The Keystone XL Pipeline

“The Keystone Pipeline was dead. And the Dakota Access Pipeline was in even in worse shape because they built it but they weren’t allowed to hook it up,” Trump said, referencing two of the most disputed pipeline projects in the country. ” And in my first week, I approved both. It’s 42,000 jobs. The Dakota is already open and Keystone is starting; it’s actually already started. And that was done in the first week—got it approved.”

Trump said this in November 2017 when he visited Japan.  Only problem is that it’s not true.  Keystone XL pipeline isn’t starting.   The Dakota pipeline was completed before Trump took office.  It was only a problem at one of the terminal points.

The reasons for the Keystone XL delays are many, some ironically as a result of White House “pro-energy” policies.   TransCanada Corporation (symbol TRC) wanted to bring the heavy oil from Alberta’s oil sands to the refineries in Oklahoma and Houston and Port Arthur by pipeline.   The little known fact, is Obama approved many of the vital links of the pipeline,  so oil was flowing from Alberta, Canada to the refineries, before Trump was elected.   This was accomplished through completion of the Keystone pipeline Phases 1, 2, 3a and 3b.   The big controversy was on Phase 4, the Keystone to Steele City leg, shown in green.    The pipeline isn’t just about getting oil from Canada to the US.  It is also adds to the pipeline capacity to ship US oil from oil producing areas, to refineries.  Cushing, Oklahoma has a large storage capacity, so this link  (Phase 3b) was pushed when oil prices were dropping, so they could store more oil, to avoid shutting in wells or halting ongoing development.

 

So,  don’t think Obama was “anti-pipeline” construction since the major links of Keystone were completed during his administration.  It was the Phase 4 expansion as shown in green, that  caused so much controversy.  From 2008 to 2015, there were a number of approvals, but the final State Department approval was delayed as alternative routes were being examined through Nebraska, to avoid potential aquifer contamination.  Wikipedia has done an excellent job of summarizing these contentious 7 years of delays.   Ultimately, President Obama decided not to approve Phase 4,  on the grounds that expanding import of a “dirtier oil” with approximately 14% higher carbon emissions,  “would have undercut [the United States’] global leadership on climate change.”  So, it was a matter of how other countries might perceive this approval, and be less inclined to cut their own carbon emissions.  (See Wikipedia discussion)  Obama also downplayed the impact of the pipeline decision, as he stated,  “for years, the Keystone pipeline has occupied what I, frankly, consider an overinflated role in our political discourse. It became a symbol too often used as a campaign cudgel by both parties rather than a serious policy matter. And all of this obscured the fact that this pipeline would neither be a silver bullet for the economy, as was promised by some, nor the express lane to climate disaster proclaimed by others.”

Trump could not immediately reverse Obama’s decision.    He issued an Executive Memorandum to expedite a new  review of the pipeline on January 24, 2017, four days after taking office. A clip from the signing ceremony is provided in the links below.  At that day,  TransCanada stock was about $48 on January 24, 2017.  (see note at bottom).

On March 24, 2017 the State Department issued a Presidential Permit to begin construction (see State Department link).   This wasn’t enough.  It had to be approved by Nebraska regulators, which  occurred on November 20, 2017.   The approved route was not the one that TransCanada wanted.

It is likely in 2018,  on the tenth anniversary of the initial application ,  all issues on the pipeline will come full circle, with new rounds of economic uncertainty and legal problems.   The cost of steel products, needed for the pipeline is going up, due to Trump’s tariffs.   The oil price seems pretty steady at $60 to $62/bbl,  instead of EIA forecast of $80/bbl several years ago.   The heavy oil from Canada sells at a lower price than the sweet Bakken and Permian  crude, from fracked wells.  The Dakota pipeline, which Trump wants to take credit for, doesn’t help the Keystone XL prospects.  So, it is difficult to know if TransCanada will still want to build the pipeline given the soft oil prices and increases in steel.

Finally, legal problems are mounting.  The National Defense Resource  Council (NDRC) has challenged the State Department’s approval in March 2017, saying it was based on old economic evaluations (2014).  They are seeking State Department documents related to the decision.   The Trump administration has provided some documents, but NDRC claims they were only a selected few of the documents they requested.  The rest is considered “privileged information”,  but the government must back their claim  with a “privilege log” – all this could come to a head soon in March.   See link from NDRC.

The pipeline is likely neither a great economic boost nor an terrible threat to global warming as Obama stated.   He recognized that without the pipeline, the heavy oil from Canada could come to the US.   In the end,  if TransCanada can’t find partners, and commitments from refiners, they may decide the pipeline expansion just isn’t worth it.  At least, at today’s oil prices.  TransCanada trades today at $44.00/shr down from $56.00 when Trump signed the Executive Memorandum in January 2017.

Stay tuned,

Dave

— Note:  Original post stated $56.00 but this was today’s price in Canadian dollars.  Stock price  was  $47.71 at the close in New York on Jan 23, 2017.

Links:

Note:  I admit I grossly simplified the story.  I had to!  See links below which do a much better job with all issues.

Wikipedia: Keystone Pipeline

https://www.cnbc.com/2017/01/24/trump-to-advance-keystone-dakota-pipelines-with-executive-order-on-tuesday-nbc.html

March 24, 2017 State Department

Nebraska Allows Keystone XL Pipeline, but Picks a Different Path

NDRC Keystone XL Update

CNBC: Steel tariffs won’t help Trump achieve his goal of ‘American energy dominance,’ oil industry warns

 

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