Bloomberg News

Enbridge Faces New Costs, Opposition After Gateway Approval (2)

December 20, 2013

Enbridge Inc. (ENB) cleared a major regulatory hurdle for its C$6.5 billion ($6.1 billion) Northern Gateway pipeline. The company now faces higher costs and continued opposition from aboriginal and environmental groups.

Canada’s National Energy Board approved the project, subject to 209 conditions, and said the country would be “better off” with the pipeline than without it, according to a report released yesterday in Calgary. Enbridge, Canada’s biggest pipeline company, next must seek approval from the federal government, which has 180 days to review the project.

“We’re not celebrating,” Chief Executive Officer Al Monaco said yesterday during a conference call. The conditions imposed by the regulator are “tough” and the approval is “just one step” in getting the project built, he said.

The pipeline from Alberta to the Pacific Coast would help discounted Canadian crude reach international markets and earn higher prices. Northern Gateway has faced delays like other oil-sands pipeline projects, including TransCanada Corp. (TRP)’s Keystone XL.

“This isn’t a win yet for Enbridge,” Bob Schulz, a professor at the University of Calgary’s Haskayne business school, said yesterday in an interview. “It’s not a done deal. No one knows how much all of this will cost.”

Enbridge, based in Calgary, contested the regulator’s C$7.9 billion cost estimate for the project, while conceding its current C$6.5 billion projection will likely increase when it updates costs in the first quarter, according to Monaco.

‘Big Issue’

“The big issue is margins on what these producers can get for their oil,” Schulz said. With rising costs to build the pipeline, Enbridge may try to pass on those costs to producers, who may balk, he said.

Suncor Energy Inc. (SU), Canadian Natural Resources Ltd. and Cenovus Energy Inc. are among producers that need more options to transport their crude to market, including Keystone XL, which must receive U.S. approval because it crosses the Canada-U.S. border en route to the Gulf coast.

Canadian oil-sands output is set to more than double from last year to 4.5 million barrels a day by 2025, according to the Canadian Association of Petroleum Producers, an industry group.

The gap between Canadian heavy crude and West Texas Intermediate, the U.S. benchmark, has widened to $23.50 a barrel from $18.25 on Jan. 9, 2012, the day before the National Energy Board began its review of the project.

Increased Prices

Northern Gateway will increase the price Canadian producers are paid for their bitumen by as much as $15 a barrel, according to Schulz. The pipeline will contribute C$32 million in property tax revenue for communities in British Columbia as well as 560 long-term jobs, according to the project’s website.

Enbridge was little changed at C$45.35 at the close in Toronto. The shares have increased 5.4 percent this year.

Among the regulator’s conditions announced yesterday, Enbridge must have liability coverage of C$950 million, lead research efforts on heavy-oil spills in marine and freshwater environments, and compensate aboriginal hunters and fishermen. Other conditions include building extra oil storage in the event of disruptions at Kitimat and establishing an emergency-response plan.

“To date, not a single oil spill response study has adequately accounted for what would happen if diluted bitumen were to spill in the ocean,” Andrew Weaver, a Green Party member of the British Columbia legislature, said in an e-mailed statement. “How can we possibly gauge how well prepared we are?”

First Nations

Northern Gateway would cut over the Rocky and Coast Mountains, an area sparsely inhabited by aboriginal groups. The 1,178-kilometer (732-mile) conduit would carry 525,000 barrels a day of diluted bitumen to the Pacific port of Kitimat, British Columbia, where it would be loaded onto tankers and shipped through the Douglas Channel, which narrows to less than a kilometer.

“We are disappointed in the joint review panel’s recommendation,” Arnold Clifton, chief councilor of the Gitga’at First Nation, said in an e-mailed statement yesterday. The federal government needs to consider the legal and political effects of the pipeline as well as the damage to the group’s territory and should reject the proposal, he said.

Environmental Effects

Other opponents to the project, including the Natural Resources Defense Council and the WWF, expressed disappointment with the decision. The Pembina Institute, a Calgary-based think tank, urged Prime Minister Stephen Harper’s government to consider the climate impacts of oil-sands development as well as local environmental effects when making its final decision on Northern Gateway.

Harper has favored oil and gas development as a means to create jobs, and Natural Resources Minister Joe Oliver has said getting Canadian oil to Asian markets is “crucial” to promote economic growth.

“No project will be approved unless it is safe for Canadians and safe for the environment,” Oliver said yesterday in an e-mailed statement. The government will review the recommendations and consult with affected aboriginal groups, he said.

Opponents also have threatened legal action to stop the pipeline or delay construction.

‘Social License’

“If they try to build Northern Gateway, First Nations and residents have committed to taking the company to the courts and to putting their bodies in front of bulldozers,” Nikki Skuce, a campaigner for environmental group ForestEthics, said in an e-mail before the decision. “Enbridge will never gain social license to operate in northern B.C.”

To tackle such opposition, Harper appointed lawyer Douglas Eyford earlier this year as a special representative to address concerns raised by West Coast aboriginals about energy projects.

Canada should take steps to secure native support, including measures to prevent oil spills and providing financing for aboriginal companies that want to participate in such projects, according to a report prepared by Eyford that was released Dec. 5 in Vancouver.

Canada’s Supreme Court has ruled that the government has a duty to consult aboriginal groups on decisions that affect their traditional land and way of life.

Northern Gateway is one of C$36 billion worth of projects that Enbridge is developing through 2017,Monaco said Oct. 1 at an investor meeting in Toronto. Those projects include reversing an oil pipeline to carry crude to refineries in Quebec and the Sandpiper line in the Bakken. The company expects per-share earnings to grow 10 percent to 12 percent from 2012 to 2017.

To contact the reporter on this story: Jeremy van Loon in Calgary at jvanloon@bloomberg.net

To contact the editors responsible for this story: Steven Frank at sfrank9@bloomberg.net; David Scanlan at dscanlan@bloomberg.net


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