The Business Piece for Pipelines
February 23, 2012
Cathy MacLellan in Enbridge, Kinder Morgan, energy, oil sands, pipelines

 Two of Canada’s most powerful energy companies, Kinder Morgan (KMP-N85.50-0.20-0.23%) and Enbridge (ENB-T37.84-0.16-0.42%) are laying competing plans to pipe and ship massive volumes of crude to Asia. Their projects could, for the first time, free the Canadian energy industry from its dependence on the U.S. market while at the same time fattening profit margins.

Enbridge like any other corporation has a vision: we want to be the leading energy delivery company in North America. We deliver energy and we deliver value to shareholders.This is reflected in our growing portfolio of oils sands pipeline projects…to diversify and sustain growth in the longer term in order to maintain Enbridge’s historical growth rate.

And they continue to grow. For the last 10 years Enbridge shareholders have enjoyed increased dividends year after year. Same for Kinder Morgan. If you own this stock, you have received an increase in dividend value year after year. This is the twelfth consecutive year the Board of Directors has raised the dividend. Pretty amazing considering the economic turmoil we've been experiencing.How do they do it? A company with rising gross and operating margins often fuels its growth by increasing demand for its products. If it sells more units while keeping costs in check, its profitability increases.I guess that means more and more pipelines.

Who buys the crude in the pipelines flowing out of Alberta now? Some makes its way to a few Canadian refineries, less gets to the Port of Vancouver and is shipped to Asia but most goes to the US for refining for their use or onto the world market (via the Gulf).

There is a short term glut of oil heading toward Cushing, Oklahoma which is a hub for oil activities. The glut has occurred because the market is being flooded with Bakken shale oil, rapid expansion of the oil sands, and the shut down of some pipelines and refineries. At the same time North American demand for oil is dropping, while Asian demand is rising even faster.  Asia demand will be there for a long, long time.

How could they anticipate the 2008 meltdown,the end of the Iraq war, or refinery shutdowns?  Any good business has 5, 10, even 15 year strategic plans. Oil companies have planned badly and created the sudden need to get their product to Asia.

Well, it is the job of business to anticipate all kinds of scenarios. If they don't they soon find themselves out of business.This has played out in the solar industry, as prices for panels, cells, etc. have plummeted more than 50% in the past five years due to a number of unplanned for scenarios. Solar companies are going belly up faster than the fish in the Kalamazoo River did after the recent spill there. But that doesn't happen to oil companies. Business continues unabated, shareholder value increases, the subsidies roll on, executives receive their bonuses, lobbyist continue to lobby, and governments defend them.

Why continue to flood the market with oil sands products when there is a glut? Instead of doing the logical thing and slowing things down they cast there eyes to oil hungry Asia and come up with what any average person would consider a crazy scheme to disregard history (First Nations rights to their lands), disregard the fragile BC rainforest,the commercial fisheries, disregard a moritorium on tanker traffic, and disregard the possibility of shipping oil to Eastern Canada to deal with a short term problem. Apparently our reliance on the oil economy means that any slow down will have serious consequences.

How many pipelines is too many pipelines?

A few years ago the names TransCanada, Kinder Morgan and Enbridge would not have meant much to most North Americans. Where Middle Eastern Wars, high oil prices, economic collapse, devastating oil spills (Exxon Valdez, Gulf of Mexico) failed to stir more than water cooler conversation with your average citizen, recently proposed pipelines have ignited a fuse that will not be stomped out.

Pipelines are not at all like the "canary in a coal mine". Afterall, most of us don't have close relations with canaries and we have never set foot in a coal mine. But pipes, we are all very familiar with. If your're living under a roof, you eventually become intimately acquainted with pipes, usually pipes that have burst, leaked, frozen, or cracked and left you with a mess. So when there is talk about pipelines, we intuitively know that things go wrong.Telling us anything different just won't cut it.

Pipeline companies appear to have not taken this natural defensiveness seriously enough, because ultimately this is where the battle about bitumen will happen.

After the Keystone XL rejection?/delay, pipeline companies are battling back. They have a big task ahead of them. The fact that pipelines have been around for a very long time, means there is lots of evidence regarding the behaviour of pipeline companies. Take a look at their websites and witness the worst kind of soothing, father knows best, drivel about how much they care. Then go to YouTube and search pipelines. Actions speak louder than words and there is no industry that suffers from a more complete disconnect here than the oil industry.

Enbridge's Values

We operate with integrity, honesty and transparency in all of our dealings with stakeholders. We operate to the highest ethical standards with our customers, shareholders, employees, partners, landowners, regulators and others. We communicate openly and honestly.

 

 

 

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