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Canadian Oil Producers May Have A Lot More Riding On The Keystone XL Pipeline Than Transcanada

By Jeff Spross  

"Canadian Oil Producers May Have A Lot More Riding On The Keystone XL Pipeline Than Transcanada"

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The fate of the Keystone XL pipeline may matter far more to Canada’s oil producers than to Transcanada, the company that would actually build it.

According to a story yesterday in Bloomberg, Transcanada has reduced Keystone from 32 percent of its contracted projects four years ago to just 14 percent today. It did that by taking on new projects — the total for which now stands at $38 billion, including some solar power — and by splitting the Keystone XL pipeline itself into two legs. The southern portion, from Oklahoma to the Gulf Coast, has already been constructed and is scheduled to start moving crude in January of next year.

Transcanada has already had to excavate the southern leg at 125 different locations to repair various problems.

But while the Keystone pipeline is smaller as a share of Transcanada’s overall business, it still looms large for several of Canada’s major oil production companies. Bloomberg reports that Canadian Natural Resources Ltd., for one, has already booked 120,000 barrels per day on the Keystone XL, and plans to boost its output of oil sands in 2014 by 14 percent. Suncor Energy Inc. has also already secured a portion of the pipeline’s oil flow, and plans to boost production 10 percent in 2014. Imperial Oil Ltd. is yet another company that’s already booked capacity.

That makes Keystone “far more important” to those companies than to Transcanada, said John Stephenson of First Asset Investment Management Inc., who helps oversee investments in all three companies. Todd Kepler, an analyst at Cormark in Calgary, also told Bloomberg that stocks for all three companies, as well as for several others, could rise if the U.S. government ultimately gives construction of Keystone’s northern leg the green light. If it doesn’t, Canadian Natural could see a drop of 3 percent.

All of which builds the case that the Keystone pipeline would be a significant factor in just how much of Canada’s oil-sands — which are expected to more than double in production by 2025 — can feasibly make it to the world market. The U.S. State Department’s initial draft assessment argued Canada’s oil sands would make it to the Gulf Coast with or without the pipeline, thanks to the availability of rail. But an investigation by Reuters concluded it was very unlikely rail shipments could make up the pipeline’s anticipated flow of 830,000 barrels per day. The Canadian Association of Petroleum Producers also put out a forecast last year that implied failure to build Keystone could reduce production of Canadian oil sands by as much as half.

Canadian oil producers should also be eager to see Keystone approved, since right now they’re having difficulty competing with U.S. producers who are closer to the Gulf Coast and its access to wider markets. That geographic bottleneck means Canadian oil sands are building up in America’s midwestern states. So if the pipeline is built, allowing supply to flow more easily southward, gas prices in those states could actually go up.

Finally, this also reasserts Keystone’s importance from a climate perspective. In terms of carbon emissions, the oil sands are significantly dirtier than most forms of crude oil, and Canada’s reservoirs will need to remain unburned if the world is to avoid more than a two degree Celsius increase in global warming. Preventing Keystone’s construction would increase the practical likelihood that those oil sands stay in the ground.

Because it crosses the U.S.-Canada border, the Obama administration must approve the northern leg of the Keystone XL pipeline before it can be constructed. A final decision is expected this coming Spring, after the State Department completes its review process.

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