November 28, 2017 Read More →

Economics May Yet Kill the Keystone XL

The Economist:

In the nine years since Keystone XL was first proposed it has become the most political of pipelines, pitting environmentalists, ranchers and Native Americans against oil companies, state officials and unionists. Barack Obama’s administration delayed its construction in 2011, then rejected it in November 2015. Shipping oil from Canada’s tar sands, which is one of the dirtiest sources of crude, threatened to undercut the leadership role the government wanted to play on climate change. “So sad that Obama rejected Keystone Pipeline. Thousands of jobs, good for the environment, no downside!” tweeted Donald Trump, then a presidential candidate.

As soon as Mr Trump was in office he revived the proposal for a large tube running from Alberta, Canada, to the Gulf of Mexico. Russell Girling, boss of TransCanada, the Canadian operator of Keystone, said he was “very relieved” to see the $8bn project finally approved. On November 20th Nebraska’s regulators had more good news for Mr Girling. The Public Service Commission, an elected panel of four Democrats and one Republican, approved Keystone XL crossing Nebraska, clearing the last big hurdle for the construction of the expanded pipeline.

Yet the green light came with an amber one—the commissioners did not approve the route preferred by TransCanada, but one farther east. This could add more expense and complexity to a project that was costly and complicated before it even started (it involves dozens of landowners who have not yet been consulted). It could also prompt yet another review of Keystone XL in neighbouring South Dakota, which has already said it will look at the pipeline again if changes made by other states affect the route through its plains.

TransCanada’s reaction to the regulators’ decision was muted, at best. Mr Girling is now “assessing how the decision would impact the cost and schedule of the project”, he said in a statement. In July TransCanada launched an “open season” to solicit binding commitments from shippers for Keystone XL. It has not made the results public.

Once all the reviews are completed, it may be economics rather than politics that halts the pipeline.

“The financial viability of the project is highly speculative,” says Tom Sanzillo of the Institute of Energy Economics and Financial Analysis, a research group, who thinks there is only a 20-30% chance the pipeline will be built. For Keystone XL to work financially, the price of oil needs to be $80-90 a barrel, with an upward trajectory, says Mr Sanzillo.

The price of oil is at $60 a barrel, compared with $140 in 2008 when TransCanada first applied for a permit to pipe oil across the American-Canadian border. Lorne Stockman of Oil Change International, an advocacy group, also thinks the pipeline is unlikely to be built. To get going TransCanada needs to sign up enough clients with long-term contracts for 90% of the capacity of Keystone XL, which will be able to transport 830,000 barrels of oil a day (compared with 600,000 barrels from the current pipeline).

“Shippers will not have signed the dotted line before the Nebraska decision,” says Mr Stockman. And they are likely to be more hesitant to sign up now given that the route has been altered from the one preferred by TransCanada.

More: The Keystone XL pipeline has won approval in Nebraska: That is no guarantee it will actually be built

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