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ENERGY FEATURE: Beyond Keystone by CIBC's Avery Shenfeld

"Beyond Keystone", by CIBC's Avery Shenfeld

"Judging by the ramp-up in Canada's messaging to Washington, which has included everyone from energy sector participants, politicians and hockey coaches, we're in the final crunch on a White House decision over the Keystone pipeline

project. There will be a sigh of relief if President Obama is able to put aside mere symbolism and approve a project that will have no material bearing on global climate, particularly relative to what America could do if it took its own coal appetite seriously.

"But recent developments in the global oil industry, from Venezuela to Iraq, from North Dakota to Mexico, from California to China, suggest that Keystone is just one of several important pieces of the puzzle for Canada's energy sector. Three key trends - rising shale oil prospects stateside, the shift in

consumption growth to Asia, and a growing list of oil producing countries open to foreign participation - all pose challenges if Canada is to maximize the value of its resource base.

"Keystone will improve access stateside, and put a cap on adverse price differentials for Western Canadian producers. But growth in US shale output, coupled with a much softer trajectory for medium term demand growth stateside, put America's net import requirements on a collision course with Canadian plans to ramp up its output by a further two million bbl/day over the balance of this decade.

"Long term projections for the US to be fully self-sufficient have to be taken with a grain of salt, but it's now less clear that Americans need every drop Canada could export. The world will still need Canada's crude, given still ample demand growth ahead for Asia, and we doubt supply-demand conditions will permanently sustain prices below Canadian project break-evens. But it's increasingly important that Canada move on one or more of the alternative pipelines to get our product headed Asia's way. Canada's own central and eastern markets are another option, but longer term demand growth there is also likely to be lacklustre.

"Clarity on the pipeline front will also be critical to attracting the capital, both domestic and foreign, needed to finance the growth in Canadian production. Only a half decade ago, due to restrictions elsewhere, Canada represented more than half of the reserves accessible to foreign capital. Today, there are many more competitors for those same investor dollars. Not only in the US shale plays, but much further afield. Iraq is rebuilding, Mexico is looking more open to inflows of foreign capital and expertise, and the winds of political change could at some point see the same swing in Venezuela.

"The policy implication for Canada is that while Ottawa has imposed some new

restraints on oil sands activity by foreign state-owned enterprise, other measures on the policy dial may have to move the other way. With more competition for investor dollars, deficit-fighting federal and provincial governments may have less room to manoeuvre in setting taxes and royalties than was earlier the case. Both pipelines and reasonable royalties will be critical to avoid killing the black-gold goose."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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