Key­stone XL-er­ated

Be­fore the Dakota Ac­cess pipe­line protests, Key­stone XL was the most hated pipe­line in North Amer­ica. Now it’s back and it’s find­ing fa­vor with de­ci­sion mak­ers ev­ery­where

Alberta Oil - - CONTENTS - By todd coyne

Be­fore the Dakota Ac­cess pipe­line protests, Key­stone XL was the most hated pipe­line project in North Amer­ica. Now it’s back and sud­denly it’s find­ing fa­vor with de­ci­sion mak­ers ev­ery­where.

It’s three feet across and 1,900 kilo­me­ters long, but its sym­bolic di­men­sions are im­mea­sur­ably larger still. That’s an im­pres­sive feat when you con­sider that the Key­stone XL pipe­line does not, and may never, ex­ist. But af­ter nearly a decade of le­gal churn south of the bor­der, and one flat-out re­jec­tion by the Obama ad­min­is­tra­tion, the ex­panded Al­berta-to-Ne­braska pipe­line is sud­denly back on the agenda—and pos­si­bly closer to be­ing built than ever be­fore. A lot has changed to put the Key­stone XL back into play, but a lot has changed to ac­com­mo­date a world with­out it too.

In Jan­uary 2014, when the U.S. State De­part­ment gave its pro­vi­sional nod to the Obama White House to ap­prove the Tran­sCanada pipe­line, Cana­dian oil pro­duc­ers needed the project like never be­fore. Although world oil prices were still flirt­ing with the US$100-per-bar­rel mark, Western Cana­dian crude was tak­ing a deep dis­count to WTI. The av­er­age spread for Jan­uary 2014 was about US$30; the pre­vi­ous month it had neared US$40. Now three years later, the dis­count has eased to less than US$15, largely due to the cat­a­strophic drop in world oil prices and the ad­di­tion of new oil sands take­away ca­pac­ity in the U.S. Mid­west. Still, the nar­rower mar­gin high­lights the grow­ing im­por­tance of trans­porta­tion costs, which nat­u­rally make up a larger slice of what pro­duc­ers pay when oil prices shrink.

To­day, Key­stone XL is find­ing fa­vor across the board in both coun­tries. Tran­sCanada has reaf­firmed its com­mit­ment to the pipe­line in 2017. Cana­dian nat­u­ral re­sources min­is­ter Jim Carr says the Lib­eral gov­ern­ment has al­ways sup­ported the Key­stone ex­pan­sion. So too does the Con­ser­va­tive op­po­si­tion, mak­ing Key­stone a rare ex­am­ple of a na­tional project with some cross-party push be­hind it. More im­por­tantly, U.S. Pres­i­dent Don­ald Trump has said that ap­prov­ing Key­stone XL could be done within the first 100 days of his ad­min­is­tra­tion.

Many of Pres­i­dent Trump’s ear­li­est cabi­net picks sig­naled a re­newed fond­ness for oil and gas de­vel­op­ment in Washington af­ter eight years of Obama. Those picks, of course, in­clude Rex Tiller­son, ExxonMo­bil’s chair­man and chief ex­ec­u­tive, to lead the State De­part­ment, the agency that ul­ti­mately re­views cross-bor­der pipe­line pro­pos­als like the Key­stone ex­pan­sion. “Key­stone XL would do more than de­liver oil from Al­berta and North Dakota’s Bakken shale to re­fin­ers on the Gulf Coast,” Tiller­son told Hous­ton’s an­nual CERAWeek con­fer­ence in 2015. “It would im­prove U.S. com­pet­i­tive­ness, in­crease North Amer­i­can en­ergy se­cu­rity and strengthen the rela- tion­ship with one of our most im­por­tant al­lies and trad­ing part­ners.” Even Scott Pruitt, Trump’s pick to lead the U.S. En­vi­ron­men­tal Pro­tec­tion Agency (EPA), is an avowed ally of the en­ergy busi­ness, es­pe­cially the oil and gas frack­ing in­dus­try in his home state of Ok­la­homa.

But all that home-team fa­vor­a­bil­ity for a project like Key­stone could ul­ti­mately back­fire. “The peo­ple he’s nom­i­nated for of­fice, with a cou­ple of ex­cep­tions, don’t know what they’re talk­ing about,” says Michal Moore, a se­nior fel­low at the Univer­sity of Cal­gary’s School of Pub­lic Pol­icy and a vis­it­ing pro­fes­sor of eco­nom­ics and engi­neer­ing at Cor­nell Univer­sity in New York. “They don’t have a clue how the gov­ern­ment wheels turn, be­cause gov­ern­ment is sim­ply not busi­ness—it doesn’t work that way, and for good rea­son.” Moore says the Trump team could find it­self mired in le­gal quick­sand for months be­fore it can gain enough foot­ing to get some­thing like a Key­stone ac­com­plished. “The idea of re­open­ing a Key­stone ap­peal or per­mit is go­ing to be way down their list be­cause they’ll be up to their asses in al­li­ga­tors so fast,” Moore says. “Key­stone won’t rise up to where any­body could get an au­di­ence on it un­til Novem­ber or De­cem­ber of 2017, when ev­ery­thing shuts down again.”

