PNN March 2020 by Pipeline News North

MARCH 20, 2020

PIPELINE NEWS NORTH •

The climate risk calculus of Teck’s cancellation of Frontier nelson bennett Teck Resources stock fell 5% the morning of Feb. 24, following the previous night’s announcement that the Vancouver-headquartered mining company was pulling the plug on its $20 billion Frontier oil sands project. By the end of the day, the Vancouver company’s stock had recovered somewhat. But Canada’s stock as a place to invest in fossil fuel projects may have a harder time recovering. Sunday night, Teck CEO Don Lindsay released a letter to federal Environment Minister Jonathan Wilkinson, announcing his company was withdrawing its Frontier oil sands project in Alberta from the federal environmental assessment process. That saves Wilkinson and the Trudeau government from a decision that would have angered half of the country, regardless of whether it approved it or rejected the project. But it brings the value of large energy projects killed or cancelled under Prime Minister Justin Trudeau’s watch to about $120 billion. (The C.D. Howe Institute estimated $100 billion worth of projects died or were killed since 2015). The $20 billion Frontier project joins Northern Gateway, Energy East, and Pacific NorthWest LNG in a growing list of major energy projects that have died just in the last few years. And even a project that enjoys wide support among First Nations, and aims to have one of the lowest emissions profile in the world – the $40 billion LNG Canada project and associated Coastal GasLink pipeline – has prompted a literal paralysis in the form of railway blockades by First Nations across Canada. First Nations in Alberta that supported the Frontier project expressed dismay over the project’s cancellation. “Revenue from Teck-related enterprise would have helped to support our on-reserve Elder’s long-term care centre and the new K-9 school on which we hope to break ground in 2020,” Mel Grandjamb, chief of the Fort McKay First Nation, said in a press release. Alberta Premier Jason Kenney blamed the Trudeau government for the decision. “Weeks of federal indecision on the regulatory approval process and inaction in the face of illegal blockades have created more

‘The promise of Canada’s potential will not be realized until governments can reach agreement around how climate policy considerations will be addressed in the context of future responsible energy sector development’ Teck CEO Don Lindsay.

uncertainty for investors looking at Canada,” Kenney said. “Teck’s predicament shows that even when a company spends more than $1 billion over a decade to satisfy every regulatory requirement, a regulatory process that values politics over evidence and the erosion of the rule of law will be fatal to investor confidence.” But some are reading Lindsay’s letter to Wilkinson as a subtle rebuke of Jason Kenney’s watered down climate change policies. “We support strong actions to enable the transition to a low carbon future,” Lindsay writes. “We are also strong supporters of Canada’s action on carbon pricing and other climate policies such as legislated caps for oil sands emissions.” There has been some wrangling over the question of whether the Frontier project would fit within Alberta’s 100 megatonne cap on oil sands emissions, and how it might fit into Canada’s GHG emission reduction targets. It would have produced 4 million tonnes of CO2 annually. There are also questions about whether the project made economic sense anymore, given how low oil prices have been since 2014. Frontier’s cancellation appears to be, at least in part, the result of Canada’s indecision on the question of whether it can – or wants to – continue developing and exporting fossil fuels, while implementing strong climate change policies and addressing

First Nations reconciliation, and Teck does not want the Frontier project to be caught in that indecision. In making the announcement, Lindsay suggested that Canada needs to sort out how to develop fossil fuel projects that are aligned with its climate change objectives. “The promise of Canada’s potential will not be realized until governments can reach agreement around how climate policy considerations will be addressed in the context of future responsible energy sector development,” Lindsay writes in his letter to Wilkinson. “Without clarity on this critical question, the situation that has faced Frontier will be faced by future projects and it will be very difficult to attract future investment, either domestic or foreign.” The company noted that global capital markets “are increasingly looking for jurisdictions to have a framework in place that reconciles resource development and climate change, in order to produce the cleanest possible products. “This does not yet exist here today and, unfortunately, the growing debate around this issue has placed Frontier and our company squarely at the nexus of much broader issues that need to be resolved. “In that context, it is now evident that there is no constructive path forward for the project.” In recent weeks, Mark Carney – the former head of the Bank of Canada and – more recently, the

