Canada as Energy ‘Superpower’ Requires More Pipelines, Expansion Into Asia

Canada’s role as a global energy “superpower” requires the U.S.’s largest trading partner to spend on pipelines and develop new markets in Asia while halting environmental damage, said Randy Eresman, Encana Corp. (ECA)’s chief executive officer.

The nation’s natural gas is locked within the North American market, and growing supplies mean natural-gas prices will be “constrained” around $6 per thousand cubic feet, said Eresman. Oil needs an outlet other than just the U.S. to help producers get better prices, said Lars Christian Bacher, who heads Statoil ASA (STL)’s Canadian operations.

“To become a global superpower, we need to be able to export it to more than just our neighboring country,” Eresman said during a Bloomberg Summit yesterday in Toronto.

Canada holds the world’s third-largest crude reserves, behind Saudi Arabia and Venezuela, according to the Canadian Association of Petroleum Producers, and has “over 100 years” worth of natural gas, Eresman said. The size of the fossil-fuel resources in Canada helps the industry to play a “dominant” role in the world’s tenth-largest economy and offers the potential for an even more significant role abroad, said John Stephenson, a senior portfolio manager at First Asset Investment Inc. in Toronto.

“Canada’s economy is driven by oil,” said Stephenson, who helps manage C$2.5 billion ($2.6 billion) at First Asset. “What we lack is export capacity in a meaningful way, and we should be courting Asian markets.”

Stability Touted

Since coming to power in 2006, Prime Minister Stephen Harper has promoted Canada as an “energy superpower,” pointing to its political stability and proximity to the U.S. as advantages. The nation of 34.8 million has a system of parliamentary democracy, and almost a third of its economy derives from exports, the largest of which are commodities.

Canada’s energy industry will attract as much as C$20 billion annually in the coming years, Suncor Energy Inc. (SU) Chief Executive Officer Rick George has said. More than 99 percent of Canada’s crude exports flow to the U.S.

While the size of Canada’s resources offer great potential, the North American nation will likely never influence energy markets in the same way a country like Saudi Arabia does, said Pietro Nivola, a senior fellow at the Brookings Institution in Washington, D.C. Instead, the U.S. will always remain the most important customer for Canada, he said.

“Energy superpowers in general strengthen a country’s geopolitical position,” he said. “And for Canada, these resources mean that American politicians can’t rock the boat and have to be respectful.”

Markets Boost Margins

A “structural oversupply situation in the U.S. midcontinent” has led to record gaps between Brent and West Texas Intermediate, the grade of crude sold in the U.S., Societe Generale SA said in November.

West Texas Intermediate for June delivery rose $1.33 to $103.88 a barrel on the New York Mercantile Exchange, the highest settlement since May 4. Brent crude for June settlement rose $1.73, or 1.5 percent, to end the session at $117.63 a barrel on the London-based ICE Futures Europe exchange.

“This is an example of what can happen to pricing if you don’t have access to markets,” said Statoil’s Bacher. “The more markets you can play in means higher margins.”

Enbridge Inc. (ENB), Canada’s largest pipeline owner, has applied to build a 1,172-kilometer (730-mile) pipeline that would terminate at the Pacific port of Kitimat and enable tankers to take up to 525,000 barrels of bitumen per day from Alberta to China, Japan and South Korea. Opening those markets is worth an extra $2 to $3 a barrel, said Enbridge’s John Carruthers, who is spearheading efforts to build the company’s proposed Northern Gateway pipeline, on April 4.

Northern Gateway

The project is expected to add C$270 billion to Canada’s economy over 30 years and generate C$81 billion in tax revenue for federal and provincial governments, Carruthers said at the time.

Northern Gateway would be the second pipeline to transport crude across the Rocky Mountains to the Pacific. Kinder Morgan Inc. already has the capacity to pump 300,000 barrels per day of a variety of products including jet fuel and bitumen through its Trans Mountain pipeline to Vancouver.

Even with the additional capacity to send crude and natural gas over the Rockies and onto Asia-bound tankers, the volumes wouldn’t be big enough to have an influence on global markets for at least another decade, said Gerry Angevine, senior economist at the Fraser Institute in Calgary.

More Pipelines Sought

“The potential is certainly there, but we need more pipelines and liquefied natural gas facilities,” Angevine said. Being an energy superpower means being able to influence prices for crude and natural gas as well as adjust production to accommodate changes in demand, he said.

Damage to the environment from production of natural gas and oil is also a limiting factor to Canada’s influence, Nivola said. Extracting oil and gas in quantities that would provide Canada with a greater influence in energy markets would have “major environmental implications,” he said.

Environment groups including Greenpeace and the Pembina Institute have called for a halt to oil-sands development citing damage to local ecosystems, emissions of carbon dioxide and potential for leaks from pipelines. In the U.S., which imports more than 1 million barrels of oil a day from its northern neighbor, an extension of a pipeline to the Gulf Coast has stumbled over opposition from locals in the Midwest who fear leaking pipes may damage their drinking water.

“In light of the environmental concerns and climate change it’s hard to imagine that Canada would become a dominant geopolitical force because of its energy resources,” said Nivola.

To contact the reporter on this story: Jeremy van Loon in Toronto via jvanloon@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net

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