The ongoing pipeline situation in Canada is uncertain and complex, and is weighing on the energy sector.

So says Brian See, vice-president of equities at CIBC Asset Management, noting during a late April interview the ongoing dispute between Alberta and B.C. over Kinder Morgan’s Trans Mountain pipeline expansion, and the federal government’s involvement.

On May 8, Natural Resources Minister Jim Carr told a conference in Ottawa he was confident that an agreement with Kinder Morgan would be reached by the May 31 deadline—even while the risk of “endless court action” is scaring Kinder Morgan investors.

Last month, Kinder Morgan suspended all “non-essential activities” related to the project and set the May 31 deadline to decide whether it would proceed.

The expansion has been in the works since 2016, when the federal government signed off, but opposition from B.C. residents and indigenous communities over the potential environmental impact of the project, and a legal challenge from B.C.’s NDP government, are major hurdles.

As Canadian oil production grows and as disputes in the space continue, See and his team are analyzing the lack of pipeline capacity, without which “producers can’t get their crude out of the country.” This can result in lower Western Canadian Select (WCS) heavy oil prices.

Without pipelines, alternative means of shipping oil, such as crude by rail, become more important, says See, who manages the CIBC Energy Fund.

“The differential between WSC and WTI, West Texas Intermediate, is wide, and that incentivizes shipment of oil by rail—today and until additional pipeline capacity comes on. We’ve already seen real volumes of over 100,000 barrels a day in Canada, and we forecast this number to increase further as we get into 2018, as other oilsands projects come online.”

As of May 8, the price of WCS was around US$51 and lagging the rest of the oil market. Both WTI and Brent crude were above US$70, for example.

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See forecasts that crude by rail will be a driving factor going forward. That won’t change until Kinder Morgan disputes are resolved and projects such as Enbridge’s Line 3 Replacement Program comes on, he adds. (Line 3 is a 1,097-mile crude oil pipeline built in the 1960s from Edmonton to Wisconsin.)

TransCanada’s Keystone XL is another one to watch, says See, who adds “it won’t be coming on until, probably, the end of the decade or well into the next decade. So in the meantime, producers have to figure out a way to ship their product, and that’s where crude by rail enters.”

Portfolio positioning

For now, See is focusing on companies with “actual market access (i.e. access on pipelines), or [those] with refineries to mitigate and hedge against lower oil prices. Integrated producers can do this and we hold a variety of those.” The rail companies themselves are also beneficiaries of current trends.

When analyzing these companies and the overall crude-by-rail situation, See and his team use data from industry sources and independent third parties to assess how much oil is moving and how that’s occurring.

They also “conduct […] management meetings with producers, refiners and marketers, and with the rail companies themselves,” says See. This helps uncover “what their future plans and intentions are.”

On top of that, independent and scenario analysis by his team is key, he adds. This helps “determine the viability” of oil production and movement data. “From all of that, […] we make educated decisions and forecasts for our portfolios.”

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This article is part of the AdvisorToGo program, powered by CIBC. It was written without input from the sponsor.