former head of the Bank of England – has said that half of the world’s oil reserves could be stranded assets and warned financial institutions that they need to take into account climate risk. And the CEO of the world’s largest asset managers – BlackRock – recently warned of a “significant reallocation of capital” to avoid climate risk. That warning follows a number of pension funds, universities and financial institutes that have announced plans to divest from fossil fuels, particularly Alberta’s oil sands. A number of environmental groups say Teck is simply acknowledging that fossil fuel investments are no longer a smart long-term investment. The Institute for Energy Economics and Financial Analysis (IEEFA) pointed out that when the project was approved by a joint review panel, it projected global oil prices of US$95 per barrel. The U.S. Energy Information Administration (EIA) projects an average price of US$61 per barrel in 2020. By 2025, it projects oil to sell in the US$81 per barrel range and US$93 by 2030. Pedro Antunes, chief economist for the Conference Board of Canada, said investment in Alberta’s oil patch declined significantly since 2014, with a plunge in oil prices. “We had Alberta doing a little bit better going forward, because we expected some investment to come back to the province,” he said. “This puts some risk to that forecast.” Marvin Shaffer, a public policy professor at Simon Fraser, said the Kenney and Trudeau governments probably both share in some of the blame for Teck’s decision: Kenney for watering down climate change policies, and Trudeau for not being clear enough on just how projects like Frontier might fit within Canada’s carbon budget. But he also thinks economics had something to do with Teck’s decision. “And, while Teck clearly didn’t want to get caught up in the climate wars battering other major projects, it seems clear that their project was on shaky economic ground, and a decision to withdraw was substantively not much different from what would likely have been a decision not to proceed in the foreseeable future in any event,” he said. — Business in Vancouver

MARCH 20, 2020

PIPELINE NEWS NORTH •

The climate risk calculus of Teck’s cancellation of Frontier NELSON BENNETT Teck Resources stock fell 5% the morning of Feb. 24, following the previous night’s announcement that the Vancouver-headquartered mining company was pulling the plug on its $20 billion Frontier oil sands project. By the end of the day, the Vancouver company’s stock had recovered somewhat. But Canada’s stock as a place to invest in fossil fuel projects may have a harder time recovering. Sunday night, Teck CEO Don Lindsay released a letter to federal Environment Minister Jonathan Wilkinson, announcing his company was withdrawing its Frontier oil sands project in Alberta from the federal environmental assessment process. That saves Wilkinson and the Trudeau government from a decision that would have angered half of the country, regardless of whether it approved it or rejected the project. But it brings the value of large energy projects killed or cancelled under Prime Minister Justin Trudeau’s watch to about $120 billion. (The C.D. Howe Institute estimated $100 billion worth of projects died or were killed since 2015). The $20 billion Frontier project joins Northern Gateway, Energy East, and Pacific NorthWest LNG in a growing list of major energy projects that have died just in the last few years. And even a project that enjoys wide support among First Nations, and aims to have one of the lowest emissions profile in the world – the $40 billion LNG Canada project and associated Coastal GasLink pipeline – has prompted a literal paralysis in the form of railway blockades by First Nations across Canada. First Nations in Alberta that supported the Frontier project expressed dismay over the project’s cancellation. “Revenue from Teck-related enterprise would have helped to support our on-reserve Elder’s long-term care centre and the new K-9 school on which we hope to break ground in 2020,” Mel Grandjamb, chief of the Fort McKay First Nation, said in a press release. Alberta Premier Jason Kenney blamed the Trudeau government for the decision. “Weeks of federal indecision on the regulatory approval process and inaction in the face of illegal blockades have created more

