The attention that TransCanada's (TRP) controversial Keystone XL pipeline has received has certainly surprised me. Why has it surprised me?
- The United States is the biggest oil importer in the world and it desperately needs secure sources of the commodity. Us fine folks to the north are about as secure as it comes and I would have thought Canadian oil to be a far superior alternative to other options.
- Oil pipelines other than the Keystone XL are being laid every day in North America and no one ever says a thing about it. To me, the Keystone XL is just another pipeline.
- Pipelines are by far the safest way to transport oil from an environmental perspective, trucks and trains spill and leak too and they also crash.
- The oil sands are going to be developed no matter what, and stopping the Keystone XL won't change that, it will just mean that the oil will go to Asia which is likely better for Canada anyway (diversification of customers).
While media focus has been on TransCanada and the Keystone XL, there is another major pipeline company with some aggressive expansion plans. Enbridge (ENB) has stepped up and made some big plans to get currently discounted Canadian oil production to markets that will pay a better price for it.
Over the next three years Enbridge is investing $15 billion in three initiatives that will transport an additional 1 million barrels of oil to markets. That 1 million barrels excludes all of the regional work Enbridge is doing in the oil sands and elsewhere.
The first initiative is the Gulf Coast Access which involves spending $6.4 billion to expand the Enbridge Mainline to Chicago, and then construct the Flanagan South line to Cushing. Flanagan South will move 600,000 barrels per day and be open in 2014.
The second initiative is the $6.2 billion Light Oil Market Access project which involves the 375,000 barrel per day Sandpiper line bringing oil from the North Dakota Bakken as well as Canada to Chicago where it can then flow either South or East.
The third initiative is the $2.7 billion Eastern Access project which will move 300,000 barrels per day through a reversed Line 9 to refineries in Eastern Canada which will replace oil that is currently being imported to Canada from the Middle East and Africa.
These have to be glory days for Enbridge. Enbridge is faced with a virtually unlimited number of projects that need pipeline solutions and with interest rates at record low levels this is a company with a recipe for profitable growth.
Enbridge is one of very few companies that have the financial capability to invest the billions of dollars needed to build out the pipeline infrastructure. That advantage of scale that Enbridge has is going to result in steady long term growth in cash flow and dividends for shareholders.
The chart below shows the growth in Enbridge's dividend over the past twelve years. If you bought shares in 2000 your annual dividend payment has tripled.
With the projects Enbridge already has in the pipeline (pun intended) and unconventional oil and gas production booming that dividend seems likely to grow for the next decade as well.
That kind of dividend growth as well as the capital appreciation that will likely come with it seem like a nice alternative for retirees to government bonds offering no return. The chart below shows how Enbridge's stock price has followed its dividend higher. If that dividend growth continues into the future I expect the stock chart to continue up and to the right.
The Main Risk To An Investment In Enbridge
The one concern I have about investing in Enbridge is potential fallout from some sort of environmental damage. Pipelines are the safest game in town when it comes to transporting oil and natural gas, but they aren't foolproof.
With the high profile controversy of the Keystone XL and the BP Gulf of Mexico spill still very much on the minds of the general public, as a potential Enbridge investor I'm concerned with regulators being excessively penal with the company should there be a pipeline leak of any significance. I think both regulators and politicians would like nothing more than to get some serious media face time as they lower the boom on an evil pipeline operator should a spill occur.
This article detailing the significant new legislation that the Canadian Government intends to introduce that could see pipeline companies on the hook for billions of dollars of fines in the event of environmental damage only heightened my concerns.
To try and alleviate my worries I did a bit of research into methods utilized for detecting and preventing pipeline leaks. I was surprised to find what the common leak detection methods are today - I feel there is a lot of room for improvement.
The current, most sophisticated detection techniques for monitoring pipelines for leaks only detects leaks that amount to 1% or more of the total pipeline flow. Any leak less than 1% goes undetected.
That doesn't sound so good to me. It basically means that with best practices we only become aware of a pipeline leak when it reaches a pretty major size.
The less sophisticated but possibly more precise methods are shockingly simplistic.
One of these methods involves paying a person to walk a pipeline route carrying a device that monitors for leaks. This method has very small range of perhaps several meters with pipelines that are hundreds of km long, done by general laborers getting $12/hr.
The other method involves using trained dogs to detect a problem.
Given the miles and miles of pipeline that have to be monitored for leaks, much of it in very unfriendly terrain it doesn't take much imagination to realize these methods are lacking.
In fact, the majority of pipeline leaks that are detected are actually done so by third parties such as passers-by or farmers who have pipelines running through their lands.
That makes for horrible PR for the industry and certainly opens companies like Enbridge up to regulatory and legal complications.
Better Options May Be Available
While I have my concerns about current best practices for pipeline leak detection it looks to me like significant improvements are on the horizon. One significant improvement has been developed by a company called Synodon Inc (SYXXF.PK).
Synodon has developed a remote sensing technology that can measure very small ground level concentrations of escaped gas from an aircraft flying overhead. The technology is called "realSens" and it is mounted on a helicopter that then flies (pilot is guided by GPS) over the pipeline being monitored.
The origins of the technology actually date back to the 1990s when the Canadian Space Agency was attempting to develop a technology that could detect carbon monoxide from orbit. Synodon bought the technology from the Canadian Space Agency and have moved it forward.
As I understand it, the technology is like a big infrared camera that uses reflected light to detect very, very small color changes in the infrared spectrum. Those color changes are caused by various gases, with each different type of gas creating a different color pattern.
The image below shows the technology detecting a traditional pipeline leak. You can see that the leak is immediately apparent and its exact location evident.
This is the sort of high tech, precise technology that I would expect Enbridge to be using, and I expect likely soon will be using. If not this specific technology then something equally sophisticated.
With the billions of dollars that Enbridge is spending to build out its North American pipeline network the company needs to do more to make sure those pipelines are as safe as possible. As someone interested in investing in Enbridge I would certainly welcome that incremental spending so that I could sleep better at night having to worry less about liability from an environmental disaster.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.