Canada’s Open Minds Will Open Its Oil to Asian Consumption

By David Dittman • November 22, 2011 • Canadian Edge Weekly

The Standard & Poor’s/Toronto Stock Exchange Composite Index finished in the green Tuesday, distinguishing itself from major US indexes that continued to sell off, if only mildly, a day after the Joint Committee on Deficit Reduction, known misleadingly as the “Super Committee,” announced failure in its attempt to bridge a widening partisan gap between Democrats and Republicans.

This failure was set in motion from the beginning, manufactured by partisans to generate as much heat to launch campaigns for control of the White House and Congress that will dominate the next 12 months.

It follows the Obama administration’s similarly calculated decision to hold TransCanada Corp’s (TSX: TRP, NYSE: TRP) Keystone XL project hostage to the November 2012 elections.

In hindsight it’s pretty easy to see that the so-called Super Committee was destined to fail. But this wasn’t some iceberg that popped up on a murky horizon; the political barriers to success were obvious–Republicans on the Super Committee operate under the watchful eye of GOP ringmaster Grover Norquist and his anti-tax pledge, the violation of which is a siren for potential primary challengers–even before people such as Senator Patty Murray (D-Wash.), who heads a key campaign committee for her party, was named co-chair.

The biggest policy consequence of the latest failure of Democrats and Republicans to fulfill great expectations is that the “Bush tax cuts”–including preferential rates on dividends and capital gains–are still set to expire on Dec. 31, 2012. Failure to extend payroll tax cuts as well as unemployment assistance will likely take a bite out of GDP. These items were expected to be part of the bill the Super Committee submitted for ratification by the full Congress.

It’s important to note, however, that these automatic “cuts” causing such a clamor in Washington are no cuts at all but really slower increases in the rate of growth. Take defense spending, for example. If the “sequestration” described by the Budget Control Act of 2011 (BCA) actually takes place Pentagon funding will still rise by 16 percent over the next decade, a “cut” from trend growth of about 23 percent.

The stage is now set for a wild race to Nov. 6, 2012, during which issues of taxes and spending are sure to dominate. However we will be spared any further drama surrounding the US debt ceiling, as the BCA included debt limit increases in three tranches, USD400 billion on Aug. 2, 2011, USD500 billion, on Sept. 21, and then USD1.2 trillion in 2012.

These hikes can only be blocked if Congress passed a joint resolution of disapproval, which would then be subject to the presidential veto. Because a two-thirds majority is required to overcome a presidential veto, these increases, totaling USD2.1 trillion, are a done deal. And that means we’ll be spared a sequel to the summertime 2011 drama that drove Standard & Poor’s to cut its rating on Uncle Sam to AA+ from AAA.

S&P and Moody’s have said they’ll take no action on their respective ratings on US debt right now. Fitch, however, said again that although it won’t cut its rating it could adjust its outlook.

All the proclamations of victory and all the calls to further action–including a cross-border invasion by mind and spirit, if you will, to join “brothers” in Canada in opposition to crude development, crude infrastructure, crudity at large–already seem a sort of high-water mark for the North American anti-oil faction. The Obama administration–particularly those in charge of the re-election effort–is without doubt pleased that this enthusiasm should now be challenged to their benefit a little less than a year from now.

A little more than a year from now these folks will likely be disappointed, as the realities of commerce, the flexibility of TransCanada in responding to local desires to shift the course of Keystone XL away from a key aquifer and either the re-election of a less politically beholden President Obama or the election of a successor who doesn’t care about them anyway leads to full construction of the extension project.

In fact crude oil pipelines are already snaking across North America, with new ones set to join the network. Production in the Bakken region of South Dakota in addition to rising output from Alberta’s oil sands, has actually triggered something of a mini-boom for pipeline ambitions.

Phase one of the Keystone project, an 1,853 line connecting Hardisty to Steele City, Kansas, and Wood River and Patoka, Illinois, came on line in June 2010. It has capacity of 435,000 barrels per day. Phase two connected Steele City to Cushing, Okla., in February 2011 and boosted capacity for the overall system to 591,000 barrels per day.

And now TransCanada is contemplating moving ahead with construction on phase three, which is actually part of the XL package and would ultimately help boost system capacity to 1.3 million barrels per day. Phase three would connect Cushing, Okla., to Houston and Port Arthur, Tex., and help alleviate a supply glut that’s put an artificial drag on West Texas Intermediate crude prices.

Closer to reality is Enbridge Inc’s (TSX: ENB, NYSE: ENB) recently announced endeavor, along with 50 percent partner Enterprise Product Partners LP (NYSE: EPD), to reverse the flow of the Seaway Pipeline and get crude flowing from Cushing to Gulf refineries by early 2012. Enbridge acquired ConocoPhillips’ (NYSE: COP) 50 percent stake in the project for USD1.15 billion. Pending regulatory approval the 500-mile pipeline could ship an initial 150,000 barrels of oil a day from Cushing to Houston by the second quarter of next year. Pump station additions and modifications could boost capacity to 400,000 barrels a day by early 2013.

The real-game changer, as it would facilitate the diversification of Canada’s oil exports from one market, the US, to many, including China, is Enbridge’s CAD5.5 billion, 550,000 barrels-per-day Northern Gateway Pipeline.

Northern Gateway is a proposed 731-mile twin pipeline system that will carry oil sands crude from Brudenheim, Alberta, near Edmonton, through British Columbia to a new marine terminal on the coast in Kitimat for export. It will also carry imported condensate. The primary hurdle to its construction is the opposition of “first nations” groups in British Columbia, through whose lands the pipeline will travel.

In a constructive sign, Coastal First Nations, which represents several interested groups, asked Enbridge to delay its application to the Canadian Environmental Assessment Agency Joint Review Panel so discussions could continue. “If we could have a fresh start and were able build a good relationship, the Coastal First Nations might be willing to take another look at the project,” said Art Sterritt, Coastal First Nations’ executive director, in an interview with the Toronto Globe and Mail. “That wouldn’t mean we would necessarily come out and agree with it, but we would certainly take a closer look at it.”

The Roundup

Third-quarter earnings reporting season has now concluded for Canadian Edge Portfolio Holdings. Here’s where you can find analyses. We’ll have a full overview and context as we enter the final weeks of 2011 and prepare for 2012 in the December CE, available at www.CanadianEdge.com on Friday, Dec. 9.

Conservative Holdings

Aggressive Holdings

Stock Talk

Comments Guidelines

Add New Comments

You must be logged in to post to Stock Talk OR create an account