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In Depth

Energy
| 01/22/15

BC pipelines in limbo after oil price slump

TCE

Low oil prices are not going away anytime soon, and the broader effects of this trend on production, and therefore pipeline development, are becoming apparent. As expansion of production in Alberta’s oil sands slows so does the impetus that has been driving the case for new pipelines, along with immediate impacts on jobs, the economy and the Canadian dollar. Suncor has reduced its capital expenditures budget by $1 billion and smaller companies are halting dividends payments to shareholders: Calgary’s Lightstream has suspended indefinitely its dividend, while CanEllison cut its budget by 80 per cent and its dividend by half. The International Energy Agency (IEA) speculates that prices are likely to stay low for at least the first half of the year, and the International Monetary Fund (IMF) has downgraded its global economic outlook for growth for 2015 from 3.8 per cent to 3.5 per cent thanks to low oil prices. The growth forecast for Canada has dropped from 2.4 per cent in each of the next two years to 2.3 per cent in 2015 and 2.1 per cent in 2016. But don’t blame oil too quickly for this: it’s the third consecutive year the IMF has cut its growth outlook, although the United States (US) economy is projected to grow thanks in part to its shale oil boom. Interestingly, the IMF says reduced oil prices should provide a net benefit to the world economy thanks to lower prices for consumers. However, oil companies will take a significant hit, as Alberta can already testify.

So what are the implications of reduced oil profit margins on pipeline projects currently on the books, especially those intended to connect Canada to distant foreign markets, particularly Asia, where demand coupled with high prices once suggested large profit? Two such pipelines proposed to traverse British Columbia—Northern Gateway and the Trans Mountain expansion—may be now facing further delay thanks to lowered output in the bitumen sands coupled with stiff community opposition. Federal Finance Minister Joe Oliver avows that the need for both is ‘still there’, and spokespeople for both projects state that they still plan to build. But declining profit from foreign markets means that the Energy East pipeline, which would carry Alberta oil to more domestic markets in eastern Canada, may now be the most economic.

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