TransCanada is digging deep into its bag of tricks to outwit opponents of Keystone XL, save what it can of the $1.9 billion it has already invested on the $7 billion project and stop those who have signed shipping contracts from walking away.
Faced with one analyst’s prediction that its shares will become “dead money” if the Obama administration’s rejection of Keystone XL is permanent, the Calgary-based pipeline company’s top brass swung into action.
“We are now open to amending or changing our plans to build (Keystone XL) in segments,” Chief Executive Officer Russ Girling told an investor conference in Whistler, British Columbia. “But, as we’ve said before, that is dependent on the interest of our shippers in doing that.”
The first step in that direction could involve building a $2 billion leg from the oversupplied oil storage hub at Cushing, Okla., to refining centers on the Texas Gulf Coast.
Alex Pourbaix, TransCanada’s president of energy and oil pipelines, said the company is also open to building a connection from the prolific Bakken light oil play in Montana and North Dakota with the Gulf Coast.
So long as these projects do not involve a pipeline that crosses the Canada-U.S. border, thus requiring a presidential permit, “we believe there may be the potential to accelerate construction of some elements of the pipeline,” he said.
Proceeding ‘cautiously’
However, Girling said TransCanada is proceeding only “cautiously” with the idea of splitting off the southern portion of the 830,000 barrels per day system.
He said the overriding priority is to work on a fresh route that bypasses Nebraska’s ecologically sensitive Sands Hills region, a process that could take six to nine months, and file a fresh application, which FirstEnergy Capital analyst Steven Paget estimated would need another 15 months for the State Department to conduct a new review.
FirstEnergy predicted that a second attempt at building Keystone XL would stretch a final approval to late 2016, a year after TransCanada’s own estimate of when a pipeline could be fully operational.
If TransCanada is able to move ahead with the Cushing to Texas leg that would close off an open door for its Canadian rival Enbridge and Enterprise Products Partners to gain a clear upper hand in the race from the Alberta oil sands to the Gulf Coast.
Enbridge Chief Executive Officer Pat Daniel told the same conference Girling attended that plans by the Enbridge-Enterprise partnership to reverse the flow of the 500-mile Seaway pipeline could allow shipments of 150,000 bpd by mid-2012 and 450,000 bpd by the start of 2013.
Currently, Seaway is in the midst of open season lasting from Jan. 4 to Feb. 10 to test shipper interest in the project at a time when Chad Friess, a UBS Research analyst, believes Keystone XL is facing “critical” time pressures.
He said late last year that if approval of Keystone XL is — as now seems certain — delayed until 2013 “most shippers have the right to opt out of their contracts under various ‘sunset clauses’ and commit their volumes to other Gulf Coast projects.”
A research note by FirstEnergy agreed some shippers could scrap their contracts, but doubted that another pipeline company would “scoop TransCanada’s customers.”
Girling said the rejection of the initial Keystone XL application does not affect shipping agreements with producers and refiners who are contracted to use the pipeline, saying they are “still contractually committed to the process.”
That view was echoed by a spokesman for Valero Energy, which has 1,600 workers currently expanding its Port Arthur, Texas, refinery to replace declining volumes of heavy oil from Mexico and Venezuela with Canadian heavy crude.
“Valero remains in support of Keystone XL,” he said. “It makes too much sense not to. It’s going to happen, one way or another.”
The spokesman said Valero has promised its business to Keystone XL for the past four years, but agreed the drawn out regulatory and approval process has become frustrating.
Instead of opening the way to a “steady supply of crude oil at a good price,” the Obama administration is turning its back on “thousands of construction jobs and millions of dollars in tax revenue,” he said.
Not known for siding with TransCanada on any issue, Daniel said the U.S. decision to turn down Keystone XL was “horrible for our industry and it’s a horrible precedent” for the reasons given.
He said the decision will “embolden” opponents of Enbridge’s proposed Northern Gateway and other pipeline projects.
Vital role challenged
The constant argument that Keystone XL is vital to U.S. is now being challenged by a number of observers, including Andrew Leach, a University of Alberta economics professor.
He drew attention to the State Department’s conclusion that the original proposal would not improve U.S. energy security over the next decade.
Leach also said that TransCanada’s case would receive a severe blow if competing proposals for relieving the bottleneck at Cushing — such as the Seaway project — came online first.
He suggested that lifting the pressure on Cushing raises a question about whether a bullet line from Canada to the U.S. Gulf Coast is in the U.S. national interest.
The International Energy Agency predicts storage facilities in Cushing could gain another 8 million barrels of capacity in 2012 to cope with a supply glut that has seen North American crudes trading at a discount to globally linked crudes for the past year.
Jackie Forrest, global oil director at the consulting firm CERA, said the current differential between similar crudes in the mid-continent and the Gulf Coast is $10-$11 a barrel and at times in 2011 reached almost $30, eating into producer profits and government royalties.
Even if Keystone XL and Seaway both go ahead, more pipeline capacity will be needed between Cushing and the Gulf Coast by 2019 as oil sands and U.S. domestic output ramp up, she said.
