Keystone XL-erated: The Most Hated Pipeline in North America is Back
Before the Dakota Access pipeline protests, there was Keystone XL. 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.
– Michal Moore
In January 2014, when the U.S. State Department gave a 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 broad favor 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.
On Tuesday, January 24, Trump was expected to sign executive orders advancing the construction of both the Keystone XL and Dakota Access pipelines. The expected decision on Keystone was welcomed by Canada’s Foreign Affairs Minister Chrystia Freeland on Tuesday morning. “We don’t have official confirmation yet of the U.S. decision, but as a government that has strongly supported Keystone from day one, we welcome this U.S. decision,” Freeland said.
Many of President Trump’s earliest cabinet picks signaled a renewed fondness for oil and gas development in Washington after eight years of the Obama administration. 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 relationship 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 yet be further 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 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 [Canadian-to-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.”
More posts by Todd Coyne
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