TC Energy will get paid even if KXL cancelled
Calgary pipeline operator more cautious as project faces increased risk: analysts
CALGARY Oil companies that have committed to ship their crude on the Us$14.4-billion Keystone XL pipeline will be on the hook for millions in contingency payments to TC Energy Corp. if the pipeline is cancelled, the Financial Post has learned.
A number of Canadian oil producers agreed to the payments when they signed contracts to ship oil on the Calgary-based giant’s 830,000-barrel-per-day pipeline between Alberta and the U.S. Gulf Coast. Those payments would be triggered if the mega-project, also known as KXL, is cancelled on or before March 31, 2021.
“There are many stakeholders who stand to benefit economically from an operational Keystone XL,” TC Energy spokesperson Terry Cunha said in an email. “As a result, it was reasonable for us (TC Energy) to align with those stakeholders to share in the risk and reward of the project.”
Cunha did not explain why the contingency payments were required for the current Keystone XL project but not when the project was first proposed, and eventually rejected, under former U.S. president Barack Obama.
The risk of a Keystone XL cancellation has increased significantly in recent months as polls have indicated former U.S. vice-president Joe Biden holding a lead over U.S. President Donald Trump ahead of November’s U.S. presidential election. Biden has promised to kill the pipeline project.
Analysts say that TC Energy had to foot the full cost of Keystone XL’S rejection in November 2016 and is taking a more cautious approach to managing risk since the project has been revived under Trump. As pipelines have become more difficult to build given frequent court and regulatory challenges, these types of contingency payments are becoming more common, generally, the analysts said.
Athabasca Oil Corp. provided TC Energy with US$48 million in financial assurances in the third quarter of 2019 when it committed to ship 7,200 bpd on the existing Keystone pipeline system, chief financial officer Matt Taylor said in an email.
“In the event the Keystone XL pipeline is cancelled before March 31, 2021 TC Energy would keep this conditional payment. When the project is officially sanctioned TC Energy is required to return the financial assurances back to Athabasca,” Taylor said.
Athabasca disclosed the conditional payment in its first quarter financial results this spring and indicated it was “evaluating various options under the agreements in order to manage risk and capture value for the company.”
“Until those options are fully assessed, the conditional payment assurance is still in place,” the company’s financial statements note.
Larger Canadian oil companies have not disclosed the size of their contingency payments to date. Suncor Energy Inc., Canadian Natural Resources Ltd., Cenovus Energy Inc. and Imperial Oil Ltd. all declined to comment on the size of the contingency payments that TC Energy would keep if the project was cancelled. Each company said the contracts were confidential and commercially sensitive.
It seems, however, that some shippers were able to avoid committing to contingency payments to TC Energy. “We would be a small shipper on the line and are not committed for contingency payments,” Husky Energy Inc. spokesperson Kim Guttormson said in an email.
Dennis Mcconaghy, who was an executive at TC Energy when it was still called Transcanada Corp. and helped oversee the KXL project the first time around, said he expects disclosures around the contingency payments will be “even more tightly held” as the risks to the project have increased.
“In the first go-round, Transcanada spent it all and ate it all, ergo the $4.5 billion write off,” Mcconaghy said of the financial penalty the company recorded when the first iteration of the project was killed. He said pipeline agreements normally contain agreements about how risk is shared between parties but as the projects have encountered more opposition, those agreements are becoming more common.
“Transcanada has been more cautious,” he said, adding that they also de-risked the project when the Alberta government took on the majority of the funding for the pipeline for this year.
The Alberta Petroleum Marketing Agency, which is part of the provincial government, had at one point committed to ship the province’s royalty-in-kind barrels on the Keystone XL pipeline, but sold its capacity on Oct. 30, 2018. “Therefore, the commission no longer has this commitment,” the APMC wrote in its annual report.
The province declined to discuss the contingency payments signed at the time as the contracts were sold.
It still faces significant risk if Keystone XL is cancelled, having committed US$1.1 billion this year to ensure construction started on April 1, an amount that will cover the majority of the project’s capital spending in 2020. Alberta is also slated to provide a $6-billion loan guarantee for the project in 2021.
When the U.S. Supreme Court declined to block a lower court ruling preventing work on the Keystone XL pipeline across U.S. waterways this week, Alberta Premier Jason Kenney said the province would support TC Energy’s ongoing court fight.
“The case itself will continue to proceed to the Ninth Circuit Court of Appeal and Alberta has retained U.S. counsel to help represent our interests,” Kenney said, adding that the project had been through “exhaustive regulatory review.”
Kenney has said the Alberta government wants to “create facts on the ground,” meaning unionized workers in the field building the pipeline, so the next U.S. presidential administration needs to consider the employment of those workers in their decision to cancel the project.
“It still comes down to the U.S. election,” said James Coleman, associate professor of law at Southern Methodist University Dedman School of Law in Dallas, noting that Biden is leading in the polls and has made aggressive promises on energy and climate so far.
“To me, the suggestion that an incoming Biden administration is not going to kill this project is extremely unlikely,” Coleman said.
“As far as the Biden promises go, this promise to stop the pipeline endangers far fewer American jobs than the other things they’re trying to do.”
As the risk to the project increases, Coleman said he’s interested to see contingency payment disclosures. He said these types of payments have become more common and have been used in cross-border natural gas pipeline projects between the U.S. and Mexico. Some of those pipelines were built by TC Energy.
“Risk is increasing for all energy transport infrastructure — power lines, pipelines, natural gas projects etc. — people are trying to find ways to reduce the risk inherent in those projects,” Coleman said. Financial Post