• PIPELINE NEWS NORTH MARCH 20, 2020

‘No incident is acceptable’: Enbridge responds to TSB findings of 2018 pipeline blast jess fedigan Enbridge has issued a response to the Transportation Safety Board of Canada’s report released March 4 into the findings of the cause of the pipeline explosion near Prince George in 2018. At roughly 5:30 p.m. on Oct. 9, 2018, the 36-inch pipeline operated by Enbridge Inc. ruptured roughly 13 km northeast of the city. Once ruptured, natural gas ignited and resulted in a fire that caused some 100 people in the Lheidli T’enneh First Nation to be evacuated. “We know this incident has caused concerns and disrupted the lives of many people in the area. For that, we apologize,” Senior Vice President and Chief Operations Officer, Gas Transmission and Midstream for Enbridge Michele Harradence said in a release. “We commit that we have learned from this incident and have taken steps to ensure the safety of our natural gas system.” The company says since the incident, they have completed a comprehensive pipeline integrity program on its natural gas pipeline system in B.C. to help stop similar events from happening going forward and improve pipeline safety. “This is the most aggressive integrity program ever undertaken on its pipeline system in B.C.,” the release adds. “It’s part of a new approach to pipeline safety and ongoing commitment to continually improve the safety of our natural gas pipeline system.” The company says the program includes: - Enhanced pipeline inspections - The entire T-South natural gas pipeline system has been inspected with the latest generation inline pipeline inspection tool. This tool has double the number of sensors than previous inspection tools and is significantly more accurate at assessing potential problems like stress corrosion cracking - The T-South mainline system now is 100 per cent inspected by this tool - We will continue to use this inspection tool going forward, conducting inspections with it more frequently Enhanced Maintenance

Aerial view of the area affected by the fire that resulted from the pipeline rupture. | Transportation Safety Board of Canada

Screening Criteria - In conjunction with these pipeline inspections, we’ve implemented more comprehensive criteria to evaluate the pipeline inspection data. This will identify potential risks earlier that may require monitoring and proactive maintenance work - Increased Integrity digs - As a result of this enhanced screening criteria, we’ve increased the number of integrity dig inspections undertaken in a normal maintenance year. During an integrity dig, we excavate a section of pipe to examine it further, validating its safety and undertaking proactive maintenance work if it is required. In 2019, we more than doubled the number of digs undertaken to validate the safety of our pipeline system compared to previous years “At Enbridge, no incident is acceptable – ever. If an incident were to occur, we will implement changes to ensure the ongoing safety of our pipeline system,” the statement continues. “Since the Shelley incident, we have completed a comprehensive integrity program on our T-South natural gas pipeline system and implemented a new approach to pipeline safety that goes well beyond the industry standard.

We are reviewing the TSB report carefully and are committed to making further changes as needed to continually improve pipeline safety.” Construction of the NPS 36 L2 pipeline (where the explosion occurred) was completed in 1972. “It was successfully hydrostatically (strength and leak) tested by Westcoast prior to approval for service by the National Energy Board (NEB) in October 1972,” the TSB report says. The investigation found that the pipeline exploded due to stress corrosion cracks on the outside surface of the pipe; and that the polyethylene tape coating applied to the exterior surface of the pipe as a measure to protect it from corrosion deteriorated over time. “This allowed soil moisture to come into contact with the pipe surface, leading to corrosion and cracking,” the report also stated. “Growing and merging over time, the cracks reduced the loadbearing capacity of the pipeline at normal operating pressures.” The crater that was created during the rupture and ejection of the pipeline from the ground was about 35 m long, 13 m wide and had a peak depth of about 9 m. “The cracks grew over time due to a near-neutral pH environment

combined with operating stresses and eventually coalesced into a larger single crack,” the report reads. “This reduced the load-bearing capacity of the pipeline steel until the critical crack size was exceeded and an instantaneous overstress fracture of the pipe occurred at normal operating pressures. The crack characteristics were consistent with near-neutral pH SCC.” The Transportation Safety Board of Canada also said in its report the stress corrosion cracking electromagnetic acoustic transducer in-line inspection for the 4AL2 segment was scheduled for 2017, but then moved to late fall of 2018, which resulted in the existing cracks remaining in the pipe undetected until failure. “There were no records indicating that a proposed deviation, rationale or technical assessment had been done, or that the deferral request had been approved, even though Westcoast’s standard operating practice required these to be documented,” the report states. The TSB said the emergency response activities that took place once the rupture happened were successful in mitigating the impacts of the explosion.

