John Auers and John Mayes
The upset election of Donald Trump in the 2016 U.S. Presidential contest certainly gave new found hope to TransCanada’s long suffering Keystone XL (KXL) crude pipeline project. With the rejection of KXL by the Obama administration in November 2015 and every expectation that Clinton would win and certainly maintain that position, the project appeared effectively dead until the shocking results on November 8, 2016. And although The Donald has run into problems making progress on some of his other agenda items, he fulfilled one of his most prominent campaign promises by signing a Presidential Memoranda expediting the approval process for KXL shortly after taking office. While not officially sanctioning the project per se, the Memoranda essentially assured that the formal approval would be both certain and soon. However approval does not assure project success, and a lot has changed in the market since KXL was first conceived. With other projects to expand takeaway capacity out of Alberta advancing (Enbridge Line 3 replacement, TransMountain expansion) and oil sands growth prospects challenged by lower crude prices, the need for KXL anytime soon is in serious question. But earlier this month another election took place which could provide a further dose of hope for KXL. This time the election was in Canada, specifically the vote to determine the next government of British Columbia. The results are still in doubt, as no party currently has a majority and uncounted absentee votes could swing the election in several different directions. What does this have to do with KXL’s fortunes you ask? We’ll discuss that In today’s blog, and since the developments are quite important to the oil industry of our neighbor to the north, we will channel one of our favorite national anthems, “O Canada”, as we do.
As Waiting For the Better Day – The Trails and Tribulations of KXL
First proposed in 2008, KXL has been mired in political controversy and a regulatory quagmire almost from the beginning. It faced opposition from a number of groups and roadblocks from various U.S. government entities until President Obama put what seemed like the final “nail in its coffin” with his official rejection of the project just before the Paris Climate Summit in late 2015. Just prior to that denial, TransCanada withdrew its permit request in an attempt to stop the official cancelation, ultimately to no avail.
The pipeline was a major issue in the presidential contest between Republican Trump and Democrat Clinton. Candidate Trump vowed to approve KXL as one of his first actions if elected, while Clinton promised her supporters she would keep it buried. Four days after his inauguration, President Trump signed the Presidential Memorandum to expedite the approval process. Two days after the Memorandum, TransCanada reapplied for the border-crossing permit.
This however is also not the end of the story and happily ever after for KXL (if and when the expected final approval from the U.S. government and relevant state governments comes). The crude oil environment in North America has radically changed since the pipeline was first proposed. At that time, production from the Alberta oil sands was rising rapidly and was expected to continue to do so for many years. Exit capacity issues had already begun to plague the region and additional pipelines were necessary to facilitate continued production growth. KXL, with over 800 MBPD of capacity to move crude to the heavy crude refineries on the U.S. Gulf Coast was going to be the “keystone” facilitating western Canadian production growth for years to come.
The oil price collapse since 2014 has certainly changed the production outlook for Canada. Investment in new mines and upgraders is drying up and non-Canadian companies, such as Marathon and Chevron to name just a couple, are pulling out. This means that less pipeline capacity will be needed than previously predicted. At the same time, with the delay in KXL, alternate crude takeaway projects have been developed. Enbridge is in the process of upgrading its system through the replacement of Line 3 and barring an unforeseen setback that project will be complete by 2019 and will increase throughput by 370 MBPD. Significant rail capacity has also been added, but the biggest competition to KXL is Kinder Morgan’s project for the expansion of its TransMountain pipeline (TMX) from Hardisty to Vancouver, B.C. and Anacortes, WA. TMX has been given the go ahead by the Canadian National Energy Board (NEB) and has received sufficient shipper interest to potentially be on track for a 2020 completion date. It would increase capacity by 590 MBPD and likely would forestall the need for KXL until well into the next decade, if then.
Help us to find, Oh God, in Thee – A Definitive Result in the B.C. Election?
