Roll out the barrel: Canada will soon ship a pipeline’s worth of oil by rail and truck

Briefing highlights

Rail-truck oil shipments rising
It’s World Kindness Day
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Brookfield, Caisse buy battery business
Amazon rules out Toronto for HQ2
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Roll out the barrel

Roll out the barrel, we’ll have a barrel of fun

Roll out the barrel, we’ve got the blues on the run

Zing, boom, tararrel, ring out a song of good cheer

Now’s the time to roll the barrel, for the gang’s all here

- Beer Barrel Polka, performed by The Andrews Sisters, 1939

Actually, the gang’s not all here.

Missing are the pipeline groups.

Which is why, as Derek Holt sees it, glasses are being raised in the boardrooms of Canada’s rail and truck companies as executives toast the fact they’ll soon be moving a pipeline’s worth of oil.

And that’s not necessarily a “positive” for the environment despite the fact that environmental concerns are behind it, warned Bank of Nova Scotia’s head of capital markets economics as he and others lament the delays in major projects.

Their comments follow the latest setback for TransCanada Corp.’s Keystone XL after last week’s ruling by a federal judge in Montana that halts construction pending another environmental review by the U.S. State Department.

That marked a victory for environmental, First Nations and other groups, with TransCanada saying it remains committed to the huge pipeline that would transport heavy crude from Alberta.

Pipelines are, of course, controversial, some having been killed and others tied up, notably the Trans Mountain expansion of the pipeline that Ottawa now owns.

It also comes as Canadian energy companies suffer a far lower price for Western Canada Select, a blend of bitumen and heavy oil, compared to West Texas intermediate, the U.S. benchmark, and Brent crude.

The Montana judge halted the Keystone XL project “because of concern for the environment, including [greenhouse gas] emissions and dangers associated with pipelines, that the Trump administration glossed over when it reversed prior assessments and approved the pipeline last year,” said Scotiabank’s Mr. Holt.

“While this won’t exactly help already very wide discounts for Canadian oil and Bakken shale relative to WTI … it will put more pressure upon rail and truck transport to get product to market,” he added in a report.

“I’m not sure how the environment wins there, and the production isn’t going away as completed projects from years ago have swung into gear, so forget about putting the genie back in the bottle.”

Where other modes of shipping are concerned, the latest National Energy Board statistics show exports by rail steadily increasing, to almost 230,000 barrels a day in August. That should hit more than 300,000 “and potentially much higher in the fairly near-term” as the two major railways carry even more, Mr. Holt said.

Add to that exports by truck, which pale in comparison but reached about 230,000 barrels for the month of August, according to Bloomberg.

The point is, add them up and the projected shipments equal amounts carried by a sizeable pipeline.

“It’s a positive for the rail and truck transport sectors as boardrooms in those sectors are popping champagne corks,” Mr. Holt said.

“I fail to see how it’s a positive for the environment to substitute modes of transport away from modern pipeline technology.”

The Montana ruling “couldn’t have come at a worse time” for Canada’s oil patch, said Joan Pinto, associate energy specialist at CIBC World Markets.

The State Department can be expected to appeal, which may delay the in-service date yet again, she said.

Canada’s “stranded supply” already failed to benefit from the previous rally in oil prices, Ms. Pinto added. And producers are reluctant to strike long-term deals with the railways, still hoping for less-pricey pipeline alternatives.

There’s also a “wide disconnect” between what’s being shipped compared to the far greater capacity to ship it.

“This impasse has originated as a result of Canadian rail companies being slow to offer short-term contracts,” Ms. Pinto said.

“In our view, since the federal government has opted to function as a pseudo petro state with the purchase of the [Trans Mountain] project, mandating rail exports in the interim to relieve pipeline infrastructure delays are actions adopted by a typical petro state to solve the impasse,” she added.

“Indeed, Alberta Premier [Rachel] Notley has officially requested the federal government’s intervention in increasing crude-by-rail volumes.”

When you put it all together, including the low price for Canadian crude, domestic producers are having a hard time of it.

“President Trump was quick to call the [Keystone XL] decision a ‘disgrace,’ and there is the possibility the ruling could be overturned by a higher court,” said Bank of Montreal chief economist Douglas Porter.

“Even so, the ruling simply shows the many, many roadblocks Canadian producers will continue to deal with in order to get product out of the country, and keeps the dark cloud hovering over future investment in the industry.”

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Brookfield, Caisse buy battery business

Brookfield Business Partners LP and the Caisse de dépôt et placement du Québec are teaming up to by the power solutions business of Johnson Controls International PLC for US$13.2-bilion.

The operation they’re buying manufactures batteries for auto makers and other businesses, with more than 15,000 employees across 150 countries.

Brookfield and the Caisse are funding the deal with about US$3-billion in equity and US$10.2-billion in debt.

Brookfield, Caisse buying Johnson Controls power business in $13-billion deal

What to watch for today

It’s the deadline for Italy to give the European Commission a revised budget, and observers suggest the government will change little from its first version, opening the door to EC penalties under the ominous-sounding excessive deficit procedure, which sounds like something my bank might have in store for me.

“The coming week will be very telling about the Italian government’s stance and how willing it is to work with the rest of Europe,” said BMO senior economist Jennifer Lee.

“The European Commission has a Nov. 13 deadline for Economy Minister Giovanni Tria to come up with a revised budget, one that is based on less optimistic growth projections,” she added, noting that Italy projects economic growth of 1.5 per cent next year, compared to the EC’s forecast of 1.2 per cent and BMO’s call for something shy of 1 per cent.

“So far, there has been no indication that Italy will bend even a little to the EC’s will,” Ms. Lee said, citing Mr. Tria’s refusal to change.

“Frankly, if the government were to tweak its plans just a little (such as delaying the retirement age changes), to show that it is making an effort, we could see the heat dialled down,” Ms. Lee said. “And, international investors will stop selling Italian debt.”

There have been some soothing words from European partners, but, as Ms. Lee noted, talk is cheap.

“It is very likely that we could see fines imposed on Italy (opening up the excessive deficit procedure), or sanctions sometime in the spring, right before the European Parliamentary elections.”

On the corporate front, Canaccord Genuity Group Inc. reports quarterly results.

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