• PIPELINE NEWS NORTH MARCH 20, 2020

Cheap oil contagion is clear and present danger nelson bennett A war between Russia and Saudi Arabia for market share for oil may have been triggered by the COVID-19 pandemic in China, but the cheap oil contagion that it will spread could have impacts that last longer than the virus. The prospects for Canada are not good. Plunging oil prices, reduced economic activity from virus containment, and the fallout from weeks of railway blockades over the Coastal GasLink pipeline all add up to “a one-two-three punch that I think is almost inevitably going to put Canada in a position where its growth has to be negative,” said Dan McTeague, a former Liberal MP and current president of Canadians for Affordable Energy. The situation “certainly has the makings” of a recession, said Ken Peacock, chief economist for the Business Council of British Columbia. “At a minimum, it’s going to be very disruptive and we’re going to have maybe one negative quarter,” Peacock said. “Whether there’s a second one, where it gets labeled a recession, is a different question. But it’s going to generate some turmoil and challenges over the next two quarters – there’s no doubt about that.” RBC Economics on March 13 announced it now predicts a global recession and cut its growth projections for Canada’s economy in 2020 by half a per cent. Oil price futures plunged 30% last week, dragging stock markets and currencies, including the Canadian dollar, down with them. That drop came on top of a 17% decline in February, due to falling demand for oil due to the virus. The latest price plunge – the worst since the 1991 Gulf War – was the result of Russia and the Organization of Petroleum Exporting Countries (OPEC), led by Saudi Arabia, failing to agree on oil production cuts. The COVID-19 outbreak in China – the world’s second-largest oil consumer – had resulted in a dramatic drop in oil demand in that country, and a sudden glut of oil. OPEC has historically been able to moderate global oil prices by controlling output. But when Russia refused to co-operate with OPEC and agree to production cuts, Saudi Arabia’s state-owned company, Aramco, announced it

Valleyview Petroleums was back in the field over the Christmas break, working just west of the Weyburn Unit after a several-year hiatus from drilling. They were using the Intellidrill underbalance package, seen in the lower right, on Panther Drilling Rig 2. | Brian Zinchuk Photo

plans to boost its oil output from 9.7 million barrels per day (bpd) to 12.3 million bpd in April. In response to that announcement, West Texas Intermediate (WTI) prices dropped 18% to below US$34 per barrel while the Canadian Crude Index fell 24% to US$21. Western Canadian Select dropped 39% to US$15.73. The effect on Alberta oilsands producers was severe and immediate. Cenovus Energy Inc. (TSX:CVE) saw roughly $2 billion in market cap erased on March 9, when its stock dropped by 52%, which came on top of a 12% drop March 6. The company responded the very next day by announcing it would cut spending by 32% in 2020, suspend its oil-by-rail program and defer expansion projects. MEG Energy Corp. (TSX:MEG), which suffered a 56% share price drop on March 9, also announced a 20% reduction in its 2020 capital spending plan. Peter Tertzakian, chief economist for ARC Energy Research Institute, wrote last week that Russia’s plan is to try to hurt U.S. shale oil producers, who have more than doubled U.S. oil production over the past decade. Anas Alhajji, a global oil analyst, expects that plan could work. Even before the oil price shock, he had

predicted the great shale boom in the U.S. was coming to an end. “Shale production will decline, and the myth of ‘explosive growth’ will end,” he told Business in Vancouver. “The impact is global and Canadian producers might suffer even more if the oil that Saudi Arabia sends to the U.S. is medium and heavy. This might last longer than what people think.” The question for Alberta is how Canadian producers can continue to operate through a period of cheap oil. Alberta producers do not compete on the global market. They serve a niche market of U.S. heavy oil refiners. “On the positive side, the industry is battle-hardened,” Tertzakian wrote. “Over the past five years, innovative companies have already learned to endure some of the lowest prices in the world.” But he added that they need WTI prices of US$30 per barrel just to break even. “But that’s an average breakeven threshold for an industry with a wide variation in costs. That means at that level about half the companies can’t pay their bills and half are treading water.” Just prior to the oil price plunge, the International Energy Agency (IEA) updated its 2020 forecast for global oil consumption from an 825,000 bpd increase in oil

consumption to a 90,000 bpd decrease, due to the COVID-19 virus and consequent economic contraction and reduction in travel. The IEA predicts global oil demand won’t return to “normal” until the second half of 2020. But even if demand does return to previrus levels, that doesn’t mean oil prices will – not if Saudi Arabia can sustain increased oil production at low prices. The oil plunge was greeted in Alberta with alarm. Alberta Premier Jason Kenney warned Alberta is in “uncharted territory” and said his government might have to review its balanced budget and resort to emergency deficit spending. While British Columbians – who pay some of the highest gasoline prices in North America – will enjoy lower gasoline prices at a time when prices are usually starting a seasonal spike, B.C.’s economy could feel knock-on effects from a recession in Alberta. “We sell a lot of inputs, do a lot of trade with Alberta, so it’s important for B.C., Alberta’s economic health,” Peacock said. Last week, the Trudeau government announced $1 billion in emergency funding to cope with the virus and waived a one-week waiting period for unemployment insurance. — Business in Vancouver

