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‘Iconic political football’ Keystone XL nears end zone after 10-year battle

 Geoffrey Morgan, Financial Post

It’s probably one of the most controversial pipeline projects ever proposed, and as Keystone XL faces its final hurdle in Nebraska next week, the stakes are still high for Canada

CALGARY – When former TransCanada Corp. executive Dennis McConaghy first put together the commercial agreements for the Keystone XL pipeline 10 years ago, he expected it to be shipping oil from Alberta to Texas by 2012.

But a decade later, the project remains in limbo, its shippers a little less committed and its strategic importance a bit more diminished, despite high-profile backing from U.S. President Donald Trump. And yet another round of legal proceedings to contend with.

Next week, TransCanada will take what it hopes will be the final step in the protracted U.S. regulatory process in Lincoln, Neb.

A five-person Nebraska Public Service Commission will hear arguments Monday through Friday to determine whether the project — which has been hotly contested by environmental groups — is in the public interest by Nov. 23.

Nebraska, which previously allowed the U.S. federal government to oversee pipeline approvals within the state border, has now tasked its own Public Service Commission with approvals for new lines within the state, and the last step in that process will play out for Keystone XL.

McConaghy, now retired from the company, says he’s relieved, to see the 830,000-bpd pipeline is near the finishing line.

“As a Canadian, I’m elated if it’s actually installed,” the company’s former executive vice-president of corporate development says. “From my perspective, if this thing is actually put in place it will create more economic value for the country.”

But opposition to the project remains strident.

Bold Nebraska, an affiliate of green group that opposes the pipeline, recently began encouraging farmers along the route to install solar panels on their property in an initiative called Solar XL to replace hydrocarbons with renewable energy programs.

“I am vehemently opposed to the Keystone XL pipeline mainly because of the properties of the contents of the tar sands oil it will carry,” Jim Carlson, a Nebraska landowner who installed solar panels along the route, said in a release from Bold Nebraska.

While many of these changes have created additional problems for the pipeline, McConaghy says the need hasn’t changed. “Keystone XL goes to the most lucrative market for Canadian (oilsands crude). It gets there in the most economic fashion,” he said.

Most financial analysts agree there is a market for the pipeline. “I think the case can still be made that it’s necessary,” Edward Jones senior analyst Andy Smith.

Multiple refineries in the Gulf region have recalibrated their facilities to process the heavy crude TransCanada would deliver on the system and would welcome a direct pipeline connection to the oilsands, says Dinara Millington, vice-president, research at the Canadian Energy Research Institute.

Recent U.S. economic sanctions against Venezuela may further boost the need for the pipeline as Canadian heavy oil barrels compete directly against Latin American blends for space at Gulf Coast refineries.

“Any move by the Trump administration to block imports from Venezuela could lead to a renewed search for heavy crude supply in the Gulf,” a report from Fitch ratings agency noted, adding a ban would help Canadian heavy oil producers.

Despite the rare convergence of favourable winds for the project, TransCanada still needs its shippers – which previously included both upstream oil producers in Canada and downstream refiners on the U.S. Gulf Coast – to recommit to the line.

“One of the things that I’m sure TransCanada has been contending with is the gamesmanship of some of its logical shippers and that others would take the long-term shipping positions, or that TransCanada is willing to build it somewhat on spec(ulation),” McConaghy said.

Large and small oil producers have so far refused to say how many barrels of their crude they will commit to the line, but say the project will be a boon for the entire oilpatch.

Keystone XL will lift companies’ share prices and domestic oil benchmark prices, Crescent Point Energy Corp. president and CEO Scott Saxberg said in an interview.

“Six years ago, when the first push against Keystone happened, we were sitting with an investor in London and their view was, ‘If Keystone gets cancelled, your netbacks will be lower and you’ll get a lower price and we’re not going to invest in Canada,’” Saxberg said, adding, “In that period of time, you saw a large exodus of shareholder base out of Canada.”

Crescent Point, which produces light oil, was not committing to Keystone XL “at this stage,” Saxberg said.

BlackPearl Resources Inc. president and CEO John Festival, said smaller companies like his will benefit from its construction through its netbacks and its share price.

“We’ve always had significant ownership and capital from outside our boundaries,” Festival said. “We see the net effect of having more pipeline space.”

Cenovus Energy Inc. continues “to be a supporter of the Keystone pipeline,” president and CEO Brian Ferguson said on an earnings call in July, but declined to indicate how much volume the company would commit because the process is competitive. The company previously committed 75,000 bpd to the line.

“With the completion of that pipeline, that will take the price differential and the investor viewpoint away from the market and attract more capital to Canada,” Ferguson noted.

The company has also tempered expectations and said any decision on constructing the pipeline was dependent on receiving shipper support and approvals from Nebraska by November.

“We’ll make an assessment of the commercial support and the regulatory approvals at that time,” TransCanada executive vice-president and president, liquids pipelines Paul Miller said on an earnings call. “In the event that we do decide to proceed with the project, we still need probably six months to nine months to start doing some of the staging of the construction crews, et cetera, and that would be followed by about a two-year construction period.”

But in a sign that it needs firmer commitments, TransCanada also launched an open season to publicly call for bids on the line in July, although some shippers have reportedly renewed their commitment.

“TransCanada maintains significant shipper support for the project and is confident that we will have the support to move ahead,” spokesperson Jacquelynn Benson said in an email. “The need for Keystone XL remains strong and both TransCanada and its shippers remain committed to the project.”

Much has changed since oil companies first committed to Keystone XL back in 2007. Global oil prices have collapsed, extensions on competing pipelines have come into service and the production forecast for the oilsands has been adjusted downward while U.S. shale oil production has surged.

Amid delays imposed by then-president Barack Obama’s administration, TransCanada was able to build the southern leg of the Keystone XL pipeline in 2012, which did not require a presidential approval from the White House.

Since that time other oil conduits have emerged to ensure Canada remains the biggest oil exporter to the U.S. by a distance. Rival Enbridge Inc. has begun shipping oil southbound on its 400,000 bpd Seaway Twin and 585,000 Flanagan South pipelines to the Gulf Coast, and it expects a U.S. presidential permit on expanding its 580,000-bpd Alberta-to-Wisconsin Line 67 to 800,000-bpd by the end of the year.

Indeed, so much time has elapsed that the pipeline “is not nearly the strategic imperative it was four years ago,” says Ken Hughes, who was Alberta’s energy minister for part of the Keystone XL regulatory process.

The pipeline has become “an iconic political football for both sides of U.S. Congress,” and that resulted in an “underperforming” Washington D.C. preventing the project from getting built, Hughes said.

One of the lessons learned from the Keystone XL saga is that companies should try to avoid, to the extent that they can, allowing their projects to get dragged into political debates.

“Keystone XL just happened to be a cudgel that each side could use to beat up the other,” Hughes said, though he acknowledged, “It’s really difficult to stay out of the political frenzy.”

Financial Post

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Photo credit: Hundreds of kilometres of pipes stacked and waiting for if and when Keystone XL is approved. Canadian Press