Falling oil prices pose another delay for B.C. pipelines

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Energy economists say that a prolonged slump in oil prices will further slow two proposed pipelines already hamstrung by court challenges and community opposition in British Columbia.

Federal Finance Minister Joe Oliver has maintained that "the strategic need is still there" for both the Northern Gateway and Trans Mountain pipelines to go through the province. But the slumping price of oil has caused enough "market instability," as Mr. Oliver put it, to prompt Ottawa to postpone its budget to at least April.

Analysts say that kind of instability hasn't yet changed the economic imperative for Canada's oil industry to open up its first major conduit to Pacific markets, but most agree that a months-long downturn in oil prices could slow investment in oil sands expansion, which in turn could decrease the supply of oil available to any future pipelines.

Werner Antweiler, an energy economics professor at the University of B.C.'s Sauder School of Business, said the gap of "almost $30" a barrel that existed a few years ago between "hugely underpriced" North American oil and the global supply meant manufacturers urgently wanted the two B.C. pipelines as a way to get oil sands bitumen to Asian markets. Now, that gap has "evaporated" and doesn't look set to return, he added.

"This was the big calculation a few years ago [that] 'we need to have these pipelines because there is this big gap and now we're losing all these arbitrage benefits,'" Mr. Antweiler said. "[Now] it's not quite as compelling, getting to the foreign markets, as maybe getting to some of the closer markets [within North America]."

That means TransCanada's Energy East pipeline proposal is likely the closest to getting built, as it would send western oil east to be refined or exported, Mr. Antweiler said.

Peter Tertzakian, chief energy economist with Calgary's ARC Financial Corp., said an ongoing price war means there is a potential for the cost of oil to remain low for several months. If that continues over the course of the year, he said companies could end up investing less in oil sands expansion, meaning less oil available for pipelines built in the future.

"If we had these pipelines today then the industry would be in a lot better shape, because they would be selling and competing in the world market without having to go through the United States," Mr. Tertzakian said.

However, Mark Jaccard, an energy economist at Simon Fraser University and climate activist, said companies plan such projects on a much longer timeline, even if price crashes shock the public, the media and sometimes politicians.

"What you should look at are fundamentals: What is the cost of production; how much supply is potentially out there; how fast would it come online; what's the rate of economic growth?" Mr. Jaccard said. "So there are a whole bunch of uncertainty factors and I don't think we have certainty that the price of oil will stay low for a long time."

The National Energy Board is now reviewing Kinder Morgan's Trans Mountain proposal, which is still economically viable and slated to go into operation in 2018 if approved, according to senior business development director Norm Rinne.

"The Trans Mountain Expansion Project has binding, long-term contracts with 13 customers in the Canadian oil producing and marketing business," Mr. Rinne said in an e-mailed statement. "Fluctuations in North American and world oil prices are normal, expected and factored into the considerations by our customers when signing-on for the project."

Ivan Giesbrecht, head spokesman for the Northern Gateway project, said the company still plans to begin construction of the $7.9-billion project in 2016, with the pipeline transporting up to 525,000 barrels a day of oil sands-derived crude to a new supertanker port at Kitimat by late 2019.

"We believe that accessing international energy markets is as important as ever for Canada," Mr. Giesbrecht said in an e-mail. "Getting the best possible return for our resources is important – even with the current fluctuations in market prices.

In the meantime, the company says it is working to meet the National Energy Board's 209 conditions for the project, as well as preparing for a number of legal challenges, the majority of which have been filed by First Nations in the Federal Court of Appeal. One of these challenges will be heard by the B.C. Supreme Court, but the Federal Court of Appeal has consolidated all the other applications into one proceeding, according to Mr. Giesbrecht.

"The Federal Court of Appeal has established a schedule for these applications, which will likely result in these matters being heard by the end of this year, with a decision by approximately the first quarter of 2016," Mr. Giesbrecht wrote in the e-mail.