We think the market overreacted to the today’s Federal Court of Approval ruling against the 590,000 b/d Trans Mountain expansion and forgot that Trans Mountain was #3 in the order of new oil pipeline projects behind Enbridge Line 3 and TransCanada Keystone XL. There is no other way to spin it except it was bad news for the project. Industry is fortunate the Liberals have bought Trans Mountain otherwise the expansion project would likely have been shelved post today’s ruling. Rather Liberal Finance Minister Morneau put out a very determined public resolve today that the Liberals will ensure the Trans Mountain expansion gets done. But even if so, today’s ruling means that the in service timing will be delayed to some yet to be determined later date. Prior to today, the Liberals had not said the targeted in service date post their formal acquisition of Trans Mountain. Our view has been that, prior to today, in service was Jan 2022 at the earliest, perhaps more like mid-2022 and had dropped to #3 in the order of oil pipeline takeaway projects behind Enbridge’s 375,000 Line 3 replacement and TransCanada’s 830,000 b/d Keystone XL. Line 3 and Keystone will add 1.205 mmb/d of capacity, equal to 30% of western Canada’s 2017 oil production of 3.975 mmb/d. Trans Mountain has dropped to #3 in the order of key takeaway oil pipelines, but Morneau is making a strong statement to industry and investors that the expansion will get done. So its going to have an even later in service date, but as #3 it will add another leg up to what Line 3 and Keystone XL will do for western Canada oil.
It will be awhile before its clear on how much longer it will take to reach a Trans Mountain expansion in service date. We reviewed the double spaced 276-pg ruling and, like Morneau said today, it will take time to develop a specific action plan and timeline, but the Liberals plan is to deal with it on an expedited basis. The one thing that is clear is that any assumed in service date will be pushed back, it will be a question of how long. We have to believe that this ruling has to put a pause in some of the pre construction activities.
Markets had already been waiting for a revised Trans Mountain first oil timing – we have been saying Jan 2022 at the earliest perhaps mid 2022. The priority of the Liberals has been to get moving to start the Trans Mountain expansion 2018 summer construction season and had their ground breaking first shovel in the ground ceremony on July 27. Their clearly stated priority was to keep to the construction schedule. The original in service date was Dec 2019, but Kinder Morgan’s comments in early 2018 (up until their ultimatum) were implying an in service date of Dec 2020. But post the Liberals purchase and the first shovel in the ground ceremony, the Liberals had not yet provided a new estimate for a revised in service date. Our Stream Asset Financial July 29, 2018 Energy Tidbits memo said mid 2021 at the earliest, and then we revised that in our Aug 5, 2018 Energy Tidbits memo to say in service date of Jan 1, 2022 at the earliest or perhaps mid 2022.
One clear positive – Finance Minister Morneau states “we will ensure the project gets done” Liberal Finance Minister Morneau was interviewed on BNN Bloomberg [LINK] “Morneau vows Trans Mountain ‘will be built’ despite court ruling”. Morneau put forward a clear view that the Liberals will ensure the Trans Mountain expansion gets done. There is no question that it is better for Trans Mountain expansion to be owned by the Liberals. We don’t think anyone would disagree that if this was still owned by Kinder Morgan, today’s Federal Court of Appeal ruling would have been the last straw. Rather, the Liberals have come out with a very firm commitment and resolve to get the expansion done.
Morneau’s resolve was needed to also signal to industry that the regulatory approved projects will have their support. We have to give Morneau credit for recognizing that his messaging today was going to be watched by more than Trans Mountain, rather it was to two other groups – industry who have other regulatory approved projects, but also to First Nations and other groups wanting a more detailed major project review process. We believe the implied message to industry was a signal that regulatory approved projects will have the Liberals support. At the same time, Morneau messaged to First Nations and other groups that the Liberals are supportive of having a “robust process” to review projects and that the ruling “reinforced the importance that the government needs to get engaged” in the Trans Mountain pipeline.
Trans Mountain had already moved down to #3 in the order of oil pipeline relief projects. In our Aug 12, 2018 Energy Tidbits memo [LINK], we noted Trans Mountain expansion, Enbridge Line 3 and Keystone XL would add 1.795 mmb/d of new oil pipeline takeaway capacity. Prior to the Liberals acquisition of Trans Mountain, the 590,000 b/d expansion was scheduled to be the #2 oil takeaway pipeline, behind the 375,000 b/d Enbridge Line 1, but earlier than the TransCanada 830,000 b/d Keystone XL. But post the Liberal acquisition and prior to today’s ruling, we saw Trans Mountain expansion being pushed back to the #3 slot for new oil takeaway pipelines.
