Pipeline capacity continues to lag North American production gains. Increased pipeline access to refineries in the U.S. and Eastern Canada and, particularly to the coasts and new international markets beyond, remains critical for the Canadian energy sector even with oil prices perilously low. Alberta's Premier recently reported that lack of access to oil markets cost the federal and Alberta government about $6 billion last year alone. Access is needed to (i) reduce the impacts of the discount that Western Canada Select heavy crude sells for; and (ii) mitigate against the impacts of the increased reliance of U.S. markets on its own domestic production, particularly Marcellus and Utica shale gas and Bakken shale oil. We have seen this reality play out over the last number of years on TransCanada's Canadian Mainline, where even the Ontario and Quebec markets are placing ever-increasing reliance on shorthaul capacity from the Dawn Hub in favour of historic reliance on longhaul capacity from the WCSB.
In this climate of much needed access, pipeline projects necessary to access refineries and new markets are continuing to face fierce resistance. Opposition from First Nations and environmental groups continued throughout 2014; heading into 2015, the new source of resistance is political, and comes from our very own provinces and municipalities. While their jurisdictional and constitutional footing to make demands or impose certain conditions on particular pipeline projects is questionable, their influence is unmistakable and their concerns will have to be addressed. After all, public expressions of a lack of confidence in Canada's federal energy regulator from provincial governments do little to instill confidence in Canadian energy sector investors.
Developments over the course of 2014 on various major approved and proposed pipeline projects are outlined below. While slumping oil prices may have an impact on whether some of these pipelines are ultimately built, given the long lead-times required to navigate regulatory and appeal processes, and to construct major pipelines, we do not expect current oil prices to significantly influence the proponents' continued pursuit of the projects discussed below.
TransCanada filed its application for approval of its Energy East Pipeline Project with the National Energy Board on October 30, 2014, some three business quarters later than anticipated. The holdup? Presumably learnings from the Enbridge Northern Gateway project gave rise to serious introspection on the adequacy of TransCanada's consultation program. Additionally, TransCanada would certainly have been motivated to keep the Energy East project as far away from its Mainline Toll Settlement proceeding as possible given that a segment of the natural gas pipeline to be repurposed as part of Energy East is being used at capacity and has been the subject of demands for new capacity given its location within the "Eastern Triangle", where Ontario and Quebec distribution companies had been fighting tooth and nail with TransCanada for greater access to the Dawn Hub and the Marcellus and Utica gas beyond. This is why Quebec's largest gas utility has been splashing full-page ads opposing Energy East in national newspapers.
The Energy East Pipeline is TransCanada's $12 billion project comprised of a proposed 4,600- kilometre pipeline to carry 1.1-million barrels of crude oil per day from Alberta and Saskatchewan to refineries in Eastern Canada (Montreal, Levis and St. John). The project entails converting 3000 kilometres of an existing natural gas pipeline to oil service between Saskatchewan and Ontario, and building 1600 new pipeline segments in Alberta, Saskatchewan, Manitoba, Eastern Ontario, Quebec and New Brunswick to connect with the converted pipe (plus 250 kilometres of new natural gas capacity to replace the fully utilized segment discussed above). There are also numerous associated facilities, including two export marine terminals.
Just a month after filing its application, amidst public and political outcry, TransCanada has put its plans for a controversial marine terminal in Cacouna, Quebec on hold. The announcement came on the heels of a report by a federal government wildlife committee concluding that beluga whales in the area are endangered. It also came just a week after the Premiers of Ontario and Quebec announced that Energy East would have to meet seven conditions before they would approve the project in their respective provinces. Of course, the provinces' approval of the project is not strictly necessary, but that's a discussion for another day. Of the seven conditions, most notable are demands that natural gas capacity be sufficient to meet the needs of the respective provinces (i.e. the Mainline end game), and that the project be subject to a comprehensive environmental assessment taking into account greenhouse gases. This last "condition" will likely be the subject of most controversy and it is not clear that the Ontario and Quebec Premiers had the same scope of assessment in mind. Quebec appears to be seeking an environmental assessment that includes consideration of upstream greenhouse gas emissions from production outside the province. The National Energy Board has consistently refused to require the inclusion of upstream gas emissions in its assessment of other pipeline projects. In fact, the failure to include upstream emissions in its environmental assessments is one of the issues before the Federal Court of Appeal in the numerous appeals and judicial reviews of the approval of Northern Gateway.
