Keystone XL Could still win slow pipeline race
TransCanada project has had a strange and detour-filled journey since 2008
Imagine placing several turtles on a racetrack.
The starter’s pistol sounds and one wanders off course, while the others plod ahead. But the slowest poke of all finds its way back on course and threatens to take the lead.
That’s a good way to picture TransCanada’s Keystone XL pipeline project today.
It’s impossible to definitively say which of the two largest pipeline proposals to move Canadian oil out of the country will be built first: the Trans Mountain expansion or Keystone XL.
But after facing an odyssey unlike any other, the once-dead Keystone project is back in the hunt.
“It looks at this point that Keystone will be the one,” said industry analyst Jennifer Rowland of Edward Jones.
“After all the years of pushback and delay, ironically that could be pipeline that gets done before anything else, especially before Trans Mountain.”
Today, the Trans Mountain expansion is surrounded by problems. Proponent Kinder Morgan is seeking some certainty from governments against the risk of further delay as it enters a heavy construction season.
The approved project was expected to be built by late 2020. Without a deal, Kinder Morgan could walk away from the development by the end of this month.
While adding less incremental capacity, Enbridge’s Line 3 replacement project appears to be the most progressed pipeline, although it hit a snag last week.
An administrative judge recommended Minnesota’s Public Utilities Commission only let it move ahead through the state on a different route than the one the company proposed.
In Canada’s Not So Amazing Pipeline Race, Keystone XL may represent this country’s best shot to end the transportation bottleneck with a significant increase in take-away capacity from Alberta.
“It’s pretty much got all of the decisions in place, it just needs a final go ahead from TransCanada,” analyst Martin King of GMP FirstEnergy said Tuesday.
It’s been a strange, detour-filled journey for TransCanada Corp. since the project was filed with regulators in 2008, proposing to take Western Canadian oil south to refiners in the U.S. Gulf Coast.
If built, the US$8-billion development would move 830,000 barrels of oil per day out of the Hardisty area to Steele City, Neb., where it connects with the company’s existing pipeline system.
After becoming a lightning rod for anti-oil activists, the project appeared finished when the Obama administration wouldn’t give it a presidential permit in 2015.
However, U.S. President Donald Trump endorsed Keystone XL last spring. Regulators in Nebraska approved an alternate pipeline route in November, giving the project momentum.
In January, TransCanada announced it had secured enough commercial commitment from shippers to position the project to proceed.
However, it still hasn’t made a final investment decision.
After the company’s annual meeting Friday, CEO Russ Girling said TransCanada’s firm 20-year contracts mean the project will be nearly fully utilized after factoring in capacity for spot shippers.
TransCanada is now negotiating with Nebraska landowners regarding the new approved route. It’s also keeping an eye on various appeals of permits and lawsuits in Nebraska and South Dakota brought against U.S. regulators and government agencies.
Work on preparing for construction has begun and will increase as the permitting process advances through 2018, he said.
“We look at all of those things as potentially dovetailing by year end,” Girling told shareholders.
For the industry, the prospect of sending more barrels south to the U.S. would be significant.
It would alleviate the current bottleneck in Canada and require less oil to move by rail, shrinking the price discount affecting Western Canadian producers.
The U.S. Gulf Coast is the world’s largest consuming market for heavy oil, with refiners gobbling up 2.8 millions barrels per day last year.
However, heavy oil imports to the region from Mexico and Venezuela are falling and there is demand for Canadian product.
“Although the U.S. has all this tight oil, they happen to be the world’s largest market for heavy sour crude, which is Canada’s largest-growing export segment. So it does match up and it’s a benefit to both,” said analyst Kevin Birn of IHS Markit.
Trans Mountain has other benefits that make the project strategically important for Canada.
It offers the industry market diversification, with the ability to send Western Canadian oil to the Pacific coast where it can be shipped to export markets in Asia.
Cenovus Energy CEO Alex Pourbaix, one of the country’s largest oilsands producers, said getting a route to tidewater makes Trans Mountain critical, but creating more capacity to the world’s largest heavy oil refining centre means Keystone XL is important.
Pourbaix, a former TransCanada executive, is optimistic the project will be built.
“I’ve had many discussions with Russ Girling at TransCanada and I’m confident from those discussions that TransCanada feels that the legal challenges they’re dealing with in Nebraska are manageable,” he added.
So why hasn’t the company made a decision to sanction the project yet?
Retired TransCanada executive Dennis McConaghy believe the pipeline firm is being cautious, trying to ensure it can start construction without suffering a major delay from a U.S. court ruling.
Both Trans Mountain and Keystone XL are marching to “similar but separate risks related to the courts right now,” he said.
“Quite honestly, I think right now if I was going to handicap them, I’d be a little more optimistic about Keystone XL,” said McConaghy.
Of course, building pipelines out of Canada isn’t a race. It’s more of a steeplechase — conducted in the middle of a mine field.
Two projects, Energy East and Northern Gateway, have already detonated. The remaining proposals have challenges ahead.
But Keystone XL is back in the game, even if it’s taken a decade to get to this point.