The #1 oil takeaway pipeline, Enbridge Line 3 replacement to add 375,000 b/d is on track for H2/19. In its Q2/18 earnings call on Aug 2, 2018, Enbridge provided an update on its 375,000 b/d Line 3 replacement project. Mgmt said “Elsewhere, we completed and tied in the segment in Wisconsin. And in C nada, 40% of the pipe is in the ground, and we’re preparing for the 2018 construction season. Overall, we’re maintaining our cost estimates, and we’re still on track to be in service by the second half of 2019 as we’ve said in the past”.
The #2 oil takeaway pipeline, TransCanada still sees no delays to its 830,000 b/d Keystone XL construction activities from the recent federal judge rulings. The recent Aug 21, 2018 Omaha World Herald article “Keystone XL pipeline company sees no delay from court-ordered study, moves to condemn S.D. land” [LINK] comments on TransCanada are consistent with what we have been hearing. They wrote “Matthew John, a spokesman for Calgary-based TransCanada, said Monday that the company does not anticipate that the ruling last week will have an impact on current construction preparation activities”, “TransCanada, according to court documents, plans to begin construction in the second quarter of 2019”, and “In his ruling Wednesday, U.S. District Judge Brian Morris ordered federal officials to conduct a supplemental environmental review of the “mainline alternative route” that was approved by the Nebraska Public Service Commission across Nebraska last year. The detoured route, which crosses five new counties in northeast Nebraska, was not a part of the Keystone XL federal environmental impact study done in 2014. The judge ordered federal officials to submit a plan to complete their additional study before TransCanada begins construction. John said the State Department had already begun reviewing the alternative route earlier this year and issued a draft environmental assessment on July 30 that “found no significant adverse environmental impact.” The expectation is that TransCanada will not have to do any new environmental studies with the US State Dept push on this issue. TransCanada has not provided a detailed construction schedule and its position has been that in service would be within 2 or 3 years post the start of construction. In the Q&A of the Q2 earnings call on Aug 2, 2018, TransCanada replied “So we’re being very cautious and careful careful about how we’re spending our money and we’re spending it cautiously but trying to maintain a schedule and that, that allows us to build in 2019 and 2020 and but, we’ll make decisions on a monthly basis as we go”. There is no formal start date or in service date, but it looks like TransCanada is pointing to a Q2/19 startup and an in service date sometime in 2021, likely sometime in H2/21.
Enbridge and Keystone Xl will add 1.205 mmb/d of new heavy oil takeaway. Enbridge Line 3 and TransCanada Keystone XL will add 1.205 mmb/d of new oil takeaway capacity. This 1.205 mmb/d is material to Canada’s oil production in total. Its 30% of CAPP’s estimated total 2017 western Canada oil production of 3.975 million b/d [LINK]. This is a huge addition and should provide visible growth potential for Western Canada oil for the next several years. And that’s before the Trans Mountain expansion volume of 590,000 b/d. Its why we say the western Canada is on the cusp of a decade or more of growth for oil production. Enbridge Line 3 and Keystone XL are a game changer to western Canada oil assets and development, and a later Trans Mountain expansion will only make it even better
A delayed Trans Mountain expansion will add another big boost to oil takeaway capacity when it finally gets done. Morneau’s strong public commitment to get the Trans Mountain expansion done is a positive. It may allow us to look at Trans Mountain as a project that is still going ahead, but the ruling today is negative as it adds uncertainty as to the timing of the in service date. The good news for the Canadian oil industry is that Line 3 and Keystone XL continue to move ahead and are #1 and #2 in the order for new oil takeaway pipelinesfrom western Canada, whereas Trans Mountan expansion was already dropped into #3 in the timeline. Trans Mountain reminds us of what is going on in the NFL this weekend. As we go to post this blog tonight, its the last of the NFL pre-season football games prior to the NFL roster cut down on Saturday. Investors can look at Trans Mountain tonight much like a NFL GM looks at a really good young #3 quarterback who is playing well but is behind quality #1 and #2 quarterbacks – it’s a nice luxury to have on the roster but he doesn’t need him to win the Super Bowl. The GM wants to keep the #3 but may have to cut him for the roster spot. Trans Mountain expansion is similar but even better. The oil industry doesn’t need it to provide several years of oil growth. But we don’t have the cut the project, rather we have a determined Liberal govt owner who vows to keep the project progressing and even with a delayed in service date, it will provide another strong leg to oil growth down the road.