Few Political Hurdles Remain for Keystone XL: Does That Matter?

David Fessler By David Fessler, Energy and Infrastructure Strategist, The Oxford Club

Oil & Gas

For the last 10 years, controversy has plagued TransCanada Corporation’s (NYSE: TRP) Keystone XL crude oil pipeline.

Regulatory roadblocks, protestors and President Obama are just a few of the obstacles that delayed the construction of the northern leg of the project.

Then the election of Donald Trump signaled a change…

One of Trump’s first moves as president was to approve the Keystone XL. Now the only thing TransCanada needs is approval from the Nebraska legislature.

But that may be a moot point…

Change of Plans?

The biggest problem for TransCanada’s Keystone XL pipeline is no longer politics. It’s business.

While construction of the northern extension continued getting delayed, potential customers for the Keystone XL pipeline were making other plans to ship their crude.

As it turns out, Keystone XL isn’t the only game in town. There are other firms building pipelines from the Alberta oil fields to the U.S. To name a few…

  • Kinder Morgan’s Trans Mountain pipeline has plans to increase capacity from 300,000 barrels per day to 890,000 bpd. Estimated completion: 2020.
  • Enbridge’s Line 3 Replacement pipeline will boost capacity to 760,000 bpd by replacing an older, smaller line. Estimated completion: 2019.
  • TransCanada’s Energy East pipeline would extend from Alberta to Saint John, Nova Scotia. It’s currently a natural gas pipeline and will need to be converted for crude. Estimated completion: 2021.

All of the above projects are already underway. That’s not good news for TransCanada.

With all the delays, TransCanada now estimates the earliest completion of the Keystone XL to be between 2020 and 2021. And it wants 90% of its capacity of 830,000 bpd to be under contract before it proceeds.

And the money clock is ticking. Delays have kicked the price up by $1 billion.

It’s now expected to cost $8 billion. Keystone took a $2 billion write-down in 2016 related to the Keystone XL.

The Cheap Oil Effect

Back in 2008, oil jumped above $130 per barrel. Producers couldn’t pump it fast enough.

And refiners wanted multiple, steady supplies. The Keystone XL made sense.

But with oil selling for $45 per barrel, that’s no longer the case.

Plus, American shale drillers are pumping as much as they can. That’s a problem for Canadian heavy crude producers, which simply can’t match the price of the light, sweet crude pumped by U.S. shale producers.

There’s another problem with oil extracted from Canada’s tar sands. Unlike the U.S., Canada is committed to reducing carbon emissions.

The Canadian government is expected to hit the oil sands industry with tougher regulations regarding greenhouse gas emissions. That’s a big flashing red light against signing any long-term contracts for oil.

There’s also the fact that pipelines aren’t the only way of getting Canadian crude to U.S. refiners. While shipping crude by rail costs $2 to $8 per barrel more than shipping via pipeline, it doesn’t require a long-term contract.

Repercussions for Investors?

TransCanada believes demand for Keystone XL capacity will materialize. I don’t believe it will.

The long-term trend for oil demand is flattening and will eventually slow. Electric vehicles and fuel efficiency regulations will curb the demand for crude.

Even TransCanada is hedging its bets. It’s jumping into natural gas in a big way.

Its natural gas pipeline business continues to grow. The company recently expanded natural gas service to Mexico.

How would the failure of the Keystone XL pipeline affect TransCanada as a potential investment? The short answer is “Not much.”

TransCanada’s recent purchase of the Columbia Pipeline Group for $10 billion signals its commitment to move into natural gas. It plans to build natural gas pipelines to serve the growing Mexican market.

Oil is on the way out, and natural gas continues to grow, which big companies like TransCanada are aware of. Investors need to position their portfolios accordingly.

Good investing,

Dave