Is a stamp of approval from Trump the only roadblock facing the start of construction on the Keystone XL pipeline project? Unfortunately, while the incoming administration and media make it seem this simple, there are more steps required to breathe life back into this project. Additionally, the market has shifted dramatically since TransCanada first submitted the Keystone XL application to the State Department in 2008.
When TransCanada first filed for the cross-border permit, WTI had reached a recent peak of $134.50/Bbl in June 2008 before the global recession. However, by 2011, WTI once again broke the $100/Bbl threshold and producers across North America were investing heavily in expanding oil production. By 2012 when Obama rejected the original Keystone XL application, but encouraged TransCanada to reapply, Kinder Morgan had already thrown its hat in the ring with an open season for the expansion of its existing TransMountain pipeline, and later in 2013, TransCanada held an open season for a second Oil Sands pipeline, Energy East, which would transport Oil Sands crude east to Montreal and Quebec rather than south through the US.Click to enlargeKeystone XL, Energy East, and TransMountain all held successful open seasons to add takeaway to support oil sands growth.
Looking at the slide below, put together by Inter Pipeline in November 2015, before the implications of the impending price downturn were realized, it is easy to see why all of these projects received support, especially looking at the forecast from 2014. However, the market has changed dramatically, and while BTU Analytics continues to expect growth out of the oil sands over the next 5 years, investment has been scaled back considerably and will impact the growth trajectory beyond 2020 as well. This raises the question, do we still need all of these pipelines, and is it worth it for TransCanada to build both Energy East and Keystone XL?
While BTU Analytics does not profess to be experts on pipeline legal matters, we did spend time conducting research to better understand what reviving Keystone XL could entail on the US side of the equation to help understand one piece of the puzzle impacting TransCanada's decisions.
In addition to refiling its application for a Presidential Permit to the US State Department, Keystone XL's final proposed route runs through Montana, South Dakota, and Nebraska which means that approval from all three states is also necessary. At the state level there are many agencies that are involved in the process making the process difficult and convoluted to understand for those of us who don't live in the pipeline regulatory world. That said, if we look at each of these states, Nebraska is the main candidate to face regulatory hurdles at the state level.
Montana is a traditionally an oil and gas friendly state that granted the necessary approval and permits the first time round. In fact, Governor Steve Bullock went so far as towrite a letter to President Obama in 2013 expressing his support of the project.
As far as South Dakota is concerned, TransCanada originally filed with the South Dakota Public Utilities Commission (SD PUC) in 2008 and received approval in 2010 that allowed construction as long as it started by 2014. However, since this timeline was not met, TransCanada had to take additional steps in 2014 to receive additional certification from the SD PUC, which it received in January 2016.
Based on this, at the state-level, the battleground for Keystone XL will likely return to Nebraska. Initially, TransCanada submitted its application to Nebraska's Public Service Commission and was approved in 2013 by Dave Heineman who was Governor at the time. This set off a series of court cases challenging the Governor's legal right to approve the pipeline that ultimately ended in the Nebraska Supreme court. The Supreme Court upheld the Governor's power to approve the pipeline. However, TransCanada withdrew its application shortly after its application for a Presidential Permit was denied and will need to refile if they choose to move forward once again with Keystone XL.
So to make a long, complicated story short, reviving Keystone XL is not as easy or as thrilling as Trump striding into the Oval Office on January 20, 2017 and with a flourish of his pen signing a document reversing President Obama's denial of the presidential permit. There are more legal and market nuances to be considered.
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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.