Keystone XL Pipeline Gets Federal Approval, but Hurdles Remain

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Researched by Industrial Info Resources (Sugar Land, Texas)--The U.S. Department of State has issued its approval for a U.S.-Canada border crossing permit for the Keystone XL crude oil pipeline (KXL) by TransCanada Corporation (NYSE:TRP) (Calgary, Canada). The previous administration denied the initial application, and seemed to kill the project in doing so. As such, the news that the Trump administration has gone ahead to grant the KXL its permit might sound like TransCanada will be rolling out the trenchers tomorrow and get to work, hiring a couple thousand Americans for the duration of construction.

However, the project has yet to clear a lesser-known regulatory hurdle involving the state of Nebraska, which has yet to grant regulatory permits. The pipeline is designed to transport about 830,000 barrels per day (BBL/d) of oil-sands crude oil about 1,179 miles, from Hardesty, Alberta, to Steele City, Nebraska, where it would intersect with other pipelines that could bring that crude to refineries in Patoka, Illinois, or the Texas Gulf Coast.

To top it all off, there are still the questions of whether KXL is still economically viable and necessary, or if it can be placed into service fast enough to compete with the other big players. In other words, it's not over yet.

The Nebraska Public Service Commission is in the midst of an 8-12 month review process of the pipeline route, and several landowners along the route have continued to resist. The delay presented in the review process at the state level pushes KXL further back, threatening its chances of remaining competitive.

However, even if KXL is approved, there is no guarantee it will be built. There are multiple pipelines slated for construction that would provide takeaway capacity for the Alberta Oil Sands, with capacities totaling roughly 2.5 million BBL/d. To put that in perspective, that is more than the current rate of production of the entire Permian Basin. As such, unless investment in oil sands development increases dramatically--a scenario which would only happen with a substantial increase in the price of Western Canadian Sour (WCS) crude--not all these pipes will be needed. As such, the first pipeline to be built is the one most likely to be and stay profitable. Thus, there is a rush to approve and built KXL, which has a considerable advantage in that it has a considerable portion of its pipe already rolled and in storage, ready for installation.

If delays continue, KXL may find itself running alongside or behind the Trans Mountain Expansion project by Kinder Morgan Incorporated (NYSE:KMI) (Houston, Texas), which would carry an amount that is roughly equal to KXL's initial flow rate from the oil sands to the West Coast for export to the Asian market. Additionally, the increased volumes of heavy sour crude from Canada may disrupt the economics of light, sweet crude producers in the Eagle Ford and Gulf Coast refiners due to competition with crude oil swaps with Mexico. For more on the economics that work against KXL, see November 6, 2015 article - Some U.S. Producers, Refiners, May Have Good Reason to Oppose Keystone XL Pipeline.

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