The Keystone Pipeline: Challenges And Alternatives

Includes: CLR, TRP
by: Orit Nathan Mahalal

The Keystone XL Pipeline is a $5.4 billion venture that has yet to take off. At the heart of this politically contentious issue is the risk/reward of investing in a North American oil pipeline and the associated benefits, or lack thereof. The naysayer - President Obama and liberal Democrats point to the potential environmental hazards of the pipeline, and given the recent BP catastrophe in the Gulf of Mexico, nobody in the Oval Office is willing to touch this hot potato. This begs the question: does the risk outweigh the rewards? A closer examination of this highly publicized and politically explosive issue will reveal some interesting facts for opponents and proponents alike.

The Keystone XL Pipeline in Perspective

In spite of affirmations from the US State Department that the environmental impact of the Keystone XL Pipeline will be negligible, progress on the ground is non-existent. It appears that this lucrative and beneficial North American initiative is being hamstrung by midterm election politicking. The pipeline would connect Gulf Coast refineries with the oil-rich tar sands in Alberta, Canada. Opponents of the pipeline continually cite the hazards of moving the oil via the pipeline from Canada to the USA. They fear the worst: an environmental disaster where a massive oil spill would have catastrophic consequences for the natural habitat, in tandem with global warming concerns by burning more oil.

In response to the question of the safety of the pipeline, a CEO of a major oil company has indicated that it is entirely possible to transport the oil via rail. The CEO of Continental Resources (NYSE:CLR), Harold Hamm, ays his company is fully prepared to shift oil from Keystone XL. He believes that the rail option is by far the most appropriate and suitable option for the US. In terms of business strategy, Hamm is opposed to the stop-start nature of the project and believes that if something is going to be done, time is of the essence. The oil can easily be transferred from the Montana and North Dakota Bakken shale formations via rail.

Six-Month Performance of Continental Resources

In fact, Continental Resources presently ships 9/10 of all of its oil via rail. This is in fact the preferred transportation medium for oil as the US production of oil outstrips the capacity that the pipeline is capable of carrying. As a case in point, 234K carloads of crude oil were shipped during 2012 via rail. This figure is an increase of 229K from 2007. Opponents of the rail option cite the inherent danger of transporting oil via the railways. For example, in July 2013 a train that was transporting oil from the USA was involved in a major catastrophe and 47 people were killed. In July 2013, the IAE cautioned that 67% of the remaining fossil fuels should be left untapped to prevent global warming from increasing more than 2°C.

The Presidential Legacy: Fact or Fiction?

Since President Obama cannot be up for re-election, he is likely considering what his legacy will be. The signature healthcare law - ObamaCare - is facing an uphill battle for approval with the populace and Capitol Hill. The midterm elections are largely seen as an endorsement or rejection of the president's health care reforms. Allied with that is the legacy that Obama wishes to leave the American people with. As a self-styled progressive president, he likely wants to be remembered for what he did in respect of climate change. To keep the environmentalists and young folks happy in the Democrat base, he has been vehemently opposing the Keystone XL pipeline. Environmentalists fear the issue of global warming, and the president doesn't want to be tarred with that brush. It appears that significant delays will be experienced as a result of the November midterms. This would effectively make the Keystone XL pipeline issue a central focus of the 2016 US Presidential Elections. It is generally accepted that American national interests will be enhanced if carbon pollution will not be increased with the project.

Nebraska Ruling on Keystone XL Pipeline

A recent court ruling in Nebraska essentially voided state approval for the Keystone XL pipeline. However in spite of this ruling, it is generally accepted that the US government will be able to reach a solution regardless. There is presently a 90 day national interest determination that is being carried out by the US State Department. The CEO of TransCanada Corporation (NYSE:TRP), Russ Girling, is not being dissuaded from the project - despite the recent court ruling. However, the stock price of dropped following the court ruling from a high of $44.81 to a low of $43.77. The stock dropped as investors feared that the company would no longer be involved in the Keystone XL Pipeline project.

Market Data

Massive Economic Stimulus with Pipeline Construction

Approval of construction for the Keystone XL Pipeline is likely to add tens of thousands, perhaps many more jobs to the American workforce. At a time where the economy is still struggling to recover fully from the recession, the Keystone XL Pipeline may just be able to tip things into the black. While it is difficult to estimate the economic impact, analysts point to figures in the region of $3 billion to $3.5 billion in economic stimulus. But more importantly, the US will become energy independent, with Canada supplying to the US what the Middle East currently is responsible for. In the absence of an agreement with the US, Canada is likely to partner with non-friendly US countries such as China for their oil exports. However, economics, politics and environmental considerations have put the Keystone XL Pipeline on the back burner for 5 years. Various Republican congressmen have been pushing hard, alongside conservative Democrats, to expedite the Keystone XL pipeline. The US Department of State Keystone XL Pipeline Project Final Environmental Statement (FEIS) is essentially an application for a Presidential Permit to construct the pipeline. According to the proposal, some 830,000 barrels per day of crude oil will be moved from the Canadian sedimentary basin and Bakken Shale formation to Steele City Nebraska. From there the crude oil would be moved to the Gulf Coast region.

Interim Investment Opportunities

Given the facts, investors can move in one of two directions with the Keystone XL Pipeline: alternative energy sources such as wind, solar, ethanol, and electric or the existing rail companies such as TransCanada Corporation which may possibly get the green light to move oil across Nebraska. Indeed Warren Buffett profited immensely from his acquisition of Burlington Northern Santa Fe Corporation (BNSF) as oil and gas transportation has increased the demand for barges and railcars. This is likely to occur when this massive USA/Canadian project gets underway.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.