Reeling from an Obama administration decision to stall by more than a year a final decision on its Keystone XL pipeline until 2013, TransCanada is taking desperate measures to save the project from what some observers believe is a fatal blow.
By rerouting a 30-mile section of the proposed 1,700-mile pipeline outside the eastern edge of Nebraska’s ecologically sensitive Sand Hills region, the Canadian-based pipeline hopes it can win over lawmakers in the state and Washington, D.C.
With the clock running down, TransCanada desperately needs to retain the backing of Alberta and Bakken oil producers and Texas Gulf Coast refiners.
It now hopes for a favorable decision within six to nine months from U.S. decision makers, including a presidential permit from the State Department which is needed for XL pipeline to cross from Canada into the United States.
Just four days after the State Department bowed to pressure from green groups and ordered TransCanada to find a new route, the company took the action that many were surprised it had not taken earlier by tweaking the XL alignment to mitigate the impact on the vast Ogallala Aquifer, which is concentrated in Nebraska, but sprawls over 164,000 square miles of six states and is a vital groundwater source for the U.S. Midwest.
TransCanada’s pipelines President Alex Pourbaix said “positive conversations with Nebraska leaders (have) resulted in legislation that respects the concerns of Nebraskans and supports the development of the Keystone XL pipeline.”
He said an environmental assessment will be developed in consultation with the State Department and Nebraska’s Department of Environmental Quality to establish the best location for XL.
Early hint of backingTransCanada got an early hint of backing from Mike Flood, speaker of the Nebraska Legislature, who said the compromise rerouting is “the right thing to do” and the state will pay to review the altered route, while Gov. Dave Heineman said the state is “all for” the supplemental impact assessment to get moving on construction.
But David Wilkins, a U.S. ambassador to Canada under President George W. Bush and South Carolina Republican whose Washington, D.C.-based law firm has been retained by the Canadian Association of Petroleum Producers, said it was “premature” for Keystone proponents to celebrate victory.
“Any way you shake it, it looks like the decision has been put off past the (2012 U.S. election), which I believe was the intention to start with,” said Wilkins, who described the postponement of a final ruling on XL as a “catastrophic” cop-out by Obama to improve the president’s chances of re-election.
“The agreement in Nebraska won’t satisfy others who don’t want the pipeline at all and they’re going to continue to put pressure on the administration,” Wilkins warned.
That view was echoed by Susan Casey-Lefkowitz, director of the international program at the National Resources Defense Council, who said TransCanada should “listen to the American people tell them ‘no’ to the pipeline as a whole and we need Canada to stop pushing dirty tar sands oil on America.”
Review delayedMost importantly, despite the repeated promises of Secretary of State Hilary Clinton to settle the XL issue before the end of 2011, State Department spokesman Mark Toner told a media briefing Nov. 15 that a review of the proposed route change will not be completed until the first quarter of 2013.
That compounds the “critical” time pressures bearing down on XL shipping contracts, which UBS Research analyst Chad Friess estimates cover 445,000 barrels per day of the pipeline’s 500,000 bpd capacity, 25 percent of which has been allocated to Bakken producers in Montana and the Dakotas and shippers to Cushing, Okla.
Friess said in a research note that a delay to 2013 will give “most shippers the right to opt out of their contracts under various ‘sunset clauses’ and commit their volumes to other Gulf Coast projects, such as Enbridge’s Wrangler (pipeline), which proposes to be on-stream by mid-2013.”
Conditions attached to shipper agreements that have been filed with Canada’s National Energy Board require TransCanada to show by the end of 2011 that it has all necessary U.S. regulatory approvals to start deliveries on Keystone XL “no later than December 31, 2013.”
Even if it obtains a presidential permit by early 2013, TransCanada has not said when XL could start operations, although Friess said a late 2014 completion would likely be acceptable to most shippers.
Getting oil to marketOil sands producer Cenovus Energy, which has commitments with XL, has declined to discuss the terms of its agreement with TransCanada or whether there is a point when it would pull out of the project, but said it remains hopeful XL will get built.
However, Cenovus, Suncor Energy and Canadian Natural Resources have not ruled out exploring alternative shipping options to the Gulf Coast or Asia, while Imperial Oil said the XL delay adds “an element of uncertainty” to its movement of crude around North America and beyond.
Oil refiner Valero Energy said its agreement with TransCanada remains in place and it is too early to talk about possible alternatives.
A TransCanada spokesman conceded that all potential XL customers have “business needs … that have to be addressed soon.”
TransCanada Chief Executive Officer Russ Girling told analysts earlier in November that “shippers will only wait so long and (Gulf Coast) refiners can only wait so long for Canadian crude and Bakken oil to come into their marketplace.”
He said that even if the Obama administration delayed approval into 2012 that would “have an impact on our customers and dictate whether they stay with this project or not,” especially refiners whose supply contracts with Venezuela and Mexico start to expire in 2012 and 2013.
“If the route is arbitrarily moved to another location, we suspect we would have to restart the environmental review,” Girling said, noting the process has already taken 38 months.
C$1.9 billion so farTransCanada has recently told investors in Toronto and New York that XL has cost C$1.9 billion so far and it expects delays stemming from a rerouting will add upwards of C$1 million each day.
David Collyer, president of the Canadian Association of Petroleum Producers, which speaks for companies that account for 90 percent of Canada’s oil production, said in a statement producers will not be affected in the near future by the XL delay.
He said other shipping options are “being pursued to ensure market access over the medium term. Delaying Keystone XL will motivate exploration of other markets for Canadian crude oil products.”
CAPP Vice President Greg Stringham told the Globe and Mail newspaper that TransCanada should be able to proceed fairly soon after the 2012 U.S. elections and start operations in 2015.
Enough blame to go aroundWhile the industry scrambles to deal with the unknown, accusatory fingers have been pointing in all directions.
A primary target has been the strategy deployed by TransCanada, which many critics say blundered from the outset by insensitively labeling the project XL, for extra large, and which appeared to assume it was home free after obtaining approval from Canada’s National Energy Board and positive conclusions in a U.S. environmental impact statement.
At the eleventh-hour, confronted with a rapidly unraveling project, TransCanada mounted a counter-attack, with Girling and Pourbaix taking up two-thirds of a 90-minute conference call on Nov. 1 to provide a “factual update on the regulatory and commercial process.”
They emphasized that in the U.S. alone the XL project would generate 13,000 construction jobs and 7,000 manufacturing jobs, while the Canadian Energy Research Institute has forecast that if the oil sands are allowed to follow their current expansion schedule 465,000 jobs would be created over 25 years.
“These jobs will be filled by hard-working Americans,” Girling said, adding, in a pointed jab at XL’s opponents, including Robert Redford, “They’re not actors or professional environmentalists.”
But the deeper question is how the Obama administration’s decision to delay approval of XL until after the 2012 presidential election will impact Canada’s role as the leading external energy supplier to the United States and, in turn, what that means for the oil sands.
Girling said nothing has emerged from 300,000 pages of public comments and 10,000 pages of impact statements and draft reports to prove that Nebraska’s water resources would be at risk.
“Opponents have scared the public into believing that XL is somehow different from 200,000 miles of pipelines that exit in the U.S. and somehow XL would contaminate all of their drinking and irrigation water,” he said.
Pourbaix said “since 1950, 30 billion barrels of oil have been produced from wells through the Ogallala Aquifer and transported safely by pipelines across America. Any suggestion that TransCanada would have a different experience with XL is patently false.”