THE END IS IN SIGHT FOR KEYSTONE XL
After a decade in limbo, TransCanada hopes to get final approval to advance project, writes Geoffrey Morgan.
When former TransCanada Corp. executive Dennis McConaghy first put together the commercial agreements for the Keystone XL pipeline 10 years ago, he expected it to be shipping oil from Alberta to Texas by 2012.
But a decade later, the project remains in limbo, its shippers a little less committed and its strategic importance a bit more diminished, despite high-profile backing from U.S. President Donald Trump. And yet another round of legal proceedings to contend with.
Starting Monday, TransCanada will take what it hopes will be the final step in the protracted U.S. regulatory process in Lincoln, Neb.
A five-person Nebraska Public Service Commission will hear arguments through to Friday to determine whether the project — which has been hotly contested by environmental groups — is in the public interest. The commission has a deadline of Nov. 23 to make a determination.
Nebraska, which previously allowed the U.S. federal government to oversee pipeline approvals within the state border, has now tasked its own Public Service Commission with approvals for new lines within the state, and the last step in that process will play out for Keystone XL.
McConaghy, the company’s former executive vice-president of corporate development but now retired, said he’s relieved to see the 830,000-barrels-per-day pipeline is near the finishing line.
“As a Canadian, I’m elated if it’s actually installed,” he said. “From my perspective, if this thing is actually put in place it will create more economic value for the country.”
But opposition to the project remains strident. Bold Nebraska, an affiliate of green group 350.org that opposes the pipeline, recently began encouraging farmers along the route to install solar panels on their property in an initiative called Solar XL to replace hydrocarbons with renewable energy programs.
“I am vehemently opposed to the Keystone XL pipeline mainly because of the properties of the contents of the tarsands oil it will carry,” Jim Carlson, a Nebraska landowner who installed solar panels along the route, said in a release from Bold Nebraska.
While many of these changes have created additional problems for the pipeline, McConaghy said the need hasn’t changed. “Keystone XL goes to the most lucrative market for Canadian (oilsands crude). It gets there in the most economic fashion,” he said.
Indeed, a U.S. judge this week notified some 25 landowners along the pipeline’s proposed route that she would exclude some of their pre-written testimony, including arguments that there is a limited market need for it, Reuters reported Friday. Lawyers for TransCanada had objected to the argument, telling the commission it is beyond the scope of its consideration, according to records seen by Reuters.
Most financial analysts agree there is a market for the pipeline. “I think the case can still be made that it’s necessary,” Edward Jones senior analyst Andy Smith.
Multiple refineries in the Gulf region have recalibrated their facilities to process the heavy crude TransCanada would deliver and would welcome a direct connection to the oilsands, said Dinara Millington, vice-president of research at the Canadian Energy Research Institute.
Recent U.S. economic sanctions against Venezuela may further boost the need for the pipeline as Canadian heavy oil barrels compete directly against Latin American blends for space at Gulf Coast refineries.
“Any move by the Trump administration to block imports from Venezuela could lead to a renewed search for heavy crude supply in the Gulf,” a report from Fitch ratings agency noted, adding a ban would help Canadian heavy oil producers.
Despite the rare convergence of favourable winds for the project, TransCanada still needs its shippers — which previously included both upstream oil producers in Canada and downstream refiners on the U.S. Gulf Coast — to recommit to the line.
“One of the things that I’m sure TransCanada has been contending with is the gamesmanship of some of its logical shippers and that others would take the longterm shipping positions, or that TransCanada is willing to build it somewhat on spec(ulation),” McConaghy said.
Large and small oil producers have so far refused to say how many barrels of their crude they will commit to the line, but say the project will be a boon for the entire oilpatch.
Crescent Point Energy Corp. president and CEO Scott Saxberg said KXL will lift companies’ share prices and domestic oil benchmark prices.
“Six years ago, when the first push against Keystone happened, we were sitting with an investor in London and their view was, ‘If Keystone gets cancelled, your netbacks will be lower and you’ll get a lower price and we’re not going to invest in Canada,’” Saxberg said in an interview. “In that period of time, you saw a large exodus of shareholder base out of Canada.”
Crescent Point, which produces light oil, was not committing to Keystone XL “at this stage,” Saxberg said.
BlackPearl Resources Inc. president and CEO John Festival, said smaller companies such as his will benefit from its construction through its netbacks and its share price. “We’ve always had significant ownership and capital from outside our boundaries,” Festival said. “We see the net effect of having more pipeline space.”
Cenovus Energy Inc. continues “to be a supporter of the Keystone pipeline,” president and CEO Brian Ferguson said on an earnings call in July, but declined to indicate how much volume the company would commit because the process is competitive. The company previously committed 75,000 bpd to the line.
TransCanada has also tempered expectations, saying any decision on constructing the pipeline was dependent on receiving shipper support and approvals from Nebraska by November.
“We’ll make an assessment of the commercial support and the regulatory approvals at that time,” Paul Miller, TransCanada executive vice-president and president of liquids pipelines, said on a recent earnings call. “In the event that we do decide to proceed with the project, we still need probably six months to nine months to start doing some of the staging of the construction crews, et cetera, and that would be followed by about a two-year construction period.”
But in a sign that it needs firmer commitments, TransCanada also launched an open season last month to publicly call for bids on the line, although some shippers have reportedly renewed their commitment.
Much has changed since oil companies first committed to Keystone XL in 2007. Global oil prices have collapsed, extensions on competing pipelines have come into service and the production forecast for the oilsands has been adjusted downward while U.S. shale oil production has surged.
Amid delays imposed by thenpresident Barack Obama’s administration, TransCanada was able to build the southern leg of the Keystone XL pipeline in 2012, which did not require a presidential approval from the White House.
Since then other oil conduits have emerged to ensure Canada remains the biggest oil exporter to the U.S. by a distance. Rival Enbridge Inc. has begun shipping oil southbound on its 400,000 bpd Seaway Twin and 585,000 Flanagan South pipelines to the Gulf Coast, and it expects a U.S. presidential permit on expanding its 580,000-bpd Alberta-to-Wisconsin Line 67 to 800,000-bpd by the end of the year.
Indeed, so much time has elapsed that the pipeline “is not nearly the strategic imperative it was four years ago,” says Ken Hughes, who was Alberta’s energy minister for part of the Keystone XL regulatory process.
The pipeline has become “an iconic political football for both sides of U.S. Congress,” and that resulted in an “underperforming ” Washington, preventing the project from getting built, Hughes said.
One of the lessons learned from the Keystone XL saga is that companies should try to avoid, to the extent that they can, allowing their projects to get dragged into political debates.
“Keystone XL just happened to be a cudgel that each side could use to beat up the other,” Hughes said, though he acknowledged, “It’s really difficult to stay out of the political frenzy.”
As a Canadian, I’m elated if it’s actually installed. From my perspective, if this thing is actually put in place it will create more economic value for the country.