Canadian energy sector looks south for expansion
Build in Canada, or buy in the United States?
When the Canadian dollar started to dive in earnest in 2015, the theory went that the low loonie would make Canada very attractive for American companies looking to buy assets or make deals. After all, Canadian companies were essentially on sale — 30 per cent off!
Instead, in the past six months, Canada's two largest pipeline companies, TransCanada and Enbridge, have spent nearly $50 billion making acquisitions south of the border, paying a 30 per cent premium over a few years ago. This follows on two deals in which Canadian power companies Fortis and Emera spent roughly $10 billion each buying U.S. utilities.
'Where would Enbridge's mind be right now if they were doing the Gateway project?'– Rafi Tahmazian, Canoe Financial
And while there are multiple reasons behind any large merger or acquisition deal, analysts are suggesting that if it's too hard for a pipeline company or other utility to build something in Canada, maybe the best idea is to buy it elsewhere.
"It seems strange to be doing it at a time when the Canadian dollar is so low," said Barry Schwartz, chief investment officer at Baskin Wealth Management, but I think they see more potential in the U.S. I think they see difficulties with regulatory issues in Canada, getting new utilities or pipelines built."
Enbridge Spectra deal largest in Canadian energy sector
The deal diversifies Enbridge's portfolio of pipelines to natural gas just as North America accelerates its shift away from coal-fired electricity to less carbon-intensive power generation using natural gas. It also gives Enbridge a way to grow without building new pipelines, since its Northern Gateway project has been stalled for years.
"Where would Enbridge's mind be right now if they were doing the Gateway project?" asks Rafi Tahmazian, a portfolio manager with Canoe Financial in Calgary. "We're starving our transportation and utility companies out of Canada."
The same might be said for TransCanada, which closed its purchase of Houston-based Columbia Pipelines in July. That was an $11-billion deal that gave TransCanada a major natural gas distribution network in the U.S. TransCanada is still waiting on approval to build a natural gas pipeline in B.C. that will feed gas to a liquefied natural gas plant.
LNG stalled in Canada
Here in Canada, LNG terminals that would allow natural gas to be exported offshore are still years away. The project most likely to be built, Pacific Northwest LNG, is waiting for regulatory approval, which is expected in October.
Meanwhile in the U.S., LNG exports began in February 2016 from the Sabine Pass facility in the Gulf Coast. Another project, the Cameron LNG plant, is already under construction and set to start shipments in 2018. With its purchase of Columbia, TransCanada is already building a direct pipeline into that facility.
The U.S. market has its own regulatory challenges for industry, of course. TransCanada knows that well and is currently suing the U.S. government over its treatment of the Keystone XL pipeline project. Last week the U.S. government moved to block the construction of an oil pipeline on tribal lands in North Dakota.
"Well, there's not much question that the advent of public awareness and activism on the part of the general public or specialized groups has slowed down progress on new pipelines or energy development," said Michal Moore, a senior fellow with the University of Calgary's School of Public Policy.
Moore describes the current climate as a testing of the regulation and policy around energy. He expects new rules will be developed that should free development.
"The new process will be more predictable and will open back up the opportunity to develop new resources."