And just like that it seems the fate of TransCanada Corp’s (TSX: TRP, NYSE: TRP) Keystone XL pipeline has turned, again, this week. US Secretary of State Hillary Clinton, whose view on the matter would, by law, seem to be controlling, said last Friday to the Commonwealth Club of San Francisco that although the State Dept hadn’t yet signed off on it “we are inclined to do so, and we are for several reasons.”

Members of Congress representing areas of the US impacted by the extension project and others simply opposed to oil sands development, vocal in recent weeks about their objections to the pipeline, what it will carry and the review process, were quick to respond, hoping to recapture the news buzz earlier in the week about an indefinite delay before the State Dept completes its review and renders a decision.

Long-term realities suggest theirs is a quixotic effort, no matter how noble, or even rational, in the really long term. The Canadian oil sands represent a key element of North American and US energy security, and this concern will ultimately rule the day.

Maybe, given the various ideological affiliations, this is actually an encouraging tale in this season of heightened political silliness.

Secretary Clinton has “authority to act” on cross-border energy infrastructure on behalf of the US government by virtue of a 2004 executive order signed by President Bush. The process includes a State Dept-led environmental impact study, public comment and consultation with other executive branch offices and key legislators, through which we know that environmental groups are lined up against labor unions and Rep. Henry Waxman (D-CA) is allied–if only on the fraught enemy-of-my-enemy basis–with Sen. Mike Johanns (R-NE).

In short, the process is long, complicated and messy. Perhaps it illustrates that sane people can use it to work toward rational solutions based on good-faith debate, no matter what color their team wears during election season. Nobody holds the wisdom on whether the costs of oil sands development are justified. We can’t know the consequences of cutting off so proximate and friendly a source of something that, without it, our economy as presently constituted literally cannot run. That’s why political processes are long, complicated and messy. Welcome to democracy, where we have the power to vote ourselves to glory and ruin.

The Canadian Oil Sands: Pipe It South

The Keystone Pipeline carries synthetic crude from the Canadian oil sands region to refiners in Illinois. The 36-inch, 2,147 mile line went operational in June 2010. US government approval for construction of the first phase of what we refer to as the Keystone Pipeline came two years ago, when the public and politicians were more sensitive to prices at the pump and Americans were interested in diversifying away from far-off, often hostile sources of oil. Keystone XL would roughly double the system’s capacity to 1.1 million barrels of oil a day. TransCanada has long-term shipping deals for most of the line’s capacity with large oil sands producers such as ConocoPhillips (NYSE: COP), Suncor Energy (TSX: SU, NYSE: SU) and Royal Dutch Shell (NYSE: RDS/A).

The benefits of Keystone XL in particular, and the Canadian oil sands generally, are entirely pleasant, but they’re clear. First of all, during construction Keystone XL is expected to create more than 7 million work-hours and over 13,000 new jobs for Americans.

By bringing significant supplies of crude from a friendly neighbor, Keystone XL would strengthen US refining. Houston and the Gulf Coast form the largest refining hub in the US. Declining output from Mexico and geopolitical jockeying by Venezuela mean the region’s refiners are short of supply. Output from the Canadian oil sands, meanwhile, is similar to the hard-to-refine stuff that comes from those two countries.

And oil sands producers will have more ways to get their output to refining hubs, a critical concern in the wake of shutdowns and stoppages along Enbridge Inc’s (TSX: ENB, NYSE: ENB) network in Michigan and Illinois that will show up on third-quarter bottom lines.

Secretary Clinton’s support provides a significant boost to Keystone XL and to the Canadian oil sands. Sen. Johanns is opposed to it because it traverses Nebraska’s Sandhills and the Ogallala Aquifer, not because he’s anti-oil sands. He acknowledges, in fact, the key role the Canadian oil sands will play in satisfying US demand for energy while limiting security concerns and the need for infrastructure to convey synthetic crude to refining hubs. He just wants to spare the porous soil of the Sandhills and the freshwater of the aquifer the threat of a spill.

In a way these concerns are related to the short-term fear aroused by BP’s (NYSE: BP) ridiculous situation in the Gulf of Mexico and the various leaks plaguing Enbridge in the Midwest. But Sen. Johanns’s principal goal is to protect the Ogallala Aquifer, which yields about 30 percent of the nation’s ground water used for irrigation and provides drinking water to 82 percent of the people who live within the aquifer boundary. Mr. Johanns calls the Ogalla Nebraska’s “most treasured resource.”

