November 25, 2011

2011 Leaders

The Canadian energy scene and implications for construction

In Canada, the energy future is particularly important not only due to the traditional tie-in between output growth and the fuel needed to support it, but also because of the impact oil prices have on the value of the Canadian dollar and equity prices on the Toronto Stock Exchange.

Oil is often the trendsetter for TSX shares. Furthermore, the Canadian dollar has become a petro-currency.

When oil climbed above $100 U.S. per barrel earlier this year, the “loonie” reached $1.05 U.S. with every indication it would keep on soaring.

Fiscal problems in Europe, the debt downgrade in the U.S., more restrictive monetary policy in China and higher gasoline prices have all acted to slow growth. One consequence has been a lower world price of oil.

At the same time, the Canadian dollar has retreated to almost parity with the U.S. dollar.

In the recession, the global price of oil dropped down into the $30 US range. Oil Sands projects were shelved and cancelled with abandon.

Now that oil is at least twice as pricey, investment dollars have returned to the oil patch.

Furthermore, the latest round of investing has a larger foreign element than previously.

China’s presence in resource projects around the world has greatly increased. That nation is determined to assure its place in the world economy by lining up sources of supply. Raw materials are at the top of the list.

Access to an inventory of assured oil is a must. And hence Chinese partnerships with other firms in major Alberta Oil Sands projects.

Nor is Canadian energy investment limited to Alberta. Expansions of offshore drilling sites in the province of Newfoundland and Labrador are planned. Hibernia South and Hebron are two mega projects in the planning stage.

We also have our own shale-rock projects, both gas and oil, with tremendous potential in the Peace River region of northeastern B.C. (gas) and the Bakken field in southern Saskatchewan.

Bakken also stretches into North Dakota and Montana and even includes a small corner of Manitoba.

For Canada, one major issue will be the problem in getting product to market.

For example, a Mackenzie Valley gas pipeline has finally received regulatory and governmental approval. But those may have come too late. The project was first proposed a decade or more ago when circumstances were quite different.

The cost of such a pipeline, with $13 billion as a starting point, may have rendered it uneconomic given the new sources in more accessible regions that now have potential.

Canada will continue to supply the U.S. with output from the Oil Sands. But if the Keystone XL pipeline is rejected or delayed, there will be even greater impetus to seek customers in other parts of the world.

That means the need for a delivery system to the West Coast.

There are four competing proposals that involve shipping crude to nations in Southeast Asia, such as Vietnam and South Korea, if not China itself.

Two of them are pipelines — backed by Enbridge (Northern Gateway) and Kidder Morgan Canada — and two involve the use of railroad lines and tanker cars.

Again, environmental issues may be an inhibiting factor.

The election of the Conservatives in Ottawa does mean there is a greater likelihood of ocean-going ships being allowed to move oil out of ports along B.C.’s Pacific coast.

Proposals for major liquefied natural gas facilities in B.C. are also on the table.

And skipping across the country, Encana’s Deep Panuke gas field in Nova Scotia is about to begin pumping money into that province’s economy.

The gas will come ashore by means of undersea pipeline at Goldboro, then be shipped through the Maritime and Northeast Pipeline to other parts of Atlantic Canada and down into New England.

Beyond the immediate plans for energy investments in Canada and the U.S., the future of oil-well drilling internationally will concentrate on the deep waters off the coast of Brazil and West Africa, as well as in the seas of the High Arctic.

Canada must be prepared to firmly assert its rights in the Far North.

Wherever the new oil is to be found in the next five to ten years, it is likely to be expensive, not only from a cost perspective but also as a result of market conditions. There seems little doubt that emerging nations will be greatly increasing their demand.

Many of the implications for Canada, at least from a construction standpoint, are positive.

Alex Carrick, Chief Economist, CanaData.

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