I don't think any private sponsor is going to be prepared to take that risk: Ollenberger on pipeline

Key Concepts

• Framework Deal: An initial agreement between Alberta and Ottawa regarding a pipeline project.
• Major Projects Office: A government entity responsible for reviewing and approving major infrastructure projects.
• Private Sponsor: A private company willing to fund and build the pipeline.
• Shippers: Companies that will transport oil through the pipeline.
• Cost Certainty: Predictability of project costs, crucial for private investment.
• Trans Mountain (TMX) Project: A previous pipeline project that experienced significant cost overruns.
• Backstop Guarantee: A commitment from a government to cover potential cost overruns.
• Indigenous Bands: Indigenous communities along the pipeline route.
• Pathways Project: A carbon capture initiative linked to the pipeline development.
• Net Zero: Commitment to reducing greenhouse gas emissions to zero.
• Cost Curve: A representation of the cost of producing oil from different sources.

Framework Deal: A Meaningful First Step

Randy Alenberger, managing director of oil and gas equity research at Beimo Capital Markets, views the recent framework deal between Alberta and Ottawa as a "meaningful first step" towards pipeline construction. However, he emphasizes that "significant work remains to be done" before actual construction can commence.

Next Steps and Private Sponsorship

The immediate next step involves Alberta submitting an application to the Major Projects Office by July 1st. The most critical step, however, is securing a private sponsor – a pipeline company willing to build the project and sign up shippers.

Conditions for Private Investment

Alenberger believes there would be interest from private sponsors, but only under specific conditions. A primary requirement is "some level of cost certainty." He highlights the Trans Mountain (TMX) project's escalation from $7 billion to $34 billion as a cautionary tale, stating that no private sponsor would willingly undertake such a risk.

Addressing Cost Overruns and Learning from TMX

To achieve cost certainty, it's essential to understand the reasons behind the TMX project's cost overruns. A review of the TMX project is currently underway to identify these drivers and prevent similar mistakes. Alenberger suggests that some level of "backstop guarantee" from the Alberta government might be necessary in cases of cost overruns not attributable to the pipeline companies' control.

Relationship Reset and Market Interest

Despite the remaining challenges, Alenberger sees the framework deal as a "positive reset of the relationship between the federal government and the oil and gas industry here in Canada." He acknowledges the Premier's stance that public money is not planned, believing the markets will be interested.

Possibility of Proceeding Without Public Backing

Alenberger suggests that the project could proceed without public backing if the regulations and conditions for building the pipeline are understood and reasonable. He points to Canada's history of building pipelines without experiencing the TMX-like issues. The availability of oil is not a concern, with 3.8 million barrels per day identified from approved projects. The key is understanding the "really regulations and conditions under which you'd build a pipeline."

Preference for Less Government Involvement

The private market generally prefers "less government involvement and regulation." However, understanding the specific review processes, potential for court challenges, and other factors that bogged down the TMX project is crucial.

Indigenous Support and Potential Hurdles

Alenberger believes that indigenous interest is not as significant a hurdle as perceived. He estimates that "something like a hundred" out of 114 indigenous bands along the pipeline route are supportive. While some coastal bands remain opposed, he defers to whether agreements can be reached with them.

Timeline for Construction and Oil Flow

If all aspects align, construction could potentially begin as early as 2029. Alenberger estimates a build period of "3 to 5 years" for a pipeline of this magnitude, meaning oil flow is realistically expected in the "middle of the next decade."

Oil Price and Cost Curve Advantage

The price of oil is always a factor, but Alenberger notes that the oil sands are a "lowest cost source of supply in the world." This positions them favorably on the "cost curve," allowing them to withstand lower oil prices compared to competitors and making the project more viable.

Carbon Capture and Net Zero Commitment

The "Pathways Project," focused on carbon capture and a commitment to net zero, is a key component. The CEOs involved are actively meeting and ready to proceed, having invested significant time and money. Alenberger views this as a "quid pro quo" – the pipeline proceeds if Pathways goes ahead, and vice versa. He does not see Pathways as an impediment, but rather as intrinsically tied to the pipeline.

Conclusion

The framework deal represents a positive initial step, but the path to pipeline construction is complex. Securing private sponsorship hinges on cost certainty, which requires understanding and mitigating the risks that led to the TMX project's overruns. While indigenous support is largely positive, potential opposition from some groups needs to be addressed. The project's viability is supported by the oil sands' cost advantage, and the integrated Pathways carbon capture initiative is seen as a complementary element rather than a barrier. The timeline suggests construction could begin in 2029, with oil flowing by the mid-2030s.