• PIPELINE NEWS NORTH MARCH 20, 2020

Fort St. John resource rally hoped to spread Fort St. John is once again hoped to be a flashpoint for a new wave of rallies across Canada in support of natural resource development. Two dozen demonstrators took to the corner of 100th and 100th on Feb. 29 to show support for the Coastal GasLink pipeline, and to call on governments and police to clear port and rail blockades that have stung the country’s economy. “We have to show Canada that these illegal blockades are affecting the daily lives of people, and especially resource workers in the north,” said organizer Alan Yu. “It’s not just the voices of the minority, the anarchists who want to shut down Canada that should be heard. We should encourage that we should build up Canada and not shut down Canada.” Coastal GasLink has signed benefit agreements with all elected First Nation councils along its route from the Peace region to Kitimat. But the last month has seen a rise in protests and blockades organized in support of hereditary chiefs of the Wet’suwet’en who continue to oppose the pipeline. In response, federal and provincial ministers announced an agreement last weekend to expedite a process to recognize Wet’suwet’en rights and title in northwest B.C. However, they did not come to an agreement on the pipeline, and supporters of the chiefs have said the blockades and protests will continue. Yu, who immigrated from the Philippines and became a Canadian citizen in 2018, said it was good news that the chiefs and ministers were meeting to negotiate. But, he said the governments must maintain support for Coastal GasLink and Canada’s petroleum industry. Demand is broadly expected to rise in the coming decades here at home and abroad, where developing countries like the Philippines are desperate for the resource and rely on imports, he said. “Take a look around us: we rely on oil and gas to get around, especially in our day-to-day lives. We cannot survive without oil and gas,”

Two dozen demonstrators took to the streets in Fort St. John on Feb. 29 to show support for the Coastal GasLink pipeline, and to call on governments and RCMP to clear port, rail, and highway blockades that were having a crippling effect on the country’s economy at the time. | Matt Preprost Photo

Yu said. “There will come a time where there will be alternative forms of energy that are cleaner than oil and gas, but until such time oil and gas is here to stay.” Premier John Horgan has rejected calls to halt the pipeline, and has called ongoing protests counterproductive. MLA Dan Davies said Coastal GasLink and its endpoint at the LNG Canada terminal in Kitimat are both key to getting natural gas to Asia and India to displace the use of coal. “That’s what this is about. There’s climate

action,” Davies said. “It’s about supporting that, it’s about supporting our indigenous neighbours, it’s about supporting Canada’s economy.” The International Energy Agency, the world’s foremost global energy forecaster, noted in its world energy outlook year that “a three-way race is underway among coal, natural gas and renewables to provide power and heat to Asia’s fast-growing economies.” — with files from Business in Vancouver, The Canadian Press

Tourmaline bulks up Montney asset base Tourmaline Oil Corp. has announced three transactions that significantly increases its acreage position in the northeast B.C. Montney fairway, the Daily Oil Bulletin reports. The company had said last month that it planned to become bigger through mergers and acquisitions that would give it a bigger piece of the gas supply over the next couple of years. First up, the company is buying Chinook Energy Inc. in an all stock deal valued at $24.4 million, including assumed debt. The Chinook northeast British Columbia assets include approximately 3,500 boe/d of production, 35.6 million boe of 2P reserves, 54,000 acres

of Montney lands, a gas plant, a compressor station, and a 190 mmcf/d regional 12-inch pipeline. In a separate transaction, on Feb. 4 Tourmaline acquired privately-held Polar Star Canadian Oil and Gas Inc. for total cash consideration of $9 million, plus working capital adjustments. The acquired B.C. assets include approximately 2,500 boe/d of production, 2P reserves of 80.7 million boe, 106,000 net acres of Montney lands, and a compressor station. Minimal development of the assets is expected in the next two years while Tourmaline assembles a regional facility plan

as a key aspect of the future development of these assets, including a Gundy scale deep-cut facility (200 mmcf/d, 15,000 bbl/d condensate and NGLs). In yet another deal, Tourmaline acquired a 75% working interest in a 13 section block of acreage adjacent to the company’s Gundy complex for $49 million in Q4 2019. The lands offset the company’s highest deliverability, most liquid-rich lands at South Gundy. — Daily Oil Bulletin

