The Canadian oil industry endured another setback last week after an appeals court in the country overturned the government's approval of the Trans Mountain Pipeline expansion project. The pipeline, which is now owned by the Canadian government, might need to restart the entire approval process, which could take years.
With the country's current pipeline capacity filled to the brim, it makes it nearly impossible for producers to expand output much further, since the only way to get those supplies to market centers is via rail, which is much more expensive. That's why leading Canadian oil sands producer Suncor Energy (NYSE: SU) recently said that it wouldn't approve any more expansion projects until it sees construction start on new pipelines.
One step forward and two back
North American pipeline companies have three major pipeline projects currently under development: Trans Mountain, Enbridge's (NYSE: ENB) Line 3 Replacement, and TransCanada's (NYSE: TRP) Keystone XL. Of that trio, only Line 3 is currently under construction. Enbridge anticipates that the project will enter service in the second half of next year, bringing the pipeline's capacity back up to its original design of 760,000 barrels of oil per day (BPD), which is double its current rate. The company recently won approval to construct the line through the state of Minnesota along its preferred route and signed an agreement with a Native American group to build it through their reservation. As a result, the company remains on schedule and on budget with the project.
However, with Trans Mountain's future uncertain, the only hope for a meaningful near-term boost to Canada's export pipeline capacity is TransCanada's revived Keystone XL project, which would move 830,000 BPD. The company currently hopes to start construction on the project next year, which would put it into service by 2021. However, an ongoing court battle could push back that time frame.
Playing the waiting game
With continued uncertainty surrounding both Keystone XL and Trans Mountain, Suncor Energy isn't willing to risk expanding its production base only to have no outlet for that output. Because of that, "you will not see us approve those projects until we have more clarity on pipelines," according to comments by CEO Steve Williams at a recent investor conference. He further stated that "I would want to see actual, physical progress on the ground before I would commit."
The company had hoped to make a final investment decision on new projects in late 2019 and early 2020. However, given those statements, it's unlikely that it will approve another major expansion project in the oil sands region anytime soon.
It's also worth noting that Suncor recently unloaded a potential project after the company and its other partners sold their Joslyn oil sands project to Canadian Natural Resources (NYSE: CNQ). The company and its partners initially put Joslyn on hold in 2014 due to its high development costs, which made it uneconomic even at triple-digit oil prices. Meanwhile, continued pipeline constraints and lower oil prices made that project even less appealing. However, with the lease underpinning the project located directly south of Canadian Natural's Horizon oil sands facility, that company could eventually develop these oil resources as part of Horizon, which would likely be a more cost-effective way to move forward.
Dimming what was already a subdued outlook
After completing two major projects at the end of last year, Suncor Energy is on pace to grow production at a 10% compound annual growth rate (CAGR) in 2018 and 2019 as those projects ramp up. However, the company's growth prospects aren't quite as robust beyond that time frame. Currently, the company expects that a combination of debottlenecking projects, cost reductions, and other efforts to improve margins will boost its cash flow at a 5% CAGR from 2020 through 2023. Meanwhile, if it sanctions another oil sands expansion project, it could increase production at a 4% CAGR in the 2023 to 2024 timeframe. However, the company's most recent statements suggest that it will likely push back that timeline.
For comparison's sake, global oil giant ExxonMobil (NYSE: XOM) expects to grow its production 25% by 2025, driven by 25 major capital projects around the world as well as its position in the fast-growing Permian Basin. The oil giant anticipates that this production increase will more than double earnings and cash flow over that time frame, which is a roughly 9% CAGR. That's impressive for a company of Exxon's size and a much faster pace than Suncor. While that doesn't mean Suncor won't fill in the gaps elsewhere and reaccelerate its growth rate in the coming years, there are concerns whether the Canadian oil giant has enough fuel to outperform after its latest expansion projects achieve their peak production rates next year.
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