Keystone XL Resurrection Has Challenges

The final approval for 830,000 b/d Keystone XL was obtained today as the Nebraska Public Service Commission voted in favor of the pipeline. However, due to environmental concerns, the preferred route proposed by TransCanada was rejected, leaving the company to reevaluate its options. If shipper interest is strong enough to outweigh the cost associated with the inevitable legal challenges, the project will likely go forward, delivering more Canadian crude to the USGC in 2021.

The controversial Keystone XL pipeline has been resurrected after years of dispute and reviews, presidential permit denials and subsequent revival, and now includes the final approval it needed from the state of Nebraska. The preferred route was rejected by the Nebraska Public Service Commission on environmental concerns and a new route was proposed by the state. If TransCanada gives the project the greenlight, start-up is estimated for 2021.

The company is reviewing the shipper commitments from the open season that closed in October before making its final investment decision. The two main economic obstacles to the project come from the costs associated with the newly proposed route and from the inevitable legal challenges by environmental and indigenous groups. Nevertheless, if shipper interest is strong enough, the project will likely go forward.

More Heavy Crude will Flow to USGC

Keystone XL will carry crude from terminals in Hardisty, Alberta to Steele City, Nebraska. From there, volumes will be injected into the existing Keystone system that branches into two segments; one going to Midwest refiners via Wood River and Patoka, IL, and the other segment to the Cushing hub. Since Midwest refiners' ability to take more heavy crude is limited, the line to Cushing will be the likely candidate for the additional volumes from Keystone XL.

From Cushing, volumes can then flow onto TransCanada's 700,000 b/d Market Link to Houston and Nederland, or via the 850,000 b/d Seaway pipeline to Houston. Throughput volumes on these two lines have been increasing and rate hikes are in the offing. Keystone XL will mean more heavy crude delivered to the USGC as Canadian crude looks to compete and gain market share from heavy crude imported from Latin America.

Volumes from Canada to PADD 3 have been growing over the past few years and are currently about 385,000 b/d. Based on ESAI Energy's forecast of Oil Sands production growth, by 2021, roughly 600,000 b/d of additional volumes are possible, if all growth is directed to the USGC.

Excess Pipeline Capacity

Although the existing Keystone line and the Enbridge Mainline system have been running close to capacity, the expansion of Enbridge Line 67 and the Line 3 replacement, will free-up most of the constraints in the next two years. Additionally, the 590,000 b/d Trans Mountain Expansion, that will take crude from Alberta to the western coast of Canada in Burnaby, British Columbia is slated for start-up by 2020, if current legal challenges do not delay the project further.

Shipper interest is really the key issue. The coming pipeline expansions, along with Keystone XL, represent more takeaway capacity than the current outlook for Alberta's oil sands production over the next several years. By 2021, when Keystone XL could be operational, growth from the Oil Sands is forecast to be only 650,000 b/d, far below the almost 2.2 million b/d of additional capacity that would be available if both Trans Mountain and Keystone XL go forward. This brings into question the degree of shipper interest for both these projects.

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ESAI EnergyKeystone XL PipelineUnited StatesNebraskaTransCanadaCanadaOil Sandsalberta

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