• PIPELINE NEWS NORTH MARCH 20, 2020

‘No incident is acceptable’: Enbridge responds to TSB findings of 2018 pipeline blast JESS FEDIGAN Enbridge has issued a response to the Transportation Safety Board of Canada’s report released March 4 into the findings of the cause of the pipeline explosion near Prince George in 2018. At roughly 5:30 p.m. on Oct. 9, 2018, the 36-inch pipeline operated by Enbridge Inc. ruptured roughly 13 km northeast of the city. Once ruptured, natural gas ignited and resulted in a fire that caused some 100 people in the Lheidli T’enneh First Nation to be evacuated. “We know this incident has caused concerns and disrupted the lives of many people in the area. For that, we apologize,” Senior Vice President and Chief Operations Officer, Gas Transmission and Midstream for Enbridge Michele Harradence said in a release. “We commit that we have learned from this incident and have taken steps to ensure the safety of our natural gas system.” The company says since the incident, they have completed a comprehensive pipeline integrity program on its natural gas pipeline system in B.C. to help stop similar events from happening going forward and improve pipeline safety. “This is the most aggressive integrity program ever undertaken on its pipeline system in B.C.,” the release adds. “It’s part of a new approach to pipeline safety and ongoing commitment to continually improve the safety of our natural gas pipeline system.” The company says the program includes: - Enhanced pipeline inspections - The entire T-South natural gas pipeline system has been inspected with the latest generation inline pipeline inspection tool. This tool has double the number of sensors than previous inspection tools and is significantly more accurate at assessing potential problems like stress corrosion cracking - The T-South mainline system now is 100 per cent inspected by this tool - We will continue to use this inspection tool going forward, conducting inspections with it more frequently Enhanced Maintenance

Aerial view of the area affected by the fire that resulted from the pipeline rupture. | Transportation Safety Board of Canada

• PIPELINE NEWS NORTH MARCH 20, 2020

Cheap oil contagion is clear and present danger NELSON BENNETT A war between Russia and Saudi Arabia for market share for oil may have been triggered by the COVID-19 pandemic in China, but the cheap oil contagion that it will spread could have impacts that last longer than the virus. The prospects for Canada are not good. Plunging oil prices, reduced economic activity from virus containment, and the fallout from weeks of railway blockades over the Coastal GasLink pipeline all add up to “a one-two-three punch that I think is almost inevitably going to put Canada in a position where its growth has to be negative,” said Dan McTeague, a former Liberal MP and current president of Canadians for Affordable Energy. The situation “certainly has the makings” of a recession, said Ken Peacock, chief economist for the Business Council of British Columbia. “At a minimum, it’s going to be very disruptive and we’re going to have maybe one negative quarter,” Peacock said. “Whether there’s a second one, where it gets labeled a recession, is a different question. But it’s going to generate some turmoil and challenges over the next two quarters – there’s no doubt about that.” RBC Economics on March 13 announced it now predicts a global recession and cut its growth projections for Canada’s economy in 2020 by half a per cent. Oil price futures plunged 30% last week, dragging stock markets and currencies, including the Canadian dollar, down with them. That drop came on top of a 17% decline in February, due to falling demand for oil due to the virus. The latest price plunge – the worst since the 1991 Gulf War – was the result of Russia and the Organization of Petroleum Exporting Countries (OPEC), led by Saudi Arabia, failing to agree on oil production cuts. The COVID-19 outbreak in China – the world’s second-largest oil consumer – had resulted in a dramatic drop in oil demand in that country, and a sudden glut of oil. OPEC has historically been able to moderate global oil prices by controlling output. But when Russia refused to co-operate with OPEC and agree to production cuts, Saudi Arabia’s state-owned company, Aramco, announced it

• PIPELINE NEWS NORTH MARCH 20, 2020