Crude Observations


Is it finally May? It’s hard to tell, given that Calgary got slammed by a typical May Day storm and my deck and yard and car was covered by close to 15 cm of the wettest, heaviest snow I have shoveled in what feels like 100 years. ‘Cause you know I was shoveling 100 years ago. Shoveling something.


At any rate, the sun is coming out finally so it looks like something resembling spring is on the way, notwithstanding the temptation I have to go skiing next week, just because.


You know what they say – it’s gonna be May. And in Calgary that means snow. And that means the last gasp of winter and the rebirth of our trees and plants and lawns and psyches.


It also means a month of good news on virtually all fronts so I thought, instead of you having to go out and search out this news all on your own, I would instead take the time and space that I have in this short form blog to point out something that, even though some folks think is “bad”, good news. It may in fact qualify as great news. Well at least to me.


And that’s what May really needs. Good to great news that isn’t bad.


What the heck am I talking about?


Well pipelines of course. In fact one in particular.


That’s right. The TransMountain Expansion is now complete, approved by the regulator for commercial operation and is filling itself with delicious diluted bitumen as we speak. A 36 inch, 1100 kilometer tube chock full of Nutella, running from Edmonton to Vancouver to be loaded onto tankers bound for its new home, somewhere. I mean who cares, right? Oil, oil, oil. From Alberta to BC to Asia. Awesome.


I know that you all have read the news on this and countless columns and opinion pieces written by way smarter people than me, but let me tell you what I think.


Thank. F-ing. God.


No seriously. We should thank her. Because there is no way that pipeline, confronted as it was by a series of trials that would have bested Hercules, should ever have come remotely close to completion without divine intervention.


For those who may have forgotten or are suffering from Pipeline PTSD, this particular pipeline was first conceived in 2011 as an expansion to the existing TransMountain system (built in the 1950’s) on the rationale that by utilizing the existing right of way, it would be easier, cheaper and more likely to be approved.


This is of course where all the problems started. Since as we know, Canada is allergic to infrastructure and addicted to mediocrity.


But the private proponent persevered. They filed, they consulted, they planned, they cajoled, they engaged with First Nations. They survived a change in federal government and saw the newly elected anti-project Trudeau government approve the project, only to see the newly elected BC-NDP government vow to fight against it using every tool in the shed, only to see the newly elected Alberta-NDP government come out swinging in support of it. Triggering a political and constitutional crisis of epic proportion.


Seven years in, the private proponent got fed up and put down their tools. FU Canada, I ain’t playing that sh** anymore. Kinder Morgan – OUT!!!


Sensing a Canadian unity crisis at an unfamiliar door, the anti-pipeline, anti-fossil fuel, Alberta-hostile and ideologically green-leaning governing Trudeau Liberal party did what any self-respecting environmental crusader would do.


They bought the damn pipeline and project and vowed to complete it. And there was much puzzled rejoicing. Then Finance Minister Bill Morneau even came to Calgary to present to the Chamber of Commerce to present this solution to the angry masses and survived both applause from the assembled oil barons and loud heckling from an environmental activist. I was there – it was a sight to behold.


But then, not content to allow people to rejoice, the Supreme Court of Canada (yeah, those clowns) pulled the expansion’s permit, kicking Trudeau and his minions directly in the nards for spiking the ball before they got to the endzone. Come on guys, act like you’ve been there.


Back to the drawing board went the project to satisfy a bunch of new conditions, in particular a drawn-out and excruciating process of further consultations with affected First Nations.


Finally, in late 2019 the project was approved, again, and back on and ready to get started.


Light at the end of the tunnel, right?


WRONG!!!! That was the COVID train dummy and it hit TransMountain and the Energy industry right in the face.


Undeterred and now the recipient of endless amounts of Federal money, the crown corp running and building the project soldiered on, paying contractors whatever they wanted to keep making progress, and progress they did.


Until Mother Nature showed up with Fire, then Flood, then Fire again. Take that pipeline guys!


It was bad. Towns burned to the ground, rivers washed out the existing line, not to mention highways, railways, right of ways, salmon run ways, airport runways – all the ways!


Low lying areas in the lower mainland were flooded beyond historical precedent, potentially ruining the locations for various pipeline interconnections. The existing pipeline was even compromised at certain locations and required immediate remediation.


At one point, it got so bad that crews and spreads were seconded to the highway crews to clear debris and rebuild roadways and shore up mountain passes.


