Pipelines to remain a federal focal point this year

Outlook 2019: Trans Mountain expansion will be on many voters’ minds in federal and Alberta elections; trade wars promise to add uncertainty to export market

The Trans Mountain pipeline twinning project, placed on hold by a court decision last year, will continue to affect political and energy-sector fortunes in 2019 | BIV files

The Trans Mountain pipeline expansion will continue to generate a lot of headlines in 2019, energy experts say. Whether it generates any jobs is the $7.4 billion question.

Kevin Birn, a crude oil analyst for IHS Markit, said Trans Mountain promises to be a key election issue for both the Alberta government in the spring and the federal government in the fall.

“I think it’s going to be hard for the feds to stay on the sidelines,” Birn said. “I think the pipelines are going to be a key source of electioneering.”

The expansion project was sent back to the National Energy Board (NEB) by the courts for further reconsideration and more First Nations consultations.

The NEB must submit its reconsideration report to the governor-in-council by February 22, 2019. But Jonathan Wilkinson, B.C.’s senior federal Liberal cabinet minister, confirmed there is no firm timeline on concluding First Nations consultations.

There is some doubt that the expansion will resume by April in time to save Alberta Premier Rachel Notley from defeat by Jason Kenney’s United Conservative Party, which enjoys a sizable lead over Notley, according to a recent Abacus Data survey.

Dan McTeague, who spent nearly two decades as a Liberal MP and is now a gas and oil analyst for GasBuddy.com, thinks Notley’s defeat in Alberta is “a foregone conclusion.”

“I think the political environment is going to change radically,” he said.

The co-operation seen between Alberta and Ottawa on climate change policies could unravel if Notley is defeated. And Kenney would inherit a new law, passed by Notley, that may give him the legal levers to play with exports of oil and refined petroleum products that currently flow through the existing Trans Mountain pipeline.

McTeague thinks Kenney will not hesitate to use oil and gas exports to punish both B.C. and Quebec for their opposition to new pipelines.

“Rather than having batched one day diesel, next day gas, next day light crude, next day heavy crude, that could be amended to send only crude and as a result force gasoline to be sent down by different means,” McTeague said. “That would have the effect of, obviously, creating some discomfort for Vancouver and the Lower Mainland.”

In other words, more refined gasoline and diesel, currently supplied by the Trans Mountain pipeline, could be forced to move by rail. Birn noted that there are already growing capacity issues with rail.

“I think we’re not done talking about trains,” Birn said. “The railroads, they’re busy. They’re flat out. So you could see discussions about the importance of rail and port infrastructure.”

McTeague is skeptical that the impasse over the Trans Mountain expansion project will be resolved in 2019.

“Those who oppose this have found creative ways, and have found friendly ears on the benches of this country and in other corners as well,” he said. “I’m of the strong belief it won’t be anywhere near resolved in 2019, and I’m not entirely confident that it will ever get resolved.”


B.C. forestry sector  faces uncertain markets in 2019

A plunge in U.S. lumber prices in the latter part of 2018 is expected to recover in 2019. But new uncertainties for B.C. lumber producers are emerging in China, thanks in part to a trade war between the U.S. and China in which Canada has already been caught in the crossfire.

In 2018, U.S. lumber prices dropped to US$298 per thousand board feet from a record high of US$655.

Russ Taylor, managing director for Forest Economic Advisors, said lumber prices will likely come back up in 2019.

“We think prices next year could be close to being the second-highest annual average price ever,” Taylor said.

There are now some serious uncertainties over China, however.

Canadian producers could suffer collateral damage as a result of U.S. President Donald Trump’s trade war with China. That uncertainty could be deepened by the latest diplomatic fight over Canada’s detainment of Huawei CFO Meng Wanzhou, who now faces possible extradition to the U.S. for allegedly circumventing U.S. trade sanctions against Iran.

China is B.C.’s second-largest market for lumber. But Chinese tariffs on U.S. wood products are likely to have an effect on Canadian producers, Taylor said.

“The U.S.-China tariffs – that has absolutely destroyed the China market, and that’s affecting the B.C. guys as well,” Taylor said.

Although the Chinese tariffs are on logs and lumber from the U.S., not Canada, it affects buying in China.

“The Chinese will not purchase when they have uncertainty,” he said. “The market uncertainty has caused buyers [in China] to stop.”

If Chinese buyers buy Canadian Douglas fir, for example, to make furniture, and try to sell that furniture into the U.S., it faces American tariffs, so the Chinese just stop buying Douglas fir from Canada, Taylor said.

“Now you have this Canadian government intercepting this executive from Huawei, and now the Chinese are threatening Canada. We needed a win in China to get the market moving and we’re going the other way now.

