Energy Ink

FirstEnergy gets bearish about Keystone XL’s prospects

January 04, 2012

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Count FirstEnergy Capital as unimpressed with the Republican Party’s successful bid in getting a payroll tax cut bill passed – and including a rider in it that forces U.S. President Barack Obama to make a decision on TransCanada’s Keystone XL pipeline within 60 days.

In a research note to clients today, the Calgary-based investment house had some depressing commentary regarding the controversial pipeline, which would ship growing production from Alberta’s bitumen belt and North Dakota’s Bakken to U.S. Gulf Coast refineries. In the note, FirstEnergy analyst Steven Paget wrote that the Republican gambit to force Obama’s hand and make the 2012 presidential election a referendum on Keystone XL, “is nothing but negative for TransCanada as it makes the pipeline even more of a political issue, and it also means that the pipeline is still unlikely to receive approval until after the November 2012 election.”

If Obama does deny the permit, (and the U.S. State Department has already said it needs until the first quarter of 2013 to complete the review), it won’t just be oil sands producers who will be disappointed. Paget notes that if the State Department denies the Keystone XL permit and TransCanada can’t sell or use the pipeline inventory it has stockpiled to build it, its share price will fall by $7.70 – a substantial amount.

It seems this pipeline business won’t end well for TransCanada or oil sands producers. FirstEnergy’s worst-case scenario is Obama denies the Keystone XL permit. If that happens, the Calgary pipeline company would have to file a new application with the State Department and start the whole review process again. But even FirstEnergy’s best-case scenario doesn’t sound very palatable.

We think the best outcome (for TransCanada) would be if Obama simply ignores the deadline laid out in the payroll tax extension and affirms that the President maintains authority over foreign policy, including pipelines that cross the U.S. border. We expect that the U.S. Congress would then be forced to sue him to make a decision on the project, which would throw the issue to the courts, allowing time for the State Department to assess a new route and make a decision by early 2013.

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