temporary solutions of crude by rail, and potentially extended production cuts in Alberta.
- What are you watching next? What is the next piece of news or development, I should say, your waiting to hear from?
- I think the first concrete sign of progress would be, when do shovels get into the ground? The government put a pretty optimistic spin on it today. They're hoping by the summer, September, I think that would be a nice sign of progress. So that'd be the first marker that I'd watch for.