“It’s a terrible way to end the year, and more importantly a terrible way to start the year. Next year, we think, is going to be very volatile, with things changing on a month-to-month basis. So it’s going to be very unnerving for the industry.”


More LNG announcements likely this year

British Columbians can expect to see some new jobs created in 2019, as preliminary work begins on two liquefied natural gas (LNG) projects and associated pipelines – the $40 billion LNG Canada project in Kitimat and the smaller Woodfibre LNG project in Squamish.

But other LNG projects that have been on the back burner may also move to the front burner in 2019.

Energy analysts expect 2019 will be the year final investment decisions are made on new LNG projects around the world.

Throughout 2018, Chevron Corp. (NYSE:CVX) was quietly working to position the Kitimat LNG project for a final investment decision. Both the Kitimat LNG plant and associated Pacific Trail natural gas pipeline are in the front-end engineering and design phase.

The project already has provincial and environmental certificates and a 20-year export licence from the National Energy Board.

Enbridge Inc. (TSX:ENB) also announced in December 2018 that it may resurrect the Westcoast Connector natural gas pipeline to Prince Rupert, and is in talks with an unnamed “significant LNG proponent” about a potential LNG project, according to the Daily Oil Bulletin.

The Westcoast Connector was part of an LNG project that BG Group had planned for Prince Rupert before Royal Dutch Shell acquired BG and cancelled the project, and before Enbridge acquired Spectra Energy, which would have built the Westcoast Connector.

Meanwhile, the proponents of the Steelhead LNG project (recently renamed Kwispaa LNG) on Vancouver Island in October 2018 filed a project description with provincial and federal environment ministries.

All of these projects may face serious pressure from the provincial government to revise their plans in order to meet new emissions intensity targets. Unless they opt for electric drive systems, they may find it difficult to meet the new emissions intensity standards.

“There’s a lot of concern about the new B.C. climate plan,” said Dan Allan, president of the Canadian Society for Unconventional Resources. “The limits set for LNG expansion are going to be severely curtailed based on the strict GHG [greenhouse gas] restrictions.”


2019 to bring more drilling, new propane exports

There was little new drilling activity in the natural gas fields of B.C. in recent years, but towards the end of 2018, Petronas, through its Canadian subsidiary Progress Energy, moved a drilling rig into northeastern B.C. to begin a new gas well drilling program. Progress owns a 25% stake in the LNG Canada project.

“They’ve now got one rig going non-stop, and they plan to add to that over the next year to go to two rigs,” Allan said. “That’s a very a positive sign, when everybody else has been slowing down their activity.”

Some of the investments in the Montney formation in northeastern B.C. in recent years have had less to do with LNG and more to do with natural gas liquids – condensate, light oil and propane.

AltaGas Ltd. (TSX:ALA), for example, cancelled its Douglas Channel LNG project and instead focused on propane.

The company has been building a new propane export terminal in Prince Rupert, at a cost of $400 million to $500 million. The new Ridley Island Propane Export Terminal is expected to begin exporting propane in the first quarter of 2019.


Save the fish to save the whales

Commercial fishermen can expect limited openings for Fraser River sockeye in 2019, and four open-net salmon farms in the Broughton Archipelago will be permanently shut down.

But the big headlines in 2019 for B.C. coast fisheries will be about the ongoing plight of the southern resident killer whale, which has implications for the sport fishery, whale-watching industry and Trans Mountain pipeline.

“The issue around whales will be a consistent and ongoing issue,” said Wilkinson, who is minister of fisheries, oceans and the Canadian Coast Guard.

“It will also stay in the news because some of the opponents of the pipeline have tried to use the whales as a symbol of opposition. I’ve said this publicly many times, that people who think that the plight of the southern resident killer whales is a function of the pipeline don’t really know what they’re talking about.”

Roughly 11 million sockeye returned to the Fraser River in 2018. Historical patterns suggest 2019 returns will be much lower, which is likely to limit commercial fishing.

Chinook, not sockeye, garnered the most attention in 2018 and will continue to in 2019, since it is the primary food source for the southern resident killer whales, which are in a cyclical decline.

In 2018, eight of B.C.’s 16 chinook populations were deemed to be endangered by the Committee on the Status of Endangered Wildlife in Canada.

“Once we actually list those species as endangered … it requires that we have a recovery plan in place,” Wilkinson said.

In 2018, Wilkinson’s ministry created exclusion zones in orca feeding areas, making them off limits to sport fishing – a measure mainly aimed at chinook – and to whale watching, which hurt coastal towns that rely on those industries. New habitat protection areas will be created in 2019.

