Canada energy outlook 2014: Expect more of the same

If watching pipeline politics was like watching a sports game, then we should probably expect several replays in 2014 — but that's not to say the show won't be exciting.

The big plays will be whether U.S. President Barack Obama gives the $5.3-billion Keystone XL project the thumbs up, while industry watchers will also be paying a lot of attention to the fate of Enbridge's proposed Northern Gateway pipeline. That's because each will in no short order help the country become the resource powerhouse it wants to be.

Sound familiar? It should. These topics dominated the energy patch last year -- along with fluctuations in oil prices and the debate over so-called land-locked oil -- and many industry watchers are eager to get some answers. "2014 might shape up to be a monumental year for the future of Canada," says Geoff Hill, partner and national oil and gas leader at Deloitte, based in Calgary.

"For Canada to be a global energy superpower we need to get our resources to foreign markets. Right now we have more resources than we can use internally and we have limited ability to get those to foreign markets so we need to expand."

Canada came one step closer in mid-December. That's when a federal joint review panel recommended the federal government approve the controversial $7.9-billion Gateway project, albeit with 209 strings attached, stating that "opening Pacific Basin markets is important to the Canadian economy and society." Ottawa has until June to make a decision.

But there was a certain anticlimactic feel to it all. No surprise that shortly after the federal panel issued their approval, opposition groups such as the Coastal First Nations and Greenpeace voiced their disappointment. Even Prime Minister Stephen Harper, during a visit to Vancouver earlier this year, suggested the approval didn't mean the pipeline is a sure thing.

All the while, the public is pretty much split about the project, with opposition softening throughout last year, according to a fall poll by Insights West.

Waiting game

In the meantime, there will be plenty of other events to keep industry watchers occupied including what happens with Kinder Morgan's Trans Mountain project, as well as plans around Energy East and the reversal of the so-called Line 9 pipeline.

Focus will also be placed on whether transporting oil by rail. In its new energy M&A trends report, Stikeman Elliott expects shipments of crude oil by rail across North America will continue to grow in 2014, noting five new loading terminals in Western Canada are being constructed to move as much as 450,000 barrels per day of heavy crude by the end of 2014. Rail loading capacity in Western Canada is estimated to increase to more than 900,000 barrels per day from 225,000 by year's end.

Although the increase has raised speculation that rail shipments might replace the need for new pipeline capacity, it's more likely rail will be a supplement to, not a substitute for these pipeline projects, according to the report, and that's because it costs more to transport by rail and there's some bad PR around the practice. Tragic imagery such as the Lac-Mégantic derailment is not easy for Canadians to forget.

What kind of tax structure British Columbia comes up with for the development of liquefied natural gas will also be a key of note. The creation of an LNG industry has been a top priority for Premier Christy Clark's Liberal government. "LNG is the big story that will really start to gather momentum this year," Peter Tertzakian, chief energy economist at ARC Financial Corp., wrote this week in the Globe and Mail newspaper. But he questioned just how big the industry can get. Building 14 LNG plants is "wholly unrealistic," but maybe there's room for two or three.

That has led to speculation of consolidation. Significant hurdles including big capital costs, obtaining the regulatory approvals and finding common ground with First Nations, environmental groups and others. "How the field will be narrowed remains to be seen. Some project sponsors may drop out. Others may combine their projects," states the report by Stikeman Elliott.

Given all this, David Collyer, president of the Canadian Association of Petroleum Producers, has his work cut out. A top priority for 2014 will be to do some serious public outreach. "Our biggest single focus area for 2014 will be to try to ensure we have broad social licence for infrastructure development that will enable market access beyond the U.S.," he says.

More than market access

But this year won't just be all about pipelines. There's no doubt there was a lack of blockbuster M&A deals in 2013, with nothing matching the marquee deals of 2012 such as CNOOC Limited’s $20-billion acquisition of Nexen. The chill was largely blamed on tighter rules around what state-owned enterprises can buy here.

There could be a tiny pickup especially if, Stikeman notes, Spain’s Repsol Energy, which is reportedly looking to make a US$5 to 10 billion purchase of a North American oil company, spends in Canada. There's also Indian Oil Corporation's (IOC) rumoured interest to buy a stake in Canada’s shale assets.

"If Repsol’s target is in Canada, a transaction of that magnitude would boost interest and M&A activity in the sector," the report states, reinforcing Canada’s reputation as a "safe geopolitical environment for business and the Canadian energy sector as an attractive place for foreign investors to deploy capital."

Looks like it's shaping up to be an eventful, if not somewhat-familiar, year.