"O Canada" - Hurdles for Imports of Gas and Oil from North of the Border

In a widely-reported trend, an increasing U.S. regional natural gas supply has led to declining imports of Canadian natural gas, particularly into the eastern regions of the U.S., where shorter transportation distances give U.S. producers a significant cost advantage. But Marcellus and Utica basin gas searching for new markets, as well as permitting challenges for oil pipelines on both sides of the border, create substantial challenges for western Canadian oil and gas. The changing market dynamics have already affected eastern pipelines on the U.S. side of the border and that impact may be moving westward as new projects, such as Energy Transfer's Rover pipeline and Enbridge's Nexus pipeline, enter into service.

Will Midwestern Canadian Gas Imports Suffer Along with Eastern Imports?

Over the last ten years, as reflected in the chart below, gas in the Northeast has effectively stifled Canadian imports into the Eastern U.S. This decline of approximately 70% could have been even greater, but for permitting obstacles in the state of New York, where the Constitution and Northern Access projects have been denied state certifications.

A Downward Trend for Canadian Gas Exports

Source: Canada's National Energy Board

But very soon, the impact of the Marcellus and Utica basins will likely begin affecting pipelines in the Midwest, as both the Rover and Nexus pipelines are scheduled to be in-service by the end of this year. The Rover pipeline is a 3.25 Bcf/day pipeline that connects with the Vector pipeline, which can take the gas all the way to the U.S.-Canada border. The Nexus pipeline is a 1.5 Bcf/day pipeline that also includes leased capacity on Vector and another pipeline that allows its gas to flow all the way to the U.S.-Canada border.

Deliveries into the eastern U.S. have fallen dramatically, as reflected in the reports filed by Iroquois Pipeline, which transported only 67,982,43 dth of gas in the zone that includes the Canadian border, down from 90,970,911 dth in 2012. It will bear watching to see if pipelines that are connected to Canada in the Midwest, which has been collectively fairly stable over the last ten years, will be impacted by the construction of Rover and Nexus. The U.S. pipelines that bring Canadian gas into the U.S. in the Midwest include Viking Gas Transmission/Great Lakes Gas Transmission, Alliance Pipeline, and Northern Border Pipeline (at Emerson, Elmore, and Monchy, respectively).

As shown below, to date, the volumes transported on these pipelines have not been negatively impacted by the changing dynamics in the U.S., but with almost 5 Bcf of gas looking for a market in the Midwest, these pipelines may face the same challenges as Iroquois.

No Pass for Canadian Crude

Canadian crude imports are being hampered by permitting or other regulatory challenges on both sides of the border. The Canadian National Energy Board regulates companies that own and/or operate interprovincial or international pipelines, while intra-provincial pipelines are regulated by each individual province. Regulatory complexities of that oversight framework are impacting pipeline development in British Columbia, which is proving to be "Canada's New York" for Kinder Morgan's Trans Mountain Project. British Columbia Premier John Horgan has stated firmly that he "will continue to stand up for the right to protect B.C.'s environment, economy and coast." For its part, Kinder Morgan announced in mid-April that it would suspend all non-essential spending on the project. British Columbia's recent request that a court clarify its authority over crude oil shipments passing through the province may further delay a definitive outcome. However, Kinder Morgan has stated that it will continue to consult with various "stakeholders" to see if some agreement can be reached by May 31 that achieves two goals; first, clarity on its ability to construct through BC; and, second adequate protection of Kinder Morgan shareholders.

Any issues with Trans Mountain would put additional pressure on the two other major Canadian crude projects, Keystone XL (which is facing a Nebraska Supreme Court decision either late this year or in early 2019) and Enbridge's Line 3 Replacement Project (which is awaiting a Minnesota PUC Certificate of Need and Route vote in June). It is possible that all three of these pipelines will not be built, or will be delayed even further, which will undoubtedly suppress access to liquid markets for the oil producers in Western Canada.