Regulator change creates uncertainty, which combines with low oil prices, higher gas prices, politics to make TransCanada slow down on Energy East pipeline
The National Energy Board has granted TransCanada’s request for a 30-day suspension of the review for the Energy East and Eastern Mainline pipelines. Some critics of the Trudeau Government’s “modernization” of the national energy regulator say federal bungling has all but killed the projects, but economists also point to the changing economics of the energy and business.
TransCanada complained of recent “significant changes to the regulatory process” by the NEB, but the most significant appears to be the requirement to assess both upstream and downstream greenhouse gas emissions.
That has former TransCanada executive Dennis McConaghy fuming.
“Re-scoping was the ‘last straw that broke the camel’s back’ in terms of TransCanada and its shippers will to persevere with ever more dysfunctional regulatory process,” he said in an email. “At some point, a regulatory process gets to the point where it is burdensome and risky that private capital cannot relate to it. I believe TransCanada and its Energy East shippers have reached that point.”
Robert Skinner is an executive fellow at the School of Public Policy, University of Calgary, and a veteran of the Canadian oil sector. He argues that “Canada is signalling that we are a resource economy with a people that detests resource development.”
He says the “re-scoping” of the pipeline reviews is troubling to any future investor in Canadian pipelines.
“This is a convenient bit of ‘air cover’ for TransCanada to begin the process of ‘reconsidering’ and to eventually withdraw the Energy East proposal,” he said in an email. “I see this as the beginning of what will be a graceful cancellation of the project.”
One could argue that a withdrawal wouldn’t be graceful at all for TransCanada. McConaghy estimates the Calgary-based company has $800 million tied up thus far in the review process.
But as painful as swallowing that very large cost might be, continuing with a project that perhaps is no longer economic would be much worse.
“It is becoming clearer that the pipeline might be one too many pipes to meet Canada’s needs for some time. They will need to get a million b/d of commitments and I very much doubt that is doable.,” says Skinner.
“Keystone XL looks like it might be enough for TransCanada to handle, if Nebraska approves it. Other pipes to US markets have been built.”
University of Calgary economist Kent Fellows says that one thing often missed in this story is that much of Energy East is actually not new pipe at all, just natural gas line that’s being re-purposed.
“What we’re seeing now is TransCanada able to make better use of that natural gas mainline because they’ve confirmed some shippers at a lower toll rate going east on that line, so that’s starting to look a little bit more attractive,” he said in an interview.
Prior to 2014, when TransCanada started the application, oil sat around $100/b and natural gas was languishing below $3/Mcf. Now the global oil market is over-supplied and prices struggle to reach $50, while natural gas is mounting a comeback.
“I made an awful lot of sense say five to 10 years ago to be pursuing this and it may make less sense now,” says Fellows.
The over-arching concern for TransCanada, says Fellows, is probably significantly increased uncertainty created by the combination of regulatory charge, low oil prices, and not enough demand from shippers.
“Any time you’ve got increased risk, changing expectations, you’re going to have uncertainty and uncertainty is generally bad for business, especially in the short-term,” he said. “We like regulators to have an even keel. We like certainty about what these decisions will look like and what kind of criteria they’re going to be made on.”
Skinner throws in an additional variable TransCanada is probably considering: political opposition from communities, eco-activists, and First Nations.
“There is a corporate question of why any board of directors would want to have the company dragged through endless political, journalistic and social media pommeling for the next few years,” he said.
“And then become an issue in the 2019 federal election, knowing that with a Quebecer as prime minister and Quebecers opposed that the project will be dismissed by the Prime Minister [Justin Trudeau] with the same non-science-based reasoning he applied to dismiss Northern Gateway.”
McConaghy isn’t having any of the non-NEB explanations for TransCanada’s decision. Pipeline system capacity is already constrained and producers are shipping more crude oil at a higher cost with rail cars. And what about spare capacity to accommodate the inevitable outages , planned and unplanned?
“Many will try to rationalize for the current Energy East NEB expert panel – and behind it the Trudeau government – that re-scoping of the Energy East regulatory process was not the real motivation for this suspension by TransCanada,” he said.
“That the need and necessity of Energy East is now so in question that TransCanada is simply using it as an excuse to suspend and eventually wind down the project. I don’t buy that logic.”
Here’s some logic the Alberta-based oil industry would buy: while Trudeau and Carr publicly support more pipelines, the government’s fumbling of the NEB modernization sends the opposite message.
Even if Ottawa doesn’t intend to send that message, it’s the one companies like TransCanada and supporters like McConaghy and Skinner are hearing. That needs to change.