CONCLUSION: BMO’s Randy Ollenberger (Energy) and Carl Kirst (Pipelines) conclude that the delay for a decision on Keystone XL is probably “much ado about nothing.” Given the availability of alternatives, we do not believe that the delay or demise of Keystone will negatively impact the growth outlook for the Western Canadian producers. Our analysis suggests that heavy oil and bitumen producers will need to be able to access the PADD III market by 2015 or else face significant price discounting. Given the availability of alternatives within this time period we do not foresee a material increase in light-heavy spreads. We do see an increased likelihood that Enbridge’s Wrangler and Spearhead expansions proceed as well as the probability that the Canadian federal government will attempt to diversify away from the U.S., favouring the Gateway and TMX proposals. Please see Randy and Carl’s report for full details.
Summary of alternatives to Keystone for Western Canadian producers:
1- The most immediate alternative to Keystone XL is a two-step expansion by the largest transporter of crude oil, Enbridge (Wrangler/Spearhead)
2- Rail. Sending oil by rail from Alberta is an option and some producers are doing it now, although it’s a much more prevalent alternative out of the Bakken. Typically producers own the cars, and lead time to have these cars built is around 4–6 months. As we understand Alberta bitumen requires specialized cars for movement, we see rail more as a robust alternative to pipes in the Bakken.
3- Seaway Reversal. Not a true alternative, though Seaway carries crude northbound from Freeport, Texas, to Cushing, as well as supplying refineries in the Houston area. Until recently, COP was reluctant to reverse the 350k b/d pipeline, not surprising given the over-supply at Cushing and depressing impact on WTI prices has helped increase Conoco’s own realized MidContinent refinery spread. That changed, however, in early November when Enterprise announced it was in talks with Conoco to buy out its joint venture partner (while at the same time reaffirming its commitment to the larger Wrangler proposal with Enbridge). This makes sense to us.
4 – Longer-term: Crafting a path to Asia. Northern gateway: Gateway is a proposed C$5.5 billion project that would transport 525k b/d of heavy oil from near Edmonton to Kitimat.
Trans Mountain Expansion: Leveraging off its infrastructure already in place, Kinder Morgan is (has been for some time) seeking to expand its Trans Mountain Pipeline in phases, ultimately from 300k b/d today to 700k b/d