Enbridge’s Northern Gateway: Energy Politics & Oil Spread Pricing

The Harper government’s June 17^th approval for Enbridge’s construction of their Northern Gateway pipeline has been the centerpiece of Canadian political controversy in the past month. Analysts and investors are simultaneously rejoicing and lamenting the landmark decision as the energy industry turns its eye on Enbridge’s response to the approval. With 209 conditions prescribed by the National Energy Board (NEB) as well as protests from environmental and Aboriginal land-rights activists, Enbridge’s CEO, Al Monaco, expects construction of the $6.5 billion pipeline to begin as late as 2018. The expectation of increased Canadian oil supplies is likely to draw market participants’ attention, which in turn affects crude oil pricing.

Shipping 525,000 bbl/day of Athabaskan oil sands crude 1,177 km from Burderheim (AB) to Kitimat (BC), the construction of Northern Gateway is advertised as allowing crude oil to be easily sold to markets in the Pacific Rim. The pipeline will cross more than 50 First Nations’ territories most of which are in B.C. where aboriginal bands have yet to settle land claims unresolved for centuries (Figure 1). Indeed, 28 individual First Nations bands and the B.C. Assembly of First Nations have explicitly stated their opposition to the pipeline: “First Nations will immediately go to court to vigorously pursue all lawful means to stop the Enbridge project… This project, and the federal process to approve it, violated our rights and our laws. We are uniting to defend our lands and waters of our respective territories.”[1]

Enbridge sees things differently. Al Monaco is unphased by the recent Supreme Court ruling granting the Tsilhqot’in Nation 2,000 sq-km of land in the Cariboo-Chilcotin region of British Columbia[2] remarking: “the decision confirms Enbridge has been taking the right approach all along by reaching out to communities in the Alberta-to-West Coast pipeline right of way and offering economic participation. So far, 26 First Nations have signed up to be equity owners.”[3]

The economic benefits of Northern Gateway have its supporters and detractors. On the supporting side, many experts believe the fate of Northern Gateway’s construction can make up for $20 USD/bbl for Canadian crude benchmark, Western Canadian Select (WCS). Energy columnist Scott Simpson writes: “Mayan heavy crude oil from Mexico fetches the world price because it has access to the Gulf of Mexico.” Since Canada currently lacks easy crude oil access to either the Atlantic or the Pacific Ocean, Canadian crude producers are losing profits to competitors south of the border.[4] According to Simpson, Mayan heavy crude is of equal quality to WCS, but WCS must be priced lower to attract traders unwilling to pay for high transportation costs, and discounted prices entails less profits for Canadian producers. Simpson comments: “Enbridge…and Trans Mountain Expansion oil transmission pipeline projects would also create leverage to escape the [$20 USD/bbl] discount.” University of Calgary economics professor Bob Mansell claims that “[Canadian] oil companies producing bitumen risk losing up to $40 million per day – $14 billion a year – if they can’t find a way to ship their product.”[5] A quick and efficient path to the Pacific Ocean can allow Canadian oil companies to profit from Asian markets, especially China’s growing demand for crude oil.[6]

On the other hand, Policyalternative.ca published a report criticizing Enbridge’s claims about employment opportunities. Enbridge expects 63,000 person-years of employment with 1,146 full-time jobs once Northern Gateway is completed. Marc Lee, Senior Economist with the BC Office of the Canadian Centre for Policy Alternatives writes: “employment gains grossly overstated, and based on modeling that makes many unjustified assumptions. The only jobs we can bank on are approximately 1.850 construction jobs per year for three years.”[7] The Dogwood Initiative is a group preparing for a provincial referendum that aims to disrupt construction of Northern Gateway. Kai Nagata, representative of the Dogwood Initiative, says there was no democratic input from British Columbians as to whether pipeline construction was ethical or not. “A legal team is working on the draft legislation and there are 450 trained volunteers on the ground across the province. There are 5,500 people who say they will help collect signatures and already 27,000 people who have pledged to sign,” Nagata says, making it clear his organization is dedicated to its cause.