Wilkinson said $100 million earmarked in 2018 for wild salmon recovery and habitat restoration will likely start flowing in 2019.

“Focusing on how we actually make progress on salmon is going to be a big one in 2019,” he said.

Under the new joint provincial-federal aquaculture plan announced in December, four salmon farms in the Broughton Archipelago will be shut down in 2019, and more are set to be phased out in the coming years.

And in the coming months, Wilkinson said, the federal government will try to get a handle on the current technology for closed containment to try to address commercial and technological barriers.

“We’re not saying that we want to see all the open-net farms out of the water,” he said. “Ultimately, we need to make sure that the current practices are done in an environmentally sustainable way and in environmentally sustainable places, while we look at technology opportunities that may allow us to go farther.”


Powering up in 2019

The Peace River region will continue to see a construction boom related to electricity in 2019.

BC Hydro will spend roughly $1 billion next year on the Site C dam project and close to $300 million on a new transmission project that will bring additional power from the dam to the oil and gas fields of northeastern B.C.

Between now and 2030, industrial and transportation sectors in B.C. will be forced to undergo a dramatic shift to more electricity and lower-carbon fuels under B.C.’s new climate and energy plan, called CleanBC.

Planning for that transition by government, the oil and gas sector, the Parkland Fuel Corp. (TSX:PKI) refinery in Burnaby, BC Hydro and FortisBC will need to start in 2019, said David Austin, a lawyer specializing in energy for Stirling LLP.

“What I would say is 2019 is going to be the year of the planner because everybody has to now look at what the objectives of CleanBC are,” he said. “If we’re to meet the objectives for 2030, the planning has to occur very quickly.”

He said BC Hydro is going to have to update its load forecasts in light of the additional power that will be needed to electrify the oil and gas sector and industry. And FortisBC is going to need to start planning for how it will source all the new renewable natural gas that it will need to meet new targets of 15% renewable gas content.

A linchpin for the CleanBC plan will be the Site C dam and new transmission projects, like the Peace Region Electricity Supply (PRES) project.

In 2018, 3,746 workers were employed on the $10.7 billion dam project. The workforce is expected to grow even more than that in 2019.

Clearing for the new PRES line began in 2018. Construction on the new $289 million transmission line will begin in 2019, with an in-service date of 2021.

The project includes two parallel transmission lines running from the Site C dam near Fort St. John to the Groundbirch area 30 kilometres east of Chetwynd. It will supply industry, mostly the oil and gas sector, with additional supplies of electricity.


Will metal prices bounce in 2019?

High demand for copper promises to see mining majors continue their hunt for copper companies in 2019.

Even the financially troubled Imperial Metals Corp. (TSX:III) could end up on the market.

On December 28, 2018, shareholders for Vancouver-headquartered Nevsun Resources Ltd. (TSX:NSU), a copper-gold producer, were expected to approve a $1.86 billion takeover bid by China’s Zijin Mining Group Co. Ltd.

In the gold-silver space, Tahoe Resources Inc. (TSX:THO; NYSE:TAHO) shareholders will be asked at a special meeting January 8, 2019, to approve a US$1.1 billion takeover by Pan American Silver Corp. (TSX, Nasdaq:PAAS).

As for Imperial Metals, it ended the year with news that the two engineering companies it had sued over alleged design flaws that may have led to the 2014 Mount Polley tailings pond collapse have agreed on a $108 million out-of-court settlement.

The money will give the company much-needed liquidity as it explores a range of restructuring options, which could include the sale of some assets, or outright sale or merger.

The bigger picture for metal and mineral prices in 2019 is “totally dependent on the U.S.,” said Mickey Fulp, publisher of the Mercenary Geologist.

The prices for key base metals like copper, zinc and nickel fell in the latter half of 2018, partly in response to trade uncertainties and an economic slowdown in China.

Fulp said the strength or weakness of the U.S. dollar, America’s trade war with China, the performance of stock markets and interest rates will all determine whether metal prices rise again or flatline in 2019.

“If the U.S. does well and base metal prices and gold do well, the mining sector will do well,” he said. “There’s a lot of money sitting on the sidelines in this business waiting for higher metal prices. When we get higher metal prices, that speculative money is going to flood into the sector.”

Fulp said there will continue to be an appetite for copper exploration and advanced development projects because there simply isn’t enough copper in the pipeline to meet the growing demand.

Even B.C.’s metallurgical coal industry, which has in recent years chiefly relied on exports to China,  promises to be at least partly an American story in 2019. According to one recent analysis by DTE Energy, demand for steelmaking coal in the U.S. is expected to require more imports. Otherwise, the demand for the metallurgical coal produced in B.C. is still driven largely by Asia.