One mystery here, the subject of a question Sen. Johanns asked in a recent letter to the secretary of state, is why Keystone XL wasn’t built in the footprint of the first phase of the Keystone Pipeline. The rationale for the planned path of the new extension is that it provides the shortest route between Steele City, NE, and Morgan, MT. In his Oct. 14 letter Sen. Johanns contends that planners didn’t even consider following an existing path:

Understanding the primary role that distance plays in the consideration of pipeline alternative routes, I was disturbed by the fact that the DEIS (Draft Environmental Impact Statement) contains no substantial discussion of a route that would run parallel to the existing Keystone pipeline route from Steele City, Nebraska, north to the US border in Cavalier County, North Dakota. This route would be far shorter than the proposed route, and shorter than every alternative considered in the DEIS.

We’ll see if this legitimate question is answered, and whether it forms the basis of the rumored delay reported earlier this week.

Reorienting the US economy away from fossil fuels will take decades. That’s the reality Mrs. Clinton acknowledged when she described the oil sands as “dirty” but noted that it and/or the Gulf of Mexico are the sources we have until the country “gets its act together” on alternatives. Rep. Waxman has described Keystone XL as basically a down payment and several more decades of dirty-fuel dependence. He’s right. And it’s necessary.

The Canadian oil sands and the infrastructure necessary to support its flow to the US, in Secretary Clinton’s words, are part of a “very hard balancing act” between energy security and the pursuit of cleaner technologies. Perhaps it takes another spike in prices at the gas pump to boost it over US political hurdles, but Keystone XL will be built, eventually. The route may get altered, and it’ll almost certainly cost more if there are significant delays. But the reality is that right now the US needs the crude from the Canadian oil sands. 

The Roundup

Benchmark US crude averaged USD76.25 a barrel in the third quarter, nearly 12 percent higher than a year ago as the global economy got stronger and energy demand increased. But Canadian producers suffered because of the outage of Enbridge Inc’s (TSX: ENB, NYSE: ENB) Line 6B in Michigan in late July and the shutdown of the much larger Line 6A for eight days in September. That led to big discounts on their production. At one point last month Western Canada Select heavy crude sold for USD30 a barrel under benchmark West Texas Intermediate; the spread is back to the mid-teens. New York Mercantile Exchange natural gas futures averaged USD4.23 per million British thermal units in the quarter, up 23 percent from a year ago, and Canadian spot gas averaged CAD3.36 a gigajoule, an 18 percent gain.

That’s a brief backdrop as Oil and Gas companies in the How They Rate coverage universe prepare to report third-quarter numbers. We’ll have details beginning next week.

Meanwhile, two more Oil and Gas trusts have announced plans to convert to corporations with cutting distributions, while another will fill in the blanks on its own transition when it reveals third-quarter results Nov. 4.

Baytex Energy Trust’s (TSX: BTE-U, NYSE: BTE) board of directors approved a plan to become a corporation on Dec. 31, 2010, leaving only a Dec. 9 unitholder vote standing in the way of another cut-less conversion. The plan of arrangement calls for a one-for-one, units-for-shares exchange, which will be a tax-deferred event for Canadian and US income tax purposes; no gain or loss for unitholders will be generated by the conversion transaction.

“In the absence of a significant decline in commodity prices,” said management in a statement describing the transaction, “we expect to maintain our current distribution level as a dividend upon conversion to a corporation.”

Baytex Energy Corp will have approximately CAD1.5 billion in Canadian tax pools and CAD200 million in US tax pools with which to protect cash flows. Assuming that the commodity strip price in effect on Aug. 11, 2010 is realized, management projects its cash income tax expenses, expressed as a percentage of funds from operations, will be nil for 2010 and 2011, and will average approximately 5 percent from 2012 to 2015.

Baytex Energy Trust is a buy up to USD34.

Freehold Royalty Trust’s (TSX: FRU-U, OTC: FRHLF) board of directors approved a conversion plan that will also leave the corporate successor’s payout at the same level as its tax-advantaged predecessor’s level. The new company, Freehold Royalties Ltd, will debut Dec. 31, 2010, with a monthly dividend of CAD0.14 per share.

CEO Bill Ingram, explaining the cut-less conversion, noted, “The majority of our oil and gas production comes from mineral title lands and gross overriding royalties, which have no associated capital or operating costs; thus we have relatively low capital expenditure requirements. The strength of our royalties has allowed us to preserve a high payout ratio historically and should allow us to maintain a high dividend payout going forward.”

