Whether TransCanada will build the Keystone XL after overcoming its last major regulatory hurdle Monday has become an open question after nine years of planning because the project may no longer be economically viable.
Oil prices surpassed $130 a barrel when TransCanada first sought a cross-border permit for the pipeline in 2008. But oil prices have been trading for less than half that for the last several years, as an oil glut prompted prices to plunge. Crude oil currently is trading at about $60 a barrel on world markets.
The $8 billion Keystone XL pipeline would ship oil from Canada’s Alberta oil sands to Steele City, Neb., and then on to refineries along the Gulf Coast. But Exxon Mobil, ConocoPhillips and other major energy companies have pulled out of the oil sands to focus on shale development in Texas.
“It’s completely a corporate economics decision assuming they are free and clear from a regulatory perspective,” said Christopher Guith, senior vice president for policy at the U.S. Chamber of Commerce’s Global Energy Institute. “It’s a much different universe than eight or nine years ago.”
But Guith and energy analysts say a strong market still exists for heavy crude oil, the type that would flow through Keystone XL. That’s because of declining oil production in Mexico and the political volatility in Venezuela, a major producer of heavy crude.
Of the crude imported to the U.S., 47 percent of it was from Canada, according to Energy Administration Information data for the week of Nov. 10. Canada sent about 99 percent of its crude exports to the U.S. last year, data from Statistics Canada shows.
“There is still a lot of Canadian heavy crude flowing into the country,” Guith said. “Refiners, especially in the Gulf, have a significant appetite for that grade and quality of crude, and that’s not going away.”
Zachary Rogers, a refining and oil markets analyst at Wood Mackenzie, says Canadian producers are clamoring for new infrastructure that can ship their heavy crude. Without the Keystone XL pipeline, Canadian producers have leaned on rail to offer a more flexible, and expensive, way to ship its oil.
“On the producer side, they have every incentive in the world to have Keystone XL built,” Rogers said. “For years, Western Canadian producers have been held captive by geography and an ongoing battle between infrastructure and production. Infrastructure hasn’t kept up. Producers in Western Canada will be the major winner if this gets built.”
TransCanada issued a lukewarm statement Monday after the Nebraska Public Service Commission approved its permit, saying it would conduct a “careful review” on how the decision would “impact the cost and schedule” of the project. TransCanada said it won’t decide until December whether to go forward with the project.
The company’s “open season” for gauging producers’ interest in the pipeline ended last month, and TransCanada has suggested it is comfortable with the number of companies willing to commit to the 20-year contracts required to reserve space on it.
In a statement this month, TransCanada said while it anticipated “commercial support for the project to be substantially similar to that which existed when we first applied for a Keystone XL pipeline permit,” the company acknowledged it needed to find “new shippers” after “reductions in volume commitments by other shippers.”
Experts say Keystone XL could attract customers who can no longer benefit from TransCanada’s proposed Energy East project, which the company canceled last month after opposition from the Canadian government. Energy East would have linked Western Canadian producers to the Atlantic coast.
“TransCanada dropping the Energy East project allows shippers at the canceled project to switch to Keystone XL,” said James W. Coleman, who studies energy at the SMU Dedman School of Law. “It firmed up the case for Keystone XL.”
But TransCanada is also likely to face additional regulatory hurdles and potential lawsuits that could complicate its economic considerations.
The State Department is weighing whether it needs to reapprove the Keystone XL pipeline to take into account the alternative route approved by Nebraska regulators, which would move the pipeline farther east than TransCanada’s preferred route.
Opponents of the project say the new route will require the company to apply for several new permits from the federal government and potentially a State Department review of the revised route. The company also must secure property easements from a new group of landowners.
Jane Kleeb, founder of the anti-pipeline group Bold Nebraska and chairwoman of the Nebraska Democratic Party, vowed to appeal the Nebraska Public Service Commission’s decision and suggested lawsuits are coming.
“Keystone XL was not approved,” Kleeb tweeted Monday. “A new route that was never approved by the federal government that also does NOT have land easements or power agreements got approved today. KXL will never be built. Lots of legal and economic hurdles.”
Phil Flynn, a energy market analyst at Price Futures Group, says a potential further delay of Keystone XL may prove too much to bear.
“It’s not just market conditions,” Flynn said. “Market conditions change and these companies know that when they make these deals. But it’s a battle. Keystone XL has been fought every step of the way, so you can understand why [TransCanada] may be less than excited at this point. It’s like, OK they won another permit, but it was a battle where they were bloodied, and the pipeline is not as financially advantageous as it was earlier.”
Guith of the U.S. Chamber argues TransCanada will consider the economic prospects more than anything else.
“That’s the beauty of this sort of corporate mechanism,” Guith said. “You make a choice based off the current state of play, with no emotion. If there is still a way to move crude for them to benefit their shareholders, they are going to do it. And that’s what they have to figure out.”