The regulatory review before the National Energy Board is anticipated to take 18 months. Should Energy East be approved, TransCanada anticipates that the pipeline could be in service for deliveries in Quebec and New Brunswick by late 2018. In 2015, watch for political maneuvering as Alberta Premier Jim Prentice engages in productive conversations with other provincial leaders to extoll the overwhelming economic benefits of Energy East while appreciating the need for a common and meaningful approach to environmental issues. Notwithstanding its PR false start, we anticipate that Energy East will be approved and built within a reasonable timeframe. The need to move Canadian oil through Canadian refineries and then on to tidal waters converges with 3000 kilometres of existing right of way and mostly unutilized Mainline capacity.
Trans Mountain Expansion
On the other side of the country, all is not well in Burnaby B.C., where protesters successfully impeded Trans Mountain's ability to complete aspects of additional geotechnical studies to support its proposed revised routing through Burnaby Mountain to avoid the streets of Burnaby between the Burnaby Storage Terminal and the Westeridge Marine Terminal.
Kinder Morgan filed its application for approval of the $5.4 billion Trans Mountain Expansion Project with the National Energy Board on December 16, 2013. The project contemplates the twinning of the existing 1150 kilometre Trans Mountain pipeline from Edmonton, Alberta to Burnaby. to increase the capacity of the system from 300,000 barrels per day, to 890,000 barrels per day. The existing line would carry refined products, synthetic crude oils, light crude oils with capability for heavy crude oils, while the new line would carry heavier oils. Significantly, the expansion project also includes the expansion of the Westridge Marine Terminal in Burnaby to be expanded with three new berths that would increase the number of tankers to be loaded and to travel down the Burrard inlet from 5 to 34 per month.
On April 2, 2014, the National Energy Board announced that it would hold a public hearing with a legislated 15 month timeframe. There are 1650 registered participants in the process, 400 of which have been granted full intervenor status to participate in the public hearing (the most to ever participate in the hearing process). In August of 2014, the National Energy Board extended the process by seven months to consider supplemental materials related to Kinder Morgan's proposed revised controversial routing through Burnaby Mountain. This pushes the National Energy Board's recommendation to the Federal Cabinet out to January 2016.
TransMountain's supplemental work to assess the feasibility of the Burnaby Mountain alternative has been mired by roadblocks both figurative and literal. There have been court proceedings and applications before the National Energy Board to address the Municipality of Burnaby's attempts to forestall work expressly permitted under the federal regulator's enabling legislation. First the City refused to issue permits to conduct work in the Burnaby Mountain Conservation Area, then it began issuing various bylaw infractions to Kinder Morgan including an Order to Cease. In response, Kinder Morgan filed a motion with the National Energy Board seeking an order directing the City of Burnaby to permit access to the required lands, which motion resulted in an important decision from the federal regulator addressing constitutional issues that may well have to be addressed again given the increasing trend of municipalities and provinces to make demands and assert conditions precedent to federal pipeline project proponents.
The City of Burnaby too sought legal intervention, filing an application with the B.C. Supreme Court seeking an injunction preventing Kinder Morgan from undertaking any further work in the Burnaby Mountain Conservation Area in contravention of its municipal bylaws. This application was denied on September 17, 2014 and leave to appeal to the B.C. Court of Appeal has been sought. On October 23 2014, on jurisdictional and constitutional grounds, the National Energy Board granted Kinder Morgan's motion directing the City of Burnaby to permit access to Trans Mountain representatives to conduct the necessary studies and forbidding Burnaby from denying or obstructing access. With the law having landed on its side, Trans Mountain workers attempted to resume work on Burnaby Mountain only to be met with protesters and blockades necessitating another application to the B.C. Supreme Court for injunctive relief. Since issuing an injunction in favour of Trans Mountain, it is reported that over 60 protesters have been charged with civil disobedience pursuant to the injunction.
