Kinder Morgan Energy Partners (NYSE: KMP) announced that it has raised its capacity expansion plans for the Trans Mountain pipeline in Canada to 890,000 barrels per day (bpd), up from its earlier plan of 750,000 bpd citing strong demand from shippers.  The 715 mile Trans Mountain pipeline, which has a current capacity of 300,000 bpd, originates in Alberta in Canada and transports crude oil and refined petroleum products to the west coast of British Columbia and crude oil to Washington in the United States. We believe the move will help the firm capitalize on Canada’s urgent need to diversify its oil exports by increasing oil transport capacity between the country’s oil sands region and export terminals in the West Coast.
Details of The Expansion
While the expansion plans were announced in early 2012, strong demand and a slew of recent contracts have prompted the firm to scale up its proposal. The expansion project will involve twinning the existing pipeline, adding new pump stations, increasing the number of storage tanks and expanding a dock in the Vancouver harbor. The project is likely to commence construction in 2015 or 2016 and begin operations in 2017. The project will now cost C$5.4 billion (around US$5.5 billion), up from around C$4.1 billion that was estimated earlier. The firm has signed long-term contracts with 13 oil companies for around 700,000 bpd of committed shipments while the remaining capacity will be reserved for customers who want short-term or spot access.
Move Prompted By Strong Prospects For Exports From Canada’s West Coast
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Canada is the world’s 6th largest oil producer and a net exporter of oil. Presently, most of Canada’s oil exports go to the U.S. market which is becoming increasingly oversupplied and the future prospects are also looking weaker as the U.S. ramps-up domestic production. This is forcing Canada to look at other export markets like Asia to drive growth.
However, a significant part of Canada’s oil production growth comes from unconventional resources like oil sands, which are located in landlocked regions like Alberta that do not have sufficient pipeline connectivity to ports on the west coast. This lack of infrastructure to move crude oil to ports and weaker prospects in the U.S. markets have been taken a toll on Canadian oil producers, who are selling their crude at significant discounts. The price difference between West Texas Intermediate (WTI) and Canadian crude has widened this month to a 52-week high of around US$33 a barrel.  This has resulted in an urgent need to boost westbound pipeline infrastructure and midstream firms have been working towards cashing in on this route.
How The Expansion Impacts Kinder Morgan
Higher Volumes And Revenues: Trans Mountain is presently the only pipeline that connects Canada’s oil-sands region to its west coast.  The pipeline has attracted strong demand of late and, last month, the crude shipments through the pipeline were oversubscribed by as much as 70%. Given the strong demand for shipment capacity to the west coast, the firm could also have strong bargaining power with oil companies. The additional capacity is likely to help the firm increase volumes and revenues from its Canadian operations.
Long-Term Contracts: Since expanding and maintaining pipeline capacity involves high fixed costs, maintaining strong utilization is critical to boosting profitability. Given that most of the Trans Mountain pipeline’s additional planned capacity has already been contracted under long-term agreements, it could help the firm boost utilization and improve EBITDA margins for its Canadian operations.
Leveraging The Existing Right Of Way: Since the proposed capacity expansion will use the firm’s existing right of way wherever possible, Kinder Morgan will be able to expand its capacity by adding parallel pipes without having to go through new routes. This could give Kinder Morgan an edge over competition in executing its plans comparatively quickly. Competitors like Enbridge that have been planning to build westbound pipelines from Alberta using greenfield routes have been facing strong opposition from natives and environmental groups in the regions, causing repeated project delays.
We have a $86 price estimate for Kinder Morgan, which is in-line with the current market price.Notes: