There' a slowdown in pipeline construction right now, but $43 billion in projects looms
If you look at everything on the books for the next 15 years, Canada's pipeline industry has just over $43 billion of proposed new large-diameter pipelines. Not surprisingly, much of it is driven by planned oilsands development and expansions.
Add in the two Arctic natural gas pipelines-Alaska and Mackenzie (if they ever get the go-ahead)-and the tab climbs to an estimated $85 billion.
This year, however, tells another story. The sector has slowed down after several years of hectic activity, capped by 2009 with the biggest, most costly expansions ever in a 12-month period for the country's two biggest pipeline operators, Enbridge Inc. and TransCanada Corp.
"Things are very slow right now," observes Barry Brown, executive director at the Pipe Line Contractors Association of Canada.
"The years 2007-09 were probably record-breaking years in the volume of work done in Canada-not seen since the early [1960s]. When the financial collapse happened in 2008, oil went from around $150/bbl to $40/bbl. This postponed work and expansions at the oilsands, and new pipe to service all this got postponed. It was the oil lines that took the big hit. In 2009, contractors were still busy because we were completing work started before the crash."
Last year, Enbridge spent about $4.9 billion on capital projects in Canada and the United States, including completion of its $3.7-billion Alberta Clipper line, which ships crude from the Hardisty, Alta., terminal to refineries in Superior, Wisc. The 1,607 km line began service earlier this year. The company is also winding up work on its $2.3-billion Southern Lights line, which will ship diluent, a form of ultra-light oil to be mixed in with heavy crude from the oilsands so it will flow through a pipe. The line runs between points in the U.S. Midwest and northern Alberta.
Another project that has wrapped up was construction of Phase 1 of TransCanada's Keystone Pipeline system. Like some other recently completed projects and several of the proposed pipelines, much of the $5.5-billion Keystone system, which is to ship crude originating in the oilsands, is outside of Alberta.
Starting at Hardisty, the Canadian portion of Phase 1 involved the conversion of 859 km of existing TransCanada pipe in Saskatchewan and Manitoba from natural gas to crude oil transmission. This section of the line transports crude from Alberta to markets in Illinois. The major portion of Keystone Phase 1 consists of 1,735 km of new 30-inch pipe linking terminals in Illinois with others in Kansas and Missouri. In March, TransCanada announced a delay in the start of oil shipments, pointing to a need for 9 MMbbl of crude in storage to start operating by the second quarter. The company expects the linefill to be completed by mid-2010.
So what specifically is planned this year?
Brown, whose association represents large-diameter pipeline contractors, says: "This year, we are looking at 77 km for TransCanada's Groundbirch project."
GAS FROM B.C.
Groundbirch, at a cost of about $200 million, is scheduled to begin operation in the fourth quarter. It will ship shale gas from the Montney formation in northeastern British Columbia into TransCanada's pipeline system in Alberta.
Groundbirch is designed to handle up to 1.6 Bcf/d of gas, roughly the same capacity as the proposed Mackenzie line. It is regarded as a major addition to Alberta's gas pipe network. The line represents about 10 per cent of the total throughput of the Alberta system and is the first major pipeline in Canada to transport shale gas across a provincial border. It has been given a green light by the federal regulator, the National Energy Board.
The amount of natural gas flowing along Canadian pipelines has been in decline since peaking at around 16.5 Bcf/d in 2001. It could drop to about 13.5 Bcf/d this year, according to an estimate from the National Energy Board. The board attributes the drop to increased natural gas consumption in Alberta and five per cent year-over-year declines in gas production from western Canada.
Shale gas and projects like Groundbirch could halt the trend. Brown says that another shale gas project, TransCanada's Horn River mainline, could see work start sometime in 2011. Also next year, he says, work could start on planned extensions of the Keystone system. But any significant increase in large-diameter pipeline construction is not expected for nearly two years.
"In 2012, we are optimistic it will improve," Brown says.
