It was eight years in the making but news today that U.S. President Donald Trump and the U.S. State Department have signed and issued a Presidential Permit allowing the construction of the Keystone XL pipeline has been well received on both sides of the Canada-U.S. border.
The pipeline’s proponent, TransCanada Pipelines (TRP), put eight years into the permit process, which satisfied all rigorous safety and environmental requirements and regulations on both the Canadian and American side, only to be vetoed by former President Obama in advance of his Administration’s signing on to the Paris Climate Accord in November 2015. The decision then, which prompted a formal NAFTA (North American Free Trade Agreement) complaint and U.S. constitutional challenge, has now been formally withdrawn by TRP. In addition, the company announced it has begun discussions with stakeholders through the states of Nebraska, Montana and South Dakota to obtain permits and approvals needed to advance the project to the building phase.
As proposed and now approved, the 36-inch diameter, 1,179-mile-long (1897 kilometer) mega north -south pipeline will carry an estimated 1.1 million barrels of high quality synthetic oil, from Hardisty, Alberta to Steele City, Nebraska where it will connect to existing lines which provide crude feedstocks to both U. S Midwest and Gulf Coast refineries. According to TransCanada, the pipeline will likely take three years to complete and is part of its comprehensive effort to improve the movement of petroleum liquids and natural gas throughout America.
For both oil producers and U.S refiners, the news is most certainly welcomed. The lack of pipeline capacity has strained the price for Canada’s heavy oil, known as Western Canadian Select (WCS), limiting its value to $15 below the benchmark West Texas Intermediate (WTI) barrel. For Midwest and Gulf Coast refiners, who’ve spent considerable amounts over the last several years converting their facilities to run heavy slates which provide more value, having a reliable domestic supply makes good economic sense and a relief from having to rely on foreign or unpredictable supplies from Saudi Arabia, Venezuela or even Mexico.
From GasBuddy’s perspective, having followed the long path Keystone XL has endured to this day, U.S. Senior Petroleum Analyst, Patrick DeHaan noted that “while the impact on gasoline prices may not be immediately felt, the pipeline will allow more U.S refiners to process Canadian crude oil and reduce reliance on foreign supply, while helping Canadians secure their energy future. It may also bring a side effect of causing the typically discounted Canadian crude oil prices to rise, as more refiners and customers seek out Canadian crude oil. The impact may be felt most by U.S. refiners that already process a significant portion of such crude oil, as the low price of Canadian oil is likely to rise.”
Though the approval is a significant milestone, it is by no means a slam dunk. Concerns over increasing CO2 carbon emissions due to higher production of the oil sands, notwithstanding Alberta and Canada’s move to carbon taxes, effects on oil pricing in the WTI hub, the prospect that excess oil could likely be exported from the Gulf Coast to global markets, redundancy and supply limitations given the recent approval of the twinning of the Kinder Morgan Transmountain pipeline, and poor economics to support exponential growth in oil sands extraction and transport to meet the new opportunities, may be too much, too quickly. Unless shippers sign up to receive more oil, regulatory due diligence aside, the real work on the economics and value of the Keystone XL pipeline, now takes center stage.