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Not yet a done deal
Observers caution Keystone XL still faces legal challenges, market questions Gary Park for Petroleum News
The hallelujah chorus that greeted word of a return to construction on the Keystone XL pipeline, fueled by the Alberta government’s decision to acquire a US$1.1 billion equity stake and provide a US$4.2 billion loan guarantee, is rapidly being drowned out by doubters.
Within days of the March 31 announcement of a go-ahead by TC Energy and Alberta, buckets of cold water were being dumped on the optimists.
Moody’s Investors Service was quick to change the credit outlook for TC Energy and its subsidiaries from stable to negative, reflecting concerns about the costs of getting the long-delayed, hotly contested project to start delivering 830,000 barrels per day of bitumen from the Alberta oil sands to Steele City, Nebraska, by mid-2023, with an ongoing connection to U.S. Gulf Coast refineries that are configured to process heavy crude.
“The negative outlook reflects the very high level of execution risk related to the environmental, social and governance factors associated with (Keystone XL),” said Moody’s Vice President and Senior Credit Officer Gavin MacFarlane.
“We do not assume that the project will be completed in our current forecasts for the company and will only incorporate cash flow when the project is complete,” he said.
Legal, regulatory, protest issues Moody’s said the project could be disrupted by ongoing “demonstrations and civil unrest” as well as more legal and regulatory challenges.
The firm underlined some views that President Donald Trump could impose an outright cancellation of the project, despite his action three years ago to reverse President Barack Obama’s decision to halt the project.
James Coleman, a law professor at Southern Methodist University in Taxes, said Keystone XL still faces legal hurdles, including a challenge launched by environmental and Indigenous groups before the U.S. District Court in Montana.
He told the Calgary Herald that although most states the pipeline will traverse have either approved or support the project “that doesn’t mean there might not be some legal risk. You can never predict what a court is going to do.”
Positive views However, BMO Capital Markets analyst Ben Pham said the slump in West Texas Intermediate and Western Canadian Select prices - all of which would make Keystone XL uneconomic if the project was operating today - are likely to be just “transitory impacts,” while the Alberta government was “effectively bearing the risk of the U.S. election” results in November should a Democrat be elected to the White House and the Democrats gain control of the Senate while retaining the House.
Also on the upside, Stephanie Kainz, senior associate at the RS Energy Group, said that once the pipeline is completed it will improve market access for oil sands production and the price Alberta producers receive.
She said an end to the current gloom will allow the industry to bring on more upstream projects and “hopefully infuse more capital” into the Canadian energy sector.
That aligns with the thinking of Alberta Premier Jason Kenney who has broken with his strongly held opposition to government intervention in the market, even though he argues that Canada’s “failure to get pipelines built has been a failure of government policy and politics (blocking the use of export tankers in northern British Columbia waters and tougher environmental scrutiny of new projects), not of markets.”
Kenney noted that even former Alberta premiers Ernest Manning (in the 1950s) and Peter Lougheed (in the 1970s) sacrificed their unyielding belief in the private sector to support the energy industry when it was struggling to attract investment. Manning helped launch the first cross-Canada natural gas pipeline while Lougheed provided public money to advance the oil sands as a commercial enterprise.
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