Donald Trump is convinced the Keystone XL oil pipeline he revived with an executive order on Jan. 24 will gush money. “I want it built, but I want a piece of the profits,” he said last year at a campaign stop in North Dakota. “That’s how we’re going to make our country rich again.”
He could be in for an unpleasant surprise. Market changes since the $8 billion cross-border pipeline was proposed in 2008 have lowered its profit potential. U.S. oil production has jumped by more than 60 percent, to around 9 million barrels a day, undercutting the need for the kind of imported crude the Keystone XL would bring from Western Canada. At the same time, oil prices have fallen by about 40 percent, to about $50 a barrel, raising questions over the viability of Canada’s reserves of heavy oil sands, which are among the most expensive types of crude to produce relative to their market value. Traders spend a lot to move Canadian crude down from Alberta; cheaper transportation via Keystone XL would allow producers to charge higher prices at the wellhead.
If Congress passes the kind of border-adjusted tax system the president has occasionally expressed interest in, imported Canadian oil could be taxed and made significantly more expensive for American buyers relative to oil produced in the U.S. That alone could be enough to scuttle the entire project. “If there’s a border-adjusted tax, I don’t think it’s going to be built,” says energy economist Philip Verleger of PKVerleger in Carbondale, Colo.
TransCanada proposed Keystone XL as a way to provide its existing Keystone pipeline system with a more direct route from the oil fields of Western Canada to U.S. refineries, including ones on the Gulf Coast. The Gulf extension is complete. After a lengthy review, President Obama rejected the application for the northern section in November 2015, saying that “shipping dirtier crude oil into our country” wouldn’t create many long-term jobs, lower gasoline prices, or increase energy security. In 2014 the U.S. Department of State said the pipeline would create just 35 permanent U.S. jobs.
Still, Trump reversed Obama’s decision as one of his first acts in office, insisting that the pipeline be built using American-made steel and inviting TransCanada to reapply for a presidential permit. The company still intends to make a go of Keystone XL. At a conference sponsored by Canadian Imperial Bank of Commerce the day after Trump’s announcement, TransCanada Chief Executive Officer Russell Girling said “we’re obviously very, very pleased with that announcement.” Investors reacted positively as well. TransCanada shares, which rose 3 percent the day after Trump was elected, gained an additional 2.7 percent the day of the announcement.
But even the pipeline’s biggest backers aren’t taking things for granted. Girling acknowledged at the CIBC conference that the project depends on getting firm commitments from oil shippers to use it, and those conversations have barely begun. “I believe that the economics are still there for these projects, but we’ll see,” he said.
One problem for TransCanada is that the supply of rival pipeline capacity will increase by 2019. The Canadian government has approved the Trans Mountain Expansion Project, which will carry more oil to the West Coast, and the Enbridge Line 3 replacement project, which will carry more oil east to Wisconsin. Cenovus Energy, one of the biggest producers in oil sands, committed to ship 75,000 barrels of oil a day via Keystone XL the first time around, but it hasn’t re-upped. “We’re still waiting to see what the deals of the reconstituted project look like,” spokesman Reg Curren says.
U.S. tax policy is a less-predictable obstacle. A destination-based cash-flow tax such as the one being pushed by House Speaker Paul Ryan would give independent U.S. oil producers a big cost advantage against Canadian imports, undermining the pipeline’s economics, says Verleger.
The best argument for going ahead with the pipeline is that even if the economics aren’t great now, Trump’s time in office might be TransCanada’s best shot at getting a yes. Says Credit Suisse analyst Andrew Kuske: “This is an era that’s favoring pipeline builders. You have a clear window of time.”
—With Robert Tuttle
The bottom line: If Trump decides to apply a border tax on imports, he could end up killing the economics of the Keystone XL pipeline.