TransCanada affirms commitment to Energy East pipeline

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TransCanada Corp. has long-term contracts from shippers backing its $15.7-billion Energy East project and is determined to proceed despite forecasts of a surplus in pipeline capacity in the next decade, company officials told a Senate hearing Tuesday.

Oil producers are currently experiencing constraints in shipping their crude to markets and will have to rely on rail to move growing volumes over the next two years, analysts from Genscape Inc. said Tuesday. But in the long term, a surplus in pipeline capacity could arise if all the expansion projects approved by the Liberal government or endorsed by U.S. President Donald Trump are completed.

At a committee hearing in Ottawa, a senior TransCanada executive said Western Canadian crude production is expected to grow by between 1.5 million and two million barrels per day over the next 15 years, but acknowledged that the capacity of pipeline projects currently being proposed would exceed that supply growth.

"The industry will have to look at that," TransCanada vice-president Louis Bergeron told the Senate committee. However, he said the company remains committed to the Energy East project that would provide producers access to new markets in Eastern Canada, the Atlantic basin and even Asia while replacing the use of as many as 1,570 rail cars a day.

Producers are eager to capture world prices for their crude and reduce their reliance on the U.S. market where rising domestic production is adding to competitive pressures.

In an interview after the hearing, TransCanada vice-president Gary Houston said Energy East is backed by customers who have committed to 20-year contracts. "Our pipeline is precontracted so we have shippers that are contracting for the capacity and those shippers continue to show a great interest in Energy East," Mr. Houston said.

"And I think [it is] for good reason because we are connecting to new markets."

Senators warned the company that it continues to face political opposition, particularly from First Nations and municipalities in Quebec who fear the project threatens the environment and drinking-water sources. Mr. Houston said TransCanada continues its engagement with people along the route, including indigenous communities that adamantly oppose the line.

However, Grand Chief Serge Simon of the Kanesatake Mohawk First Nation said his community has had no contact with TransCanada about the proposed pipeline that would cross its traditional territory. "What is there to say – the project is dead," Chief Simon said Tuesday. "They don't have the consent of First Nations to build the pipeline, nor will they."

Some analysts question whether Energy East will be needed if other planned projects proceed.

Mr. Trump revived TransCanada's Keystone XL project last month by inviting the company to reapply for a presidential permit, which it has since done. The pipeline would add more than 700,000 barrels per day of export capacity to the U.S. market, with another 130,000 barrels per day of capacity earmarked for producers from the U.S. Bakken field.

In November, the federal government approved Kinder Morgan Inc.'s expansion of its Trans Mountain line to Vancouver, and Enbridge Inc.'s rebuild of its main export line into the United States. The two projects would add one million barrels per day of pipeline capacity.

In a note last week, Afolabi Ogunnaike, an analyst at Wood Mackenzie, said he expects TransCanada "to build Keystone XL or Energy East, but not both."

While in the longer term the completion of proposed pipeline projects could lead to overcapacity, congestion is the short-term concern. As a result, crude by rail is likely to pick up the slack.

Genscape analysts say that as oil sands production ramps up, and conventional oil production stops declining this year, Canadian crude producers are going to need to find new capacity to ship crude for export.

"When considering the main pipelines entering the United States from Canada, there's very little room for increased shipping via pipeline," Lee Satterfield, an oil transportation analyst at Genscape, said during an online presentation on Tuesday. "Without new capacity coming online, it's going to be a source of a major bottleneck."

Each major pipeline to the United States – where 99 per cent of Canadian oil exports go – is running near capacity, he added. This increases the likelihood that shipments by rail will jump later this year.

Mr. Satterfield added that although it would appear there's pipeline capacity for more product into the United States, not all pipelines are able to transport the heavy crude that now makes up the majority of Canadian oil exports.

Since the crude price slump began in 2014, the economics of crude-by-rail have made less sense and Canadian oil exports by rail dropped – reaching a four-year low of just more than 43,000 barrels per day last June, according to the National Energy Board.

But now, crude-by-rail exports are showing signs of rebound, with the NEB reporting a surge to 102,554 barrels per day in October, and 171,740 barrels per day in November.