BC Approves Trans Mountain Pipeline Expansion

The project met the province's five conditions and construction could begin in September.

Trans Mountain

British Columbia granted environmental approval on Wednesday to the $6.8-billion expansion of the Trans Mountain pipeline.

Kinder Morgan’s (NYSE:KMI) project, that could triple the pipeline’s capacity, would increase Canadian crude exports to Asia and reduce its dependence on the US market, where Canada’s oil sells at a substantial discount to global prices.

Despite the federal support given by Canadian Prime Minister Justin Trudeau last November, the province had the power to block the project.

But after more than four years of negotiations, BC’s conditions, that included world-leading oil spill response and prevention, First Nations participation in the project, a fair share of its economic benefits for the province, and successful environmental reviews, were met.

“We always said that the five conditions were a path to yes,” said Premier Christy Clark in a Wednesday news conference, “That’s where we are today.”

She said the financial agreement with Kinder Morgan will provide up to $1 billion to the province over the next 20 years that will go toward a BC Clean Communities Program that will fund local environmental projects.

Construction could begin in September 2017, with an in-service date for the expanded pipeline system in late 2019, Kinder Morgan said, although the project still requires final approval from the company’s board of directors.

Environmental Concerns

“Clearly, the project will have economic benefits for British Columbia workers, families and communities. However, we have always been clear economic development will not come at the expense of the environment,” the British Columbia government said in a statement.

But the pipeline faces strong local opposition, including environmental groups, mayors in British Columbia communities affected by the project and aboriginal leaders.

Burnaby Mayor Derek Corrigan said the project would bring seven times the number of oil tankers into Burrard Inlet, off Vancouver’s coast.

“I am surprised they have made this decision without negotiating any resolve on the conditions,” said Corrigan. “I guess [Clark] has just conceded to the federal government on the issue and put up conditions to look like she has gained something.”

NDP opposition leader John Horgan said: “Some risks are too great. Some messes you just can’t clean up,” holding up a glass of bitumen he said was given to him by someone who lives in Hope, B.C., one of the communities the pipeline passes through.

Market Impact

Kinder Morgan’s project, will rise ship loads of crude oil to foreign markets, including China, to 34 ships a month from five now.

According to the latest forecast from financial advisory firm Deloitte, oil prices should average around $55 US a barrel in 2017 for West Texas Intermediate, and this should bring some optimism into the sector, allowing many slimmed-down producers to operate profitably.

The agreement between OPEC and non-OPEC countries to cut production, should also benefit the market, with many expecting higher prices in 2017.

But this could be threatened by the expected increase in US and Canada’s supply.

“There is still a little bit of a concern on whether [OPEC cuts are] going to get through all of the oversupply that’s in the system,” Andrew Botterill with Deloitte’s resource evaluation and advisory group said.

Exploration and Production Investments

Ian Anderson, the president of Kinder Morgan Canada, said the deal it negotiated means the company will contribute a minimum of $25 million to a maximum of $50 million a year to the province, depending on how much bitumen is transported through the pipeline over its 20-year lifespan.

“We believe this represents a positive outcome for our company, customers and for British Columbians and all Canadians who will benefit from the construction and operation of an expanded pipeline,” he said in a news release.

Kinder Morgan’s stocks have gained 6.45 percent year-to-date, closing Thursday at $22.02.

Consultancy firm Wood Mackenzie said in a report released Wednesday that global investment in the exploration and production of oil and gas will rise by 3 per cent next year, to US$450 billion.

Husky Energy (TSX:HSE) and others, including Suncor Energy (TSX:SU), have begun focusing on building smaller, incremental facilities with nearly identical designs, shifting away from the costly megaprojects that companies pursued when prices were higher.

In Husky’s case, the smaller developments at those leases has “allowed them to keep capital costs down,” Wood Mackenzie Stephen Kallir said.

Globally, the forecast spending in 2017 is still 40 per cent below the 2014 average, suggesting companies are still hesitant to shell out cash due to concerns over market uncertainty.

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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.

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