TransCanada Corp. (TRP) will proceed with building a $2.3 billion segment of its Keystone XL oil pipeline from Oklahoma to the Texas coast so that it isn’t delayed by U.S. approval for the rest of the line.
The company, based in Calgary, expects the segment to begin carrying crude from the Cushing, Oklahoma, storage hub to refineries on the U.S. Gulf Coast as soon as mid-year 2013, according to a statement today. TransCanada is separating the Cushing line from its application to President Barack Obama for approval of a Keystone expansion that will bring crude into the U.S. from Canada’s oil sands.
“We remain committed to building this overall project in a timely and efficient manner and to meet demand of shippers,” said TransCanada Chief Executive Officer Russ Girling in an interview today. Shippers are making multi billion dollar commitments spanning decades and “they haven’t wavered from Keystone,” he said.
As originally envisioned, Keystone XL would have carried as much as 830,000 barrels of oil a day from Alberta, Canada, and the Bakken Shale formation in North Dakota and Montana along a 1,661-mile (2,673-kilometer) path to Texas refineries. The full $7.6 billion Keystone pipeline needed a permit from the State Department because it crossed the U.S.-Canada border.
Obama’s Keystone Rejection
Obama rejected Keystone XL in January based on concerns the pipeline might pollute drinking water resources in Nebraska. Obama said a Congressional deadline left him too little time to consider the revised route through Nebraska that the company accepted in November.
As a stand-alone project, the Cushing segment will not need approval from the State Department. The pipeline will help relieve oversupplies that have accumulated in the U.S. Midwest because of a lack of pipeline capacity to carry the oil to refineries on the coast.
Cushing is the delivery point for crude oil traded on the New York Mercantile Exchange. A lack of pipeline capacity between Cushing and the Gulf Coast, where most refineries are located, has caused U.S. oil to trade at a discount to imports.
Obama’s administration supports TransCanada’s plan to build the Oklahoma-to-Texas segment separately.
“Moving oil from the Midwest to the world-class, state-of- the-art refineries on the Gulf Coast will modernize our infrastructure, create jobs, and encourage American energy production,” White House Press Secretary Jay Carney said in a statement today.
TransCanada will apply for a permit “in the near future” to build the section from the U.S.-Canada border to Steele City, Nebraska, according to the statement. The company may alter the route in Nebraska, the company said in the statement.
Proceeding with the Cushing (CLCO1) section of the line will allow TransCanada to realize income from the pipeline before the full project is built, said Steven Paget, an analyst with FirstEnergy Capital Corp. in Calgary.
“The Gulf Coast Project will transport growing supplies of U.S. crude oil to meet refinery demand in Texas,” Girling said in the statement. “Gulf Coast refineries can then access lower- cost domestic production and avoid paying a premium to foreign oil producers.”
Environmental groups remain opposed to all sections of the pipeline because of concerns about the potential environmental impact of tar-like bitumen known as oil-sands crude.
“Whether in pieces or as a whole, the Keystone XL tar sands pipeline is not in the national interest,” Susan Casey- Lefkowitz, director of international programs for the New York- based National Resources Defense Council, wrote in a comment published on the environmental organization’s website. “Raw tar-sands oil going from the Midwest to the Gulf for refining means serious pipeline safety issues for landowners.”
Enbridge Inc. (ENB) and Enterprise Products Partners LP (EPD) are preparing to reverse the Seaway pipeline between Cushing and Houston, which will also help alleviate the glut at Cushing. Seaway will be able to carry 150,000 barrels by June 1, and will be expanded to 400,000 barrels by early 2013, the companies have said.
FirstEnergy’s Paget said there’s room for both pipelines, since oil production is growing in the U.S. Also, the full Keystone pipeline will eventually bring much more oil to Cushing, he said.
“The Seaway line’s contracts are independent of Keystone,” said Paget, who rates TransCanada’s shares“market perform” and owns none. “I’m not saying both lines will be full.”
TransCanada rose 0.9 percent to C$42.39 today in Toronto.
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