The summer after, all of BC was once again on fire.


In the meantime, the project progressed, inch by inexorable inch, as the price went up dollar by inexorable dollar.


Mixed into this chaotic unfolding of events were hundreds if not thousands of change orders to the pipeline plan, all requiring regulatory approval as the construction ran into First Nations artifacts, migratory butterflies, bird nests and the harsh reality of mountain geography and the challenges of getting over or under same. Every delay costs money. The private sector builders who had mobilized a veritable army of workers to get this done weren’t going to do anything for free. So the price continued to go up.


At some point a year or so ago, the Federal government said they couldn’t fund anymore so the corporation had to turn to a consortium of banks to keep things going, which they thankfully did (counting, I’m sure, on an implicit government guarantee), culminating in the triumph that we see today.


Canada’s first and only export pipeline to tidewater built since the 1950’s and Canada’s (likely) last great option to ship Alberta crude to markets that don’t rhyme with the USA, even though lots will go there.


So what did we get for our $34 billion?


We have an 1100 kilometre tube that is going to facilitate the export of close to 600,000 barrels of oil per day to thirsty markets in Asia.


The exportability will lead to a narrowing of the price differential between Western Canada Select and global benchmarks, leading to higher royalties for the province and taxes for all levels of government.


Higher realized prices will lift the oil and gas sector in Canada more broadly, generating better returns for shareholders


The pipeline itself should be immediately cash-flow positive and, notwithstanding the staggering amount of debt, will be a massive economic boon to the government and taxpayer (us, the owners) as well as all the stakeholders along its route.


As I said, it’s a big deal and a good thing.


So, who do we thank for this tube of plenty? This lucky talisman that will help propel the Alberta economy forward?


The list is long.


Let’s start with the idea people who came up with the plan.


Then all the political actors from across the partisan spectrum who were able to put aside their nonsense for long enough to get this nation-altering project to completion.


And yes, I include the Liberal Party and Justin Trudeau in that list. It took a lot of political will and courage to defy half his caucus and push through an unpopular project that very few wanted but that he recognized Canada needed. This is one of the most consequential non-tax acts his government has done in 9 years in office. Well done.


Thanks also to all the financial people who stepped up and funded this. You’ll get your money back, don’t worry.


Last but not least, the true heroes of this project – the tens of thousands of welders, pipe-fitters, excavator/sideboom/dozer and crane operators, safety inspectors, remote camp workers, medical personnel, engineers, security personnel and all the assembled workforce for completing one of the most challenging and expensive infrastructure projects ever undertaken in Canada. Without you on the front lines in the ridiculously hostile weather environment that is the backcountry of Alberta and British Columbia, none of this gets done. Congratulations. To all.


So what’s next?


Well I think we all need to take a collective breath and enjoy the fruits of our labour. Don’t you? We can celebrate the first tanker leaving Burnaby for, I believe, Singapore. We can read the financial reports and watch as the money starts to flow out instead of in. We can pay down some debt even. I know that’ll be awkward for the government to see that happen, but private businesses do it all the time.


And then it’s down to business. The government has said it doesn’t want to own the pipeline long term, so the process to divest it must begin. I’m pretty sure they aren’t hiring Stormont to do it (although we most certainly would do it – might even consider waiving our work fee!), but they should get moving.


As part of Canada’s commitment to reconciliation, it has become common to encourage and support First Nations ownership of major infrastructure and resource projects that affect their people and territory. This should be no different. Any successful bidder must have a First Nations partner or plan to be successful and I am 100% certain they will.


Will the government ever recover the full $34 billion it cost to build this expansion? Highly unlikely. The cash flows and multiples for pipeline operators just don’t support it.


I see a deal where a private buyer partners with a group of First Nations and puts up the cash to buy the pipeline and the government writes off a chunk and gifts/bequeaths a percentage to the First Nations.


How much of a write-off? It depends. And as Trevor Tombe the economist says, it probably doesn’t matter because the social and economic good coming out of this completed project far exceeds any realized purchase price or assumed write-off. My math shows a $5-$10 billon write-off as most likely. Deal with it,


And that, my friends, is my happy May story.


The only mystery in the end is how long will it be until Canadian producers fill that line completely and need another offtake for additional capacity. My guess is two years.


Do we dare go to the US again for Keystone XL? Will the third time be the charm?


Stranger things have happened.


Like government-owned passenger rail between Edmonton and Calgary.

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