Canadian energy sector looks south for expansion

There are always multiple reasons behind any merger or acquisition, but analysts suggest they are not surprised that pipeline and utility companies are looking south for deals.

Build in Canada, or buy in the United States?

Workers unload pipes in May 2015 for the proposed Dakota Access oil pipeline that would stretch from the Bakken oilfields in North Dakota to Illinois. (Nati Harnik/Associated Press)

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

Last week, the largest ever merger in the Canadian energy sector was announced, when Enbridge said it would spend $37 billion to buy Houston's Spectra Energy, a company focused on natural gas pipelines, but with oil infrastructure as well. 

Econ prof Michal Moore explains what the Enbridge-Spectra deal says about the state of the energy industry

6 years ago
Duration 2:50
Calgary-based Enbridge announced plans to purchase Houston-based Spectra Energy Corporation.and create a North American energy infrastructure giant headquartered in Calgary.

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.

After that is received, the company behind the project, Malaysia's Petronas, will make the decision whether to spend the $36 billion needed to fund the project. TransCanada's piece of the project includes two pipelines that would feed natural gas to the terminal, but there is speculation that Petronas may delay the final investment decision until energy prices recover.
Protesters demonstrate against the Dakota Access oil pipeline near the Standing Rock Sioux reservation in Cannon Ball, N.D., on Sept. 9. (Andrew Cullen/Reuters)

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."


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