In many ways this week is a time of great celebration in the West as LNG Canada has been given the go-ahead by its partners in the project, bringing a much-needed shot in the arm for the energy industry and the economy in general.
Not only will Canada be the beneficiary of $40 Billion of capital investment and a significant boost to the labour pool, there will be a lot of spin off benefits associated with this project in the form of supporting businesses and the like. This project also creates much needed access to new markets beyond our biggest trading partner, the United States.
Further, though there will be a boost in terms of greenhouse gas emissions as it pertains to British Columbia, on a global basis this will help reduce the overall footprint through the substitution of coal with natural gas in markets such as China. This project was one which required cooperation on a number of fronts, whether it was provincially in the form of carbon tax relief, federally through the exemption of import tariffs, and corporately though the collaboration with the various First Nation groups that were impacted by this project.
At the end of the day, we all worked together, and in perhaps one of the classiest things I have heard from a politician of late, former Premier Christy Clark said of the now governing NDP Party: “They could have changed the climate plan, or had a moratorium on fracking, there were a 100 different things they could have done to stop it, and they didn’t.”
To put some perspective on this, I turn my attention to crude oil and the situation we find ourselves in today. As a result of the lack of pipeline space Canadian producers are now seeing apportionment levels in excess of 40%, and differentials (discounts) to West Texas Intermediate (WTI) running at C$30 per barrel for MSW (Light) and in excess of C$50/B for WCS (heavy) as opposed to more normal levels of C$5/B and C$20/B respectively.
Note that Maya crude, which has similar characteristics to WCS, is currently selling at a premium to WTI due to a shortage of heavy crude in the Gulf Coast – ironic, isn’t it. As such, the impact to the top line of producers was estimated by Scotiabank to be $15 Billion per year, and I would expect that this number is now closer to $20 Billion. Said another way, in just 2 years the loses represented by the unnaturally high differentials is equivalent to the amount of capital being invested into LNG over a 5 to 6-year timeframe. By my math, that shot in the arm seems to feel more like a punch to the arm of a hemophiliac, as we are bleeding, badly.
The Government has announced that they will not appeal the decision by the Federal Court on the Trans Mountain expansion, and instead has decided to pursue a new round of consultations with the 117 First Nations that are impacted by this project.
Moreover, when pressed on the issue, Natural Resources Minister Amarjeet Sohi stated that there will be no timeline associated with this consultation and has appointed retired Supreme Court Justice Frank Iacobucci to lead these efforts. We could argue whether or not the threshold for appropriate consultation was met when Trans Mountain originally filed for and received approval of its expansion, however that horse has left the barn and is long out of sight.
By not setting goals in terms of a timeline you do not inject a sense of urgency into a situation that is becoming desperate. Loading trains full of crude and sending them to markets across North America is not only less environmentally sensitive and is not a long-term solution, there may be unintended consequences in terms of the potential impacts on other consumers who rely on the rail networks for their well-being.
As such, though the government may wish to take our time to figure this right I reflect back to the adage time is money, and we are running out of both.
William Lacey is the Chief Financial Officer of Steelhead Petroleum