On December 1, 2014, Trans Mountain filed its supplemental information in respect of routing options between the Burnaby Storage Terminal and the Westeridge Marine Terminal. Trans Mountain determined horizontal directional drilling through Burnaby Mountain is not feasible. Its preferred alternative is tunelling through Burnaby Mountain, but it is also putting forward a revised corridor through Burnaby Streets as a viable alternative for the regulator's consideration. Trans Mountain had advised the regulator that it was revising its preferred route through Burnaby streets to tunneling through the mountain because of significant public outcry from Burnaby residents who did not want a pipeline in their streets. Of course, it turns out they were equally, if not more, opposed to tunneling through Burnaby Mountain and the conservation area in which it lies. In fact, their Mayor has said in no uncertain terms that no route through Burnaby will be acceptable to the City.
Assuming issuance of the Certificate of Public Convenience and Necessity, Kinder Morgan projects that the Trans Mountain Expansion could be in service in 2018. It will not be approved in 2015.
The Northern Gateway project consists of two pipelines that would run 1,178 kilometres from Bruderheim, Alberta to a marine terminal in Kitimat, B.C. One pipeline would take 525,000 bpd of Alberta oil west to the coast for export; the other, would bring 193,000 bpd of much-needed condensate back east to thin Alberta's land-locked bitumen. The Joint Review Panel issued its report to the Federal Cabinet on December 19, 2013, recommending approval of the project subject 209 conditions. By Order in Council dated June 17, 2014, the Federal Cabinet accepted the Joint Review Panel's recommendation and ordered that the National Energy Board issue Certificates of Public Convenience and Necessity subject to the 209 conditions.
With the required approvals in hand, is Enbridge on track for its 2018 start-up date? In a word – no. Northern Gateway's President has been reported as saying that any possibility of a 2018 start-up date is "quickly evaporating". He admits that the process of re-engagement with First Nations will take time and Northern Gateway is focused on gaining the support it needs to go ahead. The Joint Review Panel was openly critical of Enbridge's consultation with First Nations and a number of conditions relating to continued consultation with First Nations prior to construction and throughout the life of the Northern Gateway project are among the 209 conditions.
In answer to how Enbridge's re-engagement with First Nations is unfolding, one need only look as far as the registry at the Federal Court of Appeal. Approval of the Northern Gateway project is the subject of 18 proceedings before the Federal Court of Appeal filed by nine different Applicants. There are five judicial reviews in respect of the Joint Review Panel's Report; nine judicial reviews of the Cabinet's Order in Council directing the issuance of the Certificates of Public Convenience and Necessity; and four Appeals of the Certificates ultimately issued by the National Energy Board. Eleven of these proceedings were commenced by First Nations and Bands challenging, among other things, the adequacy of consultation and whether the Crown met its duty to consult with and accommodate First Nations interests. The other Applicants are largely environmental groups challenging the adequacy of the environmental assessment, including the findings that the significant impacts on woodland caribou and grizzly bears are justified in the circumstances, and the Joint Review Panel's refusal to take into account the upstream environmental effects of oil sands production.
In 2015, watch for decisions of the Federal Court of Appeal on the above judicial reviews and appeals, which will not come until the latter part of the year. If unsuccessful, expect to see applications for leave to appeal to the Supreme Court of Canada.
Line 9 Reversal
On March 2 2014, the National Energy Board approved Enbridge's application to reverse the segment of its existing 639 kilometre Line 9B between North Westover, Ontario and Montreal, Quebec, in addition to expanding the entire Line 9 capacity from Sarnia, Ontario to Montreal (from 240,000 barels per day to 300,000 barels per day), and permitted the transportation of heavy crude. Enbridge had already obtained approval to reverse the pipeline's flow for the Line 9A section running between Sarnia and North Westover, in southwestern Ontario. With Western Canadian oil now priced lower than foreign sourced oil being shipped Westbound from Montreal, the Line 9 reversal will allow Quebec refineries to remain viable.
