Long Road Ahead for TransCanada's Energy East Pipeline
Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The media is buzzing about TransCanada's (NYSE: TRP) Energy East pipeline. According to its proponents, the project will allow Alberta crude to access new markets and drive oil sands development. But don't get too excited. The pipeline is still a long way from approval.
Last month, TransCanada announced that it's moving forward with its Energy East Pipeline, which will transport Canadian crude oil to east coast refineries. If approved, the project will involve converting 1,864 miles of an existing natural gas pipeline as well as laying down approximately 870 miles of new pipe.
Why build such a long pipeline? Simply put, with lanes to the south and the west blocked, shipping crude east is the path of least resistance.
Expanding exports to the United States has been challenging. TransCanada's Keystone XL -- which would ship 830,000 barrels per day to the U.S. Gulf coast refineries -- remains in political limbo. U.S. President Barack Obama has openly questioned the benefits of the pipeline and a recent ethics scandal suggests that the project's probability of approval is waning.
Political resistance could also close the West coast export door. In May, the British Columbia provincial government rejected the Enbridge (NYSE: ENB) Northern Gateway pipeline due to pressure from Aboriginal and environmental groups. The project involves constructing a 750-mile pipeline which would carry 525,000 barrels per day of diluted bitumen west to the tanker port of Kitimat, B.C. While the Northern Gateway isn't officially dead, it's unclear if the Federal government will overturn the province's decision.
Kinder Morgan's (NYSE: KMI) Trans Mountain Expansion pipeline could help oil sand producers reach the west coast. In May, the company submitted a proposal to the National Energy Board to expand capacity by 540,000 barrels of crude per day to the lower B.C. mainland. But this project also faces resistance from First Nation and environmental groups. In addition, a series of leaks in June along the existing pipeline route have damaged Kinder Morgan's reputation in the eyes of regulators and the public.
Lots of roadblocks
But while the economics of the Energy East project are sound, don't get your hopes up for a swift approval. The pipeline faces a long list of challenges before construction can begin.
First, TransCanada CEO Russ Girling is going to have to convince Quebec Premier Pauline Marois that shipping bitumen through the province is a good idea.
That's going to be a tough sell. Marois has been hostile to the interests of the energy industry after running on a green election platform and putting a halt on natural gas fracking activities. Quebec is also still cleaning up from an accident last month, where a derailed train carrying crude oil exploded, killing 47 people. Expect any pipeline proposal to spark a contentious debate within the province.
It's also unclear what Quebec would gain from the project. Sure, lucrative construction contracts would line provincial coffers, but Montreal refineries aren't in any desperate need for new feedstock. And because most of the crude is destined for export markets, drivers can't expect any break at the pump.
Second, TransCanada will also have to court Aboriginal groups and combat environmental activists. There are some 150 Aboriginal communities along the proposed route whose interests must be considered and environmentalists have already begun to mobilize against the project. Given their track record in delaying previous proposals -- see above -- investors shouldn't underestimate the power of these groups.
Third, the project has a long list of government and regulatory hurdles to climb over. TransCanada still needs final word from the National Energy Board as well as the green light from every province along the proposed route -- Alberta, Saskatchewan, Manitoba, Ontario, and New Brunswick.
The last onion in the jar
Energy East isn't the industry's Plan B or even its Plan C for that matter. The pipeline is a last ditch attempt by the oil patch to access the marketplace.
Consider the economics of the project. The length of the pipeline means it will cost a gasp-inducing $12 billion. That's nearly double to the estimated price tags on Keystone XL or Northern Gateway.
Second, the east coast isn't the most attractive market to ship to. With local energy demand in a secular down-trend, much of that crude will have to be exported.
Who will be the buyers? Europe is off the table as their refineries are mostly equipped to handle light. Asia is an option, but sheer distance may make shipping costs prohibitively expensive. Exports will be limited to the U.S. Gulf Coast.
Foolish bottom line
TransCanada shareholders shouldn't get too excited about the Energy East pipeline. The project still faces many hurdles and the battle is just beginning. But, investors should be watching this skirmish closely as it could have far-reaching consequences for the entire energy industry.
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Robert Baillieul has no position in any stocks mentioned. The Motley Fool recommends Kinder Morgan. The Motley Fool owns shares of Kinder Morgan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!