On May 9, 2017, British Columbia conducted a provincial election to elect a new legislature. With about 1,500 absentee votes yet to be counted, the result is a virtual stalemate between the incumbent Liberal party and the New Democratic Party (NDP), with neither reaching the required 44 seat majority. The Liberals are currently leading for 43 seats out of the total of 87, with the NDP leading for 41 seats and their potential allies, the Greens, ahead in three districts. A number of seats remain close enough to change hands if the absentee tallies fall just right and one seat in particular, the district of Courtenay-Comox, is incredibly close with the initial count having the NDP ahead by only 9 votes. Beginning yesterday, all of the absentee votes across the province are being counted, and all of the votes in the Courtenay-Comox district are being recounted. A number of results are certainly possible, ranging from the Liberals eking out a majority, to a continued stalemate and the formation of a minority government by the Liberals, to a potential coalition government between the Greens and one of the two major parties (most likely the NDP if this happens).
So what does this have to do with KXL, since it does not pass through B.C.? Well its main potential rival for Canadian shipper interest does and as KXL was a key campaign issue in the 2016 U.S. Presidential election, TMX was even more so featured in the B.C. vote. The Liberal Party supports the TMX expansion and voted for its approval earlier this year, while both the NDP and Greens are vocal opponents of the project. Certainly an NDP or NDP/Green government would be bad news for TMX but even a minority or slight majority but weakened Liberal leadership might be limited in their ability to defend the project against continued attacks.
From East to Western Sea – TMX Prospects Post-Election/Effects on KXL
While the vote count remains uncertain, the political rhetoric continues to escalate. It could develop into a B.C. vs. Alberta fight as the Albertan premier, Rachel Notley (who happens to be from the NDP), is already warning politicians in British Columbia that they do not have the authority to block the project. Just last week she was granted “intervener” status in a lawsuit seeking to overturn the TMX approval. She has emphasized the point that only the Canadian federal government has this power to block the project and she recently stated,
“I fundamentally disagree with the view that one province or even one region can hold hostage the economy of another province or, in this case, the economy of our entire country.”
Although legal experts agree that the provincial government in B.C. cannot stop the construction of TMX, the shifting tides of the B.C. election may bring more caution to Ottawa. Forcing a major project onto an unwilling public can have long term political repercussions, something on which Prime Minister Trudeau may be reluctant to follow through. Court challenges and local opposition could also slow down project progress. This is where KXL can get some hope, as any significant delay in TMX could result in increased shipper support for KXL, a necessary ingredient for moving forward.
At least on the Canadian side, KXL traverses a path much more amenable to pipelines than the route taken by TMX. Through sparsely populated regions of Alberta, Saskatchewan, and Manitoba, the line faces considerably less local and political resistance, except from die-hard pipeline opponents and anti-oil sands activists. In the case of TMX, the route of the pipeline is not necessarily the biggest problem however. Much of both the populace and regional governments of the Vancouver metro area have been adamantly opposed to the significantly increased tanker traffic an expanded TMX would bring. These opponents plan to use a variety of means to stop or delay the project.Image may be NSFW.
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In the end either TMX or KXL, but not both, will be required to move western Canadian crude to refining markets. The Enbridge Line 3 replacement project (assuming its gets the necessary approval from Minnesota) will furnish some breathing room, but more capacity will be needed early in the next decade to accommodate expected production growth. While TMX seems to be currently in the lead to provide that necessary outlet, the next few months and years have just gotten more interesting. The results of both the U.S. Presidential and the B.C. Legislative elections have certainly served to make the competition closer and kept TransCanada’s hope for KXL alive.
Turner, Mason & Company follows and analyzes the impacts of all developments, whether policy or market related, affecting the global petroleum markets. The last few months and years have been particularly eventful for the industry and the future appears to hold more of the same. We are in the process of preparing our next editions of the Crude and Refined Products Outlook (C&RPO) and the Worldwide Refinery Construction Outlook (WRCO), both of which are scheduled to be release in late July. North American markets have been among the most volatile and unpredictable and we will be paying specific attention to expected developments and impacts on supply, demand and prices (for both crude and refined products) from that region in both of our reports. More information can be obtained by contacting either one of us, visiting our website at turnermason.com or calling Shanda Thomas at 214-754-0898.