Canada oil patch outlook 2013: focus on pipelines

A major topic for the oil patch in 2013 will be the controversial building or expanding of pipeline networks in Canada and the United States as the big price discount energy companies producing oil in Canada get for their crude hinders economic growth.

There is roughly a $50 discount for Canadian oil compared to international benchmarks, or the difference between what it exports and imports, said Charles St-Arnaud, an economist at Nomura Securities in New York. That differential is costing the Canadian economy about $2.5 billion a month in lost revenues.

"Despite being an important crude oil producer, Canada still has to import more than 40 per cent of the oil it consumes because of an inadequate pipeline network," St-Arnaud said.

"The biggest theme will be to try to push projects to try to get the oil flowing to areas of demand," he added. "As long as the oil is not flowing the gap will be there."

The bigger the gap, the bigger the hit to the economy, the argument goes. If it were not for the excessive spread, Canada's trade balance would currently show a surplus of about $2.3-billion, instead of the current $0.2-billion, St-Arnaud said.

“This implies to a revenue loss of about $30-billion a year, or about 1.6 per cent of GDP," he said.

Pipelines key to price gap

Industry experts hope that key pipeline projects will help close the price gap. They include the expansion of TransCanada Corp.'s Keystone XL project, Enbridge's Northern Gateway and Kinder Morgan's Trans Mountain, as well as the reversal of the so-called "Line 9" pipeline that would allow oil to flow to the eastern part of the country.

"This highlights the critical need for timely government regulatory approvals & ‘public buy-in’, permitting pipeline expansion to the United States and to the B.C. coast," said Patricia Mohr, vice-president, economics and commodity market specialist at Scotiabank.

Andrew Potter, an oil and gas analyst at CIBC World Markets, said 2013 will be a defining year for pipeline politics.

"Pipeline capacity out of Western Canada is adequate for the short term, but substantial progress must be made on this front in 2013," he wrote in a recent note.

"Progress (or lack thereof) will have a big impact on sentiment towards Canadian oil producers."

Beyond pipelines: M&A landscape looks ripe

Transaction activity in Canada is set to ramp up next year as domestic players need to achieve scale to manage the risks of unconventional resource development, along with ongoing cost pressures, says KPMG.

Foreign interest remains strong, but those entities will have to become more creative in structuring future deals given the recent guidelines by Ottawa. Complete control transactions will be far more infrequent.

Canada recently okayed two major acquisitions in the energy sector by foreign state-owned enterprises -- the $15.1-billion takeover of Nexen by China’s CNOOC Ltd. and the $5.2-billion takeover of Progress Energy Resources by Malaysia’s Petronas -- while signaling a tougher stance on similar deals in the future.

"What's going to happen in the next few years, particularly given the last two deals that went through, is there's going to be stricter guidelines in the amount of foreign investments by national oil companies," said Lance Mortlock, partner in Ernst & Young’s oil and gas practice, based in Calgary.

"What we think that's going to mean in 2013 and beyond is more joint ventures."