While one might have reasonably expected an application to return a pipeline to the purpose it was originally built for 1976, and which has been operated without major incident for 35 years, to be relatively uncontroversial, that was not the case. The current state of public pipeline sentiment in Canada is such that proceedings before the National Energy Board escalated to a state where the regulator had to cancel the final portion of oral argument and resort to written submissions due to fear for the safety of attendees.
During the hearing, the regulator predominantly heard concerns respecting pipeline integrity and spill prevention and response given that Line 9 travels through the some of the most populated parts of Canada including Montreal and the suburbs of Toronto. Heightened concerns were not unexpected given that the hearing came on the heels of major incidents including the Lac-Megantic train derailment and Enbridge's own Line 6 spill into a tributary of the Kalamazoo River in Michigan. Notwithstanding that the project contemplated no new permanent land rights, the regulator also heard concerns respecting the adequacy of consultations with First Nations.
Before being granted leave to open, Enbridge is required to demonstrate that it has met all of the conditions set out by the regulator. On October 9, 2014, the National Energy Board determined that Enbridge failed to meet condition 16 because it had not installed shut-off valves around some major waterways. The regulator noted that Enbridge only has shut-off valves on both sides of six of 104 major water crossings and directed it to file a revised submission for condition 16, at least 90 days prior to applying for the final leave to open of the Project. This may not be an insignificant set-back for Enbridge and will push the in-service date of the reversed Line 9 into 2015.
Finally, an oldie but goodie; Keystone XL, which has remained on life support for five long years amidst hyperbolic political posturing in both U.S. houses and on both sides of the aisle. Any reader can be forgiven for having forgotten the particulars of this long ago proposed pipeline project, the Canadian portion of which obtained National Energy Board approval in 2010, and which has languished awaiting a coveted Presidential Permit. To recap, Keystone XL is a proposed 1897 kilometre crude oil pipeline beginning in Hardisty, Alberta and extending south to Steele City, Nebraska, with a capacity to transport up to 830,000 barrels of WCSB and Bakken oil per day to Gulf Coast and Midwest refineries.
In May of 2012, TransCanada filed a new application for a Presidential Permit with the U.S. Department of State. After controversy in respect of routing through Nebraska's environmentally sensitive Sands Hills region, the Governor of Nebraska approved a revised route in January of 2013. In March of 2013 a Draft Supplementary Environmental Impact Statement reaffirming no significant environmental impacts. On April 18, 2014 Obama's adminstration announced that its review of the project would be extended indefinitely, pending the result of a legal challenge to a Nebraska pipeline siting law that could result in route amendments. Argument was heard by the Nebraska Supreme Court on September 5, 2014 on issues including whether the landowners had standing to bring the action and whether the Legislature violated the Nebraska Constitution when it passed the law that allowed the Governor to approve the pipeline, the routing of which would typically be approved by the Nebraska Public Services Commission.
November 2014 saw a bill approving Keystone XL pass in the House of Representatives for the ninth time. The bill went on to be defeated in the Senate by one vote. While Republicans regained the majority of the Senate in recent midterm elections, the newly elected Senators had not been sworn-in yet. The bill will surely be reintroduced in the very near future, the Senate Republican Leader having declared it to be a priority item on the Senate agenda for 2015. Even if the bill had passed, President Obama was expected to veto it and may yet veto it should the opportunity present itself.
In 2015, watch for the imminent decision of the Nebraska Supreme Court concerning the constitutionality of the pipeline siting law as Obama's administration has repeatedly indicated that it will not act prior to a ruling on routing through that state. It will also be interesting to watch whether the Republican held Senate will be able to muster up the 67 votes necessary to override the presidential veto.
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