With the current conflict in Iraq negatively affecting Brent-WTI spread pricing, investors observing fluctuations of the two most important global benchmarks are beginning to be pessimistic over the future stability of one of the major OPEC crude oil producers in the region. Indeed, Christine Lagarde, the International Monetary Fund’s (IMF) managing director, comments: “When we look at big geopolitical risks of that nature, we have to look at the spill of the consequences on the U.S. economy,” Ms. Lagarde told Fox Business News. “We believe the oil shock that could result from the current tension in Iraq in particular might affect the economy.” HIS Energy, a U.S.-based think tank, sees Canada, Brazil, and Iraq as the key oil exporters in the near future with prospects for Iraq quickly diminishing.[8] Jamie Webster from HIS believes Northern Gateway would allow Canadian crude to reconnect to global prices where WCS would no longer need to be sold at discounts to attract investors.[9]

ZEMA is capable of tracking WCS fluctuations. Pictured below in Figure 2 is a snapshot of prompt contracts for WCS-WTI spread pricing with a forecast date of June 2^nd in blue and June 18^th in red (a day after Enbridge’s approval).

Investors are apprehensive about the 209 conditions that Enbridge will have to adhere to in order to construct Northern Gateway in accordance with the NEB approval. CME data (Figure 2) illustrates a fall in WCS value from June 18^th onwards as a result of these strict conditions. On top of this, aboriginal and environmental groups are preparing for potentially radical political action as the pipeline’s planned route encroaches on aboriginal property, including residential land where a possible oil spill can devastate the populace. WCS still lags behind WTI as the negatively-valued spread continues to decrease. However, WCS rises to meet the original June 2^nd values as settlements move into January 2015 and will, if Simpson and Mansell are correct, increase value compared to pricing before Northern Gateway’s June 17th approval. Whether Canadian oil producers can avoid discounting WCS to attract traders, and whether investors will become optimistic about Northern Gateway’s successful construction, remains an open topic of discussion contingent on Enbridge’s strategy to deal with the NEB conditions.

ZEMA’s powerful analytics and formula library enable traders and analysts to forecast and track the relevant market data investors need to make sound economic decisions. ZEMA collects a range of NYMEX crude futures data, including data from the NYMEX Futures Reference file and the NYMEX Futures Settlement report for petroleum and other liquids. To receive a complimentary ZEMA demonstration, visit http://www.ze.com/book-a-demo/.

Bibliography

Cattaneo, Claudia. “Supreme Court land ruling in favour of B.C. First Nation won’t impact Northern Gateway, Enbridge CEO says.” Accessed July 10, 2014. . http://business.financialpost.com/2014/06/17/northern-gateway-oil-pipeline-approved-tuesday/?__lsa=b48f-073d

Hume, Jessica. “B.C. First Nation wins landmark land claim case at Supreme Court .” Accessed July 10, 2012. http://www.torontosun.com/2014/06/26/bc-first-nation-wins-landmark-land-claim-case-at-supreme-court.

Hussain, Yadullah. “Northern Gateway pipeline decision awaited anxiously by world desperate for secure oil.” Accessed July 10, 2014. http://business.financialpost.com/2014/06/16/northern-gateway-pipeline-decision-awaited-anxiously-by-world-desperate-for-secure-oil/?__lsa=47bb-6509.

Lewis, Jeff. “Northern Gateway pipeline approved by federal government with conditions.” Accessed July 10, 2014. http://business.financialpost.com/2014/06/17/northern-gateway-oil-pipeline-approved-tuesday/?__lsa=b48f-073d

Lee, Marc. “Enbridge Pipe Dreams and Nightmares: The Economic Costs and Benefits of the Proposed Northern Gateway Pipeline.” Accessed July 10, 2014. http://www.policyalternatives.ca/sites/default/files/uploads/publications/BC%20Office/2012/03/CCPA-BC_Enbridge_Pipe_Dreams_2012.pdf.

Vanderklippe, Nathan. “Northern Gateway blessing gets mixed, muted response in Asia.” Accessed July 10, 2014. http://www.bnn.ca/News/2014/6/18/Northern-Gateway-blessing-gets-mixed-muted-response-in-Asia.aspx

William, Chief Roger, Chief Joe Alphonse, and Grand Chief Stewart Phillip. “Tsilhqot’in Nation Welcomes Recognition of Full Aboriginal Title for the First time in Canadian History.” Accessed July 10, 2014. http://www.tsilhqotin.ca/PDFs/Press%20Releases/2014_06_26_SCC_NR_decision.pdf.