Pipeline delays pose threat to companies’ credit ratings

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Ceaseless delays in building pipelines now threaten credit ratings in Canada's energy transportation sector.

New complications to old debates in recent days have added to already great uncertainty about the industry's ability to get oil to overseas markets. Bond-rating agency DBRS Ltd. said further setbacks could heap pressure on credit quality for pipeline companies, which would raise their debt-servicing costs.

A steady rotation of political and environmental controversy, shelved projects and shifting supply and demand fundamentals are raising concerns about the sector's expansion prospects and point to higher construction costs and even longer lead times for long-haul oil and gas pipelines, DBRS said.

"Credit ratings could come under pressure for companies with deteriorating business risk profiles because of slower growth and diminishing market share," the agency said in a report. It said the situation could increase risks that some shippers will not renew transport contracts when current ones expire, as the capacity won't be needed because of slumping oil prices.

On Friday, the regulatory process for the $15.7-billion Energy East pipeline project was thrown into disarray when the National Energy Board members hearing the application stepped down amid opponents' allegations of pro-industry bias.

The panel members recused themselves after revelations that two of them had a private meeting last year with former Quebec premier Jean Charest, who at the time was a paid consultant to project proponent TransCanada Corp. Energy East, which would move 1.1 million barrels of oil sands crude a day to New Brunswick and on to export markets, already faced stiff opposition from various Quebec mayors and First Nations.

It's unclear how long the Energy East hearing process will be delayed. Lawyers for one of the complainants, Transition Initiative Kenora, argued that the new panel, once appointed, should go back to square one because the perception of bias has tainted 2 1/2 years of proceedings.

The DBRS analysis was in the works before last week's regulatory drama, said Ram Vadali, the lead DBRS analyst on the report. But the machinations highlight the struggles the industry faces in trying to proceed with export projects.

"We are looking at it more from an economic and credit standpoint, rather than the process that's in front of the NEB and how they are approaching the various conflicts of interest situations that developed on Friday," Mr. Vadali said.

Other projects, such as Enbridge Inc.'s Northern Gateway line to the Pacific Coast, are years behind schedule and face an uncertain future. The oil industry has long blamed perpetual pipeline posturing for deep discounts in the price of oil sands crude, which has hurt bottom lines and, executives say, contributed to a flight of capital to other parts of the world.

Meanwhile, DBRS pointed to increasing competitiveness in potential export markets, especially with U.S. oil now freed for shipment to overseas destinations after years of restriction. That could also hurt prospects for future Canadian crude exports to the United States, as Canada's main market becomes more self-sufficient and a growing market rival.

Meanwhile, hopes for an export-focused liquefied natural gas industry in British Columbia have been repeatedly pushed back as the economic viability of massive plants is questioned.

It is not clear how soon credit could be hit by pipeline delays, Mr. Vadali said. So far, pipeline companies have maintained their high investment-grade credit ratings despite the two-year energy sector downturn due to their conservative balance sheets and regulated, fee-based revenues. However, growth prospects will stall if delays in building new projects persist.

Indeed, last week's Enbridge Inc. bid for U.S.-based Spectra Energy will remove some of that risk for that company by diversifying operations, analysts said.

With files from reporter Shawn McCarthy in Ottawa