A flurry of announcements earlier this year and last giving the green light to a number of oilsands projects has no doubt provided grounds for optimism in the pipeline construction sector. Canadian Natural Resources Ltd.'s Horizon expansion, Husky Energy's Surmont thermal project, Total Canada's Surmont project, and Imperial Oil's Kearl are all going ahead.
Brenda Kenny, president of the Canadian Energy Pipeline Association, which represents major pipeline operators accounting for more than 95 per cent of oil and gas piped in Canada, says that the pace of development is dictated by economics, and that of the $43 billion in new pipe, "almost all is oilsands driven." Both Kenny and Brown are optimistic that the pull of market demand will see almost all the proposed oilsands-related pipe going ahead-eventually.
Noting Suncor's 2009 acquisition of Petro-Canada, Barry cautions that there could be some duplication among the proposed oilsands-driven projects. Also, some of the proposed pipeline could wait until around 2025 before being built.
Brown, who spent 10 years in pipeline construction before heading the contractors' association, recalls that serious study on developing an economic plan for the then-proposed Foothills pipeline-now called the Alaska Highway Gas pipeline, but still yet to be built-began in 1977.
Regarding the current roster of proposed pipelines, "I believe they will all be built. Right now, though, the next two years look pretty grim. Our U.S. counterparts are doing very well, on the other hand. A lot of the work there is gas-related."
On the western Canadian gas pipeline front, Kenny points to some uncertainty about the future.
"In the case of gas, it's about changing the location of supply, with more unconventional gas needing connection," she says. "You are seeing growth in natural gas markets, but we expect only modest gas prices for the long term." Also, at this point, no one knows how successful the emerging shale gas sector will prove to be or how the potential liquid natural gas import and export sector will pan out across North America.
"We are at early days of knowing how the ramifications will play out," Kenny says. Another unknown she points to is whether concerns around CO2 and global warming will boost demand for natural gas, which has lower carbon emissions than coal and oil.
RIPPLES OF OPTIMISM
The effects of renewed optimism and announcements of oilsands projects going ahead are already rippling across the pipeline construction sector.
"We are getting ready to tender on Keystone XL," says Wes Waschuk, president of Waschuk Pipeline Construction Ltd. "It is mostly in the U.S. with 529 km in Canada out of 2,742-plus km.
Bids are to be in place by the end of the year. Also, we are bidding on a 42-inch pipe from Kearl. It will take water from the Athabasca River to the Kearl plant site 38 km away."
Waschuk's Red Deer-based company specializes in large pipe of 16-inch diameter and up.
Large-diameter pipeline construction contractors like Waschuk Construction are perhaps a somewhat specialized breed of operation. Although they use essentially the same unionized trades as most oilsands plant construction projects, a welder for a pipeline is drawn from a slightly different pool than a plant welder.
It's no surprise, then, that bidding on large-diameter pipe projects is something of a closed shop.
"Pipeline operators issue invitations for bids to their qualified bid list only. It's based largely on bonding qualifications, experience, and safety. Safety record is now a huge factor. Operators don't want their safety standing with the regulators compromised," says Brown of the contractors' association.
Bids are often by invitation-only on many small-diameter pipeline projects as well, says Rod Donovan, general manager at Parkland Pipeline Contractors Ltd., which specializes in small- to mid-bore pipe from 2-24 inches in diameter. The Olds-based firm is pegging some of its hopes for a turnaround on B.C. shale gas and more heavy oil activity in Alberta.
Waschuk's company had expected to stay busier during 2010 until a project he had won a bid on announced in January 2009 that it was on hold.
"It's for the time being, but [the project] has to go ahead at some point," Waschuk says.
Waschuk shares Brown's view about the next year or so.
"We just wrapped up the busiest five years since the 1960s," Waschuk says. "There won't be much of a silver lining until 2011, 2012. Then, there'll be a bunch of big projects on the go."