Obama's Keystone Denial Prompts Canada to Look to China Sales
Comment of the Day

January 19 2012

Commentary by Eoin Treacy

Obama's Keystone Denial Prompts Canada to Look to China Sales

This article by Theophilos Argitis and Jeremy Van Loon for Bloomberg may be of interest to subscribers. Here is a section:
President Barack Obama's decision yesterday to reject a permit for TransCanada Corp.'s Keystone XL oil pipeline may prompt Canada to turn to China for oil exports.

Prime Minister Stephen Harper, in a telephone call yesterday, told Obama “Canada will continue to work to diversify its energy exports,” according to details provided by Harper's office. Canadian Natural Resource Minister Joe Oliver said relying less on the U.S. would help strengthen the country's “financial security.”

The “decision by the Obama administration underlines the importance of diversifying and expanding our markets, including the growing Asian market,” Oliver told reporters in Ottawa.

Currently, 99 percent of Canada's crude exports go to the U.S., a figure that Harper wants to reduce in his bid to make Canada a “superpower” in global energy markets.

Canada accounts for more than 90 percent of all proven reserves outside the Organization of Petroleum Exporting Countries, according to data compiled in the BP Statistical Review of World Energy. Most of Canada's crude is produced from oil-sands deposits in the landlocked province of Alberta, where output is expected to double over the next eight years, according to the Canadian Association of Petroleum Producers.

Harper “expressed his profound disappointment with the news,” according to the statement, which added that Obama told Harper the rejection was not based on the project's merit and that the company is free to re-apply.

Eoin Treacy's view It is probably safe to assume that President Obama had his eye on November's election when he turned down the Keystone pipeline. After all, it is likely to be a tight race and the green lobby is a powerful demographic that helped him win last time out. The green lobby might argue that tar sands production is dirty, water intensive and emits a great deal of CO2 and they would be correct. However, they fail to identify that it is tar sands oil is also abundant, cost competitive at today's prices, shares a land border with the USA and is going to be exploited with or without the Keystone pipeline.

The decision was in essence one of whether the USA wants a slice of Canada's bounty or not. Yesterday's decision makes the prospect of a pipeline to British Columbia more likely. It is in Canada's long-term interests to diversify its customer base. They will probably now be more amenable to discussions with Asian countries such as China, India, Japan, Taiwan and Korea.

TransCanada will probably have to wait until after November before lobbying for a revised route for the Keystone project. The share has a solid record of increasing dividends and currently yields 4.01%. It fell sharply yesterday but closed well of the low and above its 200-day MA. The region of the trend mean has offered support on successive occasions since late 2009 and a sustained move below C$40 would be required to question medium-term potential for continued higher to lateral ranging.

Enbridge entered the competition to supply the proposed Kitamaat LNG project in Northern British Columbia in October. Also see this article from the Northern Sentinel. The company also has an solid record of increasing dividends and currently yields 3.1% following an impressive advance over the last few months. Last week's downward dynamic suggests a reversion towards the 200-day MA has begun.

Of the three companies building the Kitamaat LNG terminal Encana is most exposed to US natural gas prices and has declined in line with the commodity. Apache needs to sustain a move back above $100 to suggest a return to medium-term demand dominance while EOG Resources has perhaps the most encouraging chart pattern. It bounced emphatically, found support in the region of the MA and is currently pressuring the upper side of the short-term range.

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