Keystone Ardor Cools Among Producers With More Options

Now that the U.S. government has cleared the Keystone XL project of any dire environmental impact, attention is returning to why the pipeline was needed in the first place: to get more Canadian oil to U.S. refineries.

TransCanada Corp.’s Keystone promises to ease a bottleneck that’s limited how much Canadian crude can flow south. The lack of transportation has created a glut that deflated prices for producers in the country. After five years waiting for U.S. approval, though, the need for Keystone isn’t as urgent for companies such as Suncor Energy Inc., Cenovus Energy Inc. and Canadian Natural Resources Ltd.

Producers have become less reliant on Keystone XL as new rail terminals increase their ability to ship oil on trains, said Todd Kepler, an analyst at Cormark Securities Inc. in Calgary. Support has grown for other pipeline proposals, including a separate TransCanada project that would carry crude from Alberta to the nation’s Atlantic Coast.

“I don’t think that a positive Keystone announcement would benefit these players to the same degree now that we thought it would have six to 10 months ago,” Kepler said.

While he estimated in May that U.S. approval of Keystone might boost Canadian Natural shares 20 percent, he revised that to 5 percent by December. After Keystone cleared the environmental hurdle on Jan. 31, Canadian Natural rose just 1.2 percent. The S&P/TSX Energy Index, which includes the largest Canadian oil producers, gained 0.3 percent. TransCanada gained 1.4 percent.

Final Approval

Reaction to the U.S. State Department report was muted because final approval rests with President Barack Obama, and the timing and outcome of his decision remain a guessing game. Canadian producers welcomed the positive step, while emphasizing that their options for transporting crude are widening.

Oil-sands producer Suncor views any increase in takeaway capacity as a good thing, including new pipelines like Keystone to access Gulf Coast markets, said Sneh Seetal, a spokeswoman. At the same time, no single pipeline will affect Suncor’s ability to grow, she said.

Final approval of Keystone should be inevitable “if the decision is based on facts and science, like politicians are promising,” Paul Reimer, vice president of Cenovus, wrote in an e-mailed statement after the report was published. Still Cenovus, which has committed to sending 75,000 barrels of oil a day down Keystone, isn’t putting all its “eggs in one basket” and supports other pipelines too, Reimer said.

2008 Application

TransCanada first submitted an application for the pipeline, which now has a $5.4 billion price tag for the cross-border segment not yet completed, in September 2008. Opponents argue the project would stimulate production of Canada’s pollution-heavy oil sands and lead to higher greenhouse-gas emissions that contribute to climate change.

The U.S. report concluded Keystone XL wouldn’t worsen climate change to the extent its critics say. The approval process now moves on to a 90-day assessment of whether Keystone is in the U.S. national interest, a review that includes economic impact. There’s no deadline for Obama’s decision.

The report “is another important milestone in completing the regulatory review in what is a critical piece of North American energy infrastructure,” TransCanada Chief Executive Officer Russ Girling said on a conference call with reporters after the report was published.

‘Defective’ Analysis

Billionaire Tom Steyer, a Democratic Party donor and Keystone XL foe, called on U.S. Secretary of State John Kerry to begin a review of the “defective” environmental analysis on the pipeline. The final environmental impact statement on Keystone “has suffered from a process that raises serious questions about the integrity of the document,” Steyer wrote to Kerry in a letter.

The pipeline remains important for Canada’s economy. Oil is the country’s most valuable export, with shipments worth about C$73 billion ($65 billion) in 2012, according to the national statistics agency. Almost all Canadian crude exports go to the U.S., especially to Midwest refineries.

“We’re an oil and gas producer with only one customer,” Alberta Finance Minister Doug Horner said during a Dec. 5 conference call. “As our production continues to grow, we need other outlets to other markets to get better prices.”

Keystone XL, with startup planned for 2016, is one of the first steps needed to expand Canada’s exports. The pipeline would link oil-sands output in Alberta with the world’s largest refining center on the U.S. Gulf Coast.


For refiners such as Valero Energy Corp., Keystone isn’t as vital as it used to be. Within the next several months, Valero will be able to ship as many as 55,000 barrels a day of heavy Canadian crude on rail and river barges.

Although the company is still in favor of the pipeline since it’s a cheaper and more reliable means of transport, heavy crude will still arrive from Canada, Mexico and South America without it, said Bill Day, a spokesman for the San Antonio-based company.

“I wouldn’t say it’s make or break,” Day said in a telephone interview. “It’s been five years since it was proposed and we’re still doing well.”

Heavy Crude

Keystone XL’s outcome will influence the price of Canada’s heavy crude. A lack of transportation has created a glut that led to a discount of as much as $42.50 a barrel on Canadian heavy crude against the U.S. benchmark, West Texas Intermediate.

If Keystone gets built, Western Canadian Select is forecast to rise, narrowing the gap with the U.S. oil price to $12 a barrel, according to an October research report by CIBC World Markets Inc. Without the line, the price of Canadian heavy crude is set to fall to $63 a barrel, compared with $85 for WTI -- a gap of $22.

Oil-sands producers are poised to spend C$25 billion to C$30 billion a year to expand production regardless of the Keystone XL decision, RBC Capital Markets analysts led by Mark Friesen said in a September report.

Much of that new output will travel by rail, said John Stephenson, a portfolio manager who helps oversee about C$2.8 billion at First Asset Investment Management Inc. in Toronto.

“Crude-by-rail has grown enormously over the last 20 months or so,” said Stephenson.

Load Crude

The capacity of rail terminals to load crude oil in Western Canada will quadruple by the end of next year to 905,000 barrels a day, according to an August report by Calgary investment bank Peters & Co. Keystone XL’s planned capacity is as much as 830,000 barrels a day.

“This is now bigger than KXL,” Stephenson said.

Rail companies including Canadian Pacific Railway Ltd. and Canadian National Railway Co. have benefited from the pipeline delays. Canadian National in October reported a 17 percent increase in petroleum and chemicals sales in the third quarter, and Canadian Pacific posted the same gain in industrials and consumer products revenue, which includes crude shipments.

Rail fills the gap while TransCanada and its Canadian pipeline rival Enbridge Inc., as well as Houston-based Kinder Morgan Energy Partners LP, work on other pipelines that would provide access to coasts and expand exports.

“The market has figured out that Keystone is not the be-all, end-all,” Cormark’s Kepler said.

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