by Aaron Levitt | May 31, 2012 8:00 am
While it’s no secret that the U.S. is undergoing a massive energy transformation, our neighbors to the North are enjoying their own energy renaissance. Driven by the same widespread adoption of hydraulic fracturing (fracking), horizontal drilling and advanced bitumen recovery techniques, Canada has been able to unlock a virtual ocean of trapped oil and natural gas, much in the same way the U.S. has. Canada now accounts for over 90% of all proven energy reserves outside of OPEC.
And like the U.S., part of Canada’s plan for using this bounty involves exporting excess inventory to the emerging world. But while U.S. officials spar and sit on their hands, Canada has begun moving forward to tap this opportunity. Spurred by the Obama administration’s cancellation of TransCanada’s (NYSE:TRP) Keystone XL pipeline addition last January, the Canadian government has gotten serious about diversifying its energy exports.
Prme Minister Steven Harper and his administration have effectively put out an “open for business” sign, hoping to reduce its dependency on the U.S., which currently accounts for 99% of Canada’s crude oil exports. Recent moves by officials and energy companies alike are helping that cause along.
Yet, most portfolios are severely underweighted toward Canada and its bounty. For investors, betting on our Northern neighbor’s exporting plans could lead to superior gains in the years ahead.
With a population of only around 8,000, the small, coastal town of Kitimat, B.C., is quickly becoming ground zero for Canada’s exporting goals. Already home to a Rio Tinto (NYSE:RIO) aluminum smelting facility and the Kemano hydroelectric plant, the city has been identified as Canada’s strategic gateway for energy exports to the Pacific.
Several projects are underway that will transform the sleepy city into a powerhouse, with critical new pipelines leading the way. The largest of which is Enbridge’s (NYSE:ENB) $5.5 billion Northern Gateway pipeline system. The 650-mile pipeline would move nearly 525,000 barrels of petroleum per day oil from Alberta’s rich oil sands to B.C.’s coast, where it would be exported to the Pacific Rim via a new port.
A second line would transport 193,000 barrels of condensate – which is used to thin various petroleum products for transport in pipelines — back toward Edmonton. Additionally, Pembina Pipeline (NYSE:PBA) has expressed preliminary interest in building a line that would also carry condensate back to Alberta.
The Enbridge project is currently under review by Canada’s National Energy Board and has met with some opposition. However, still feeling the sting from TransCanada’s recent denial, the Canadian government has been trying to speed up the approval. Public support for the Northern Gateway has surged in the wake of the Keystone rejection, and analysts anticipate its construction beginning sooner than later.
Also receiving the go-ahead, with federal and provincial environmental assessments issued, is Pacific Northern Gas’s proposed Pacific Trail Pipeline. This trunk line will provide Kitimat with a direct connection to Spectra Energy’s (NYSE:SE) gathering system and provide access to the rich natural gas supplies in British Columbia and Alberta. Drilling activity in both the Horn River Basin and Montney shale have surged as the widespread adoption of fracking has taken hold. Ultimately, this pipeline will allow those reserves to meet their full potential.
That potential will come from a new liquefied natural gas facility on the city’s shores. Costing about $5 billion to build, the Kitimat LNG (KLNG) facility will have an initial capacity of 5 million metric tons (mmtpa) of LNG per year with the ability to increase that to 10 mmtpa. Recently receiving its export license from the National Energy Board, the facility marks the first time Canadian natural gas producers will be able to enter markets outside the U.S.
Not to be outdone, my perennial favorite integrated energy major Royal Dutch Shell (NYSE:RDS-A, RDS-B), along with PetroChina (NYSE:PTR), Korean Gas and Mitsubishi have put forth a proposal to build a second LNG facility in Kitimat. It would load nearly 1.2 billion cubic feet per day of LNG onto ships bound for Asian markets.
Shell is hoping Canada’s streamlined regulatory environment will help spur the project forward. Also catching the LNG wave in Kitimat is Imperial Oil (NYSE:IMO), which has taken the first steps at planning a new facility.
With Prime Minister Harper and host of other officials focused on moving crude oil and natural gas to Asia, the time could be right to add some Canadian energy companies to your portfolio. Most U.S. investors are heavily underweighted in Canada despite its proximity and global standing.
I’ve already highlighted Guggenheim Canadian Energy Income (NYSE:ENY) as a great play on Canada’s unconventional resources. The ETF tracks a basket of 34 Canadian oil-sands and natural gas companies, and uses an active index that shifts exposure to natural gas or oil based on trends in commodity pricing.
The Guggenheim fund yields a healthy 3.24% and charges 0.65% in expenses.
Perhaps the best play on Canada’s LNG exporting potential is the trio of Apache (NYSE:APA), EnCana (NYSE:ECA) and EOG Resources (NYSE:EOG). The three firms are the owner/operators of the KLNG facility as well as serve as partners in the proposed Pacific Trail Pipeline system.
The trio also has the most to gain from exporting their natural gas production. A partnership between Apache and EnCana gives them joint control of approximately 430,000 acres in the Horn River Basin. Likewise, EOG Resources controls nearly 157,500 net acres across the formation. The KLNG facility gives the group a direct way to profit from higher natural gas prices in the Pacific Rim.
Additionally, the KLNG liquefaction plant is the only facility that has really been given the green light by authorities and is the closest to producing LNG. The group plans on beginning exports in 2016. Shell’s proposed plant wouldn’t begin production until 2020. That’ll give KLNG the critical first-mover advantage in the sector.
Overall, Canada has gotten serious about exporting its energy abundance. Investors who play those exports could reap big portfolio gains in the years ahead. Either the Guggenheim ETF or the trio of Apache, EnCana and EOG, are ideal ways to get in on that growth.
As of this writing, Aaron Levitt doesn’t own any securities mentioned here.
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