Still, while the case for Key­stone may be de­layed, it’s not go­ing away. The U.S. Gulf Coast re­fin­ery re­gion—where Key­stone XL would ul­ti­mately feed its Cana­dian crude into—cur­rently has am­ple ex­cess ca­pac­ity to ab­sorb more heavy oil bar­rels. And if Pres­i­dent Trump is se­ri­ous about re­duc­ing the U.S.’s trade deficit with Mex­ico, one place to start might be with poli­cies that shift Amer­ica’s heavy-oil re­fin­ing fo­cus in­creas­ingly to the north. “It would be no trick to dis­place [Mex­i­can] Maya or Venezue­lan oil at that price point, or even some Nige­rian oil,” Moore says. “Any­thing up to say a mil­lion more bar­rels a day, you’ve prob­a­bly got a pretty ready mar­ket for it.”

But Mex­i­can crude may not be so easy to shoul­der aside, ac­cord­ing to Tim Pick­er­ing, founder and chief in­vest­ment

“They don’t have a clue how the gov­ern­ment wheels turn, be­cause gov­ern­ment is sim­ply not busi­ness—it doesn’t work that way, and for good rea­son.” -Michal Moore

of­fi­cer at Cal­gary-based Aus­pice Cap­i­tal Ad­vi­sors. “Mex­i­can crude has re­ally come back into light here be­cause the ba­sis has nar­rowed,” Pick­er­ing says. “They’re go­ing to send crude wher­ever they get the best value for it, and you’ve got to give [Mex­ico] credit—they’ve been very dis­ci­plined, they’ve had a hedg­ing pro­gram that’s been suc­cess­ful the last few years and they seem to have a good plan of at­tack.” But, much like the highly un­pre­dictable Trump ad­min­is­tra­tion, Pick­er­ing says Mex­ico re­mains “an­other econ­omy and regime that’s go­ing to be hard to pre­dict.”

In the wake of Trump’s elec­tion last year, Tran­sCanada was quick to pump the brakes on its liti­gious stand against the U.S. over the can­cel­la­tion of Key­stone XL in 2015, and re­assert Canada as a safe haven to meet Amer­ica’s en­ergy needs. That was surely no snap de­ci­sion by the com­pany, hav­ing al­ready sunk more than $2 bil­lion into the pipe­line and hav­ing al­ready filed a NAFTA law­suit to re­coup $15 bil­lion in al­leged dam­ages over its can­cel­la­tion. But the com­pany wouldn’t be en­ter­tain­ing an­other at­tempt on Key­stone with­out sound le­gal as­sur­ances and the with­out the com­mer­cial sup­port of its ship­pers, many of which had to swal­low hard to get over their losses and come back to the ta­ble.

It may be that, for the time be­ing at least, there’s sim­ply no other ta­ble to come back to in 2017. “The [Cana­dianto-U.S. crude price] ba­sis wants to widen out be­cause we’ve got legacy oil projects com­ing out; we’ve got oil com­ing on here in 2017, and again we’re full,” Pick­er­ing says. “So, for Key­stone, I’m still quite pos­i­tive. The value is there, it makes sense eco­nom­i­cally.”

While the eco­nom­ics might make sense, there’s still plenty else that re­mains ut­terly un­pre­dictable. The en­vi­ron­men­tal back­lash against Key­stone XL, par­tic­u­larly among farm­ers and ranch­ers in parts of Ne­braska, likely hasn’t gone away. And the Univer­sity of Cal­gary’s Moore pre­dicts that the new strat­egy among the most en­vi­ron­men­tally minded Democrats in Washington will be to “sue any­thing that moves.” Then there’s the ques­tion of whether the new pipe­line ap­provals for Trans Moun­tain and Line 3 in Canada will al­le­vi­ate enough of the Cana­dian oil bot­tle­neck and nar­row enough of the price dif­fer­en­tial to make Key­stone re­dun­dant—or else em­bolden a still-buzzing anti-pipe­line move­ment.

And, fi­nally, there’s the ques­tion of the Trump ad­min­is­tra­tion it­self and whether its word and com­pe­tency on an is­sue as del­i­cate as new en­ergy in­fra­struc­ture can be trusted. “You’re weigh­ing a po­lit­i­cal path against an eco­nomic path, and if I was to say which was more at­trac­tive to­day, I’d prob­a­bly rather go through the Cana­dian po­lit­i­cal process than the Amer­i­can one,” Moore says. “Right now, if I was in class and talk­ing about risk ver­sus cer­tainty, I would say that Don­ald Trump is one of the most un­cer­tain com­modi­ties that we’ve ever en­coun­tered.”

Rex Tiller­son is a staunch pro­po­nent of the KXL pipe­line

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