Freehold will have approximately CAD215 million in tax pools and doesn’t expect to pay corporate tax on income earned in 2011, though planned capital expenditures won’t generate significant new pools; starting in 2012, Freehold Royalties expects to be taxable at a rate of 15 to 20 percent.

Taxable Canadian investors will benefit from the enhanced dividend tax credit for eligible dividends, which will effectively lower their tax rate and boost their yield in 2011. Freehold expects to continue to be classified as a passive foreign investment company (PFIC) under US federal income tax principles. The taxable portion (for Canadian income tax purposes) of dividends to US individuals should continue to be subject to a minimum 15 percent Canadian withholding tax. US individuals holding shares in a qualified retirement account should no longer be subject to the 15 percent Canadian withholding tax on dividends. Hold Freehold Royalty Trust.

Bonavista Energy Trust (TSX: BNP-U, OTC: BNPUF) will clarify its post-conversion dividend policy during its Nov. 4 conference call to discuss third-quarter results.

The board of directors approved the conversion into a “dividend-paying corporation,” to be completed on Dec. 31, 2010. Bonavista is paying CAD0.16 per unit for the fourth quarter of 2010, based on a distribution policy of paying up to 50 percent of funds from operations. Bonavista Energy Trust is a buy up to USD22.

Here are announcement dates for the CE Portfolio Conservative Holdings:

• AltaGas Income Trust (TSX: ALA-U, OTC: ATGFF)–Oct. 28 (confirmed)
• Artis REIT (TSX: AX-U, OTC: ARESF)–Nov. 9 (confirmed)
• Atlantic Power Corp (TSX: ATP, NYSE: AT)–Nov. 10 (confirmed)
• Bell Aliant Regional Communications Income Fund (TSX: BA-U, OTC: BLIAF)–Nov. 3 (confirmed)
• Bird Construction Income Fund (TSX: BDT-U, OTC: BIRDF)–Nov. 9
• Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPFF)–Nov. 9 (confirmed)
• Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF)–Nov. 8 (confirmed)
• Cineplex Galaxy Income Fund (TSX: CGX-U, OTC: CPXGF)–Nov. 11 (confirmed)
• CML Healthcare Income Fund (TSX: CLC-U, OTC: CMHIF)–Nov. 11
• Davis + Henderson Income Fund (TSX: DHF-U, OTC: DHIFF)–Nov. 2 (confirmed)
• IBI Income Fund (TSX: IBG-U, OTC: IBIBF)–Nov. 4
• Innergex Renewable Energy (TSX: INE, OTC: INGXF)–Nov. 12
• Just Energy Income Fund (TSX: JE-U, OTC: JUSTF)–Nov. 5
• Keyera Facilities Income Fund (TSX: KEY-U, OTC: KEYUF)–Nov. 2 (confirmed)
• Macquarie Power & Infrastructure Income Fund (TSX: MPT-U, OTC: MCQPF)–Nov. 3 (confirmed)
• Northern Property REIT (TSX: NPR-U, OTC: NPRUF)–Nov. 10 (confirmed)
• Pembina Pipeline Corp (TSX: PPL, OTC: PBNPF)–Nov. 3 (confirmed)
• RioCan REIT (TSX: REI-U, OTC: RIOCF)–Oct. 28 (confirmed)
• TransForce (TSX: TFI, OTC: TFIFF)–Oct. 29 (confirmed)

And here are announcement dates for the Aggressive Holdings:

• Ag Growth International (TSX: AFN, OTC: AGGZF)–Nov. 12
• ARC Energy Trust (TSX: AET-U, OTC: AETUF)–Nov. 1 (confirmed)
• Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–Nov. 11
• Daylight Energy (TSX: DAY, OTC: DAYYF)–Nov. 4
• Enerplus Resources Fund (TSX: ERF-U, NYSE: ERF)–Nov. 12 (confirmed)
• Newalta Corp (TSX: NAL, OTC: NWLTF)–Nov. 5
• Parkland Income Fund (TSX: PKI-U, OTC: PKIUF)–Nov. 5
• Penn West Energy Trust (TSX: PWT-U, NYSE: PWE)–Nov. 5
• Perpetual Energy (TSX: PMT, OTC: PMGYF)–Nov. 9
• Peyto Energy Trust (TSX: PEY-U, OTC: PEYUF)–Nov. 11
• Provident Energy Trust (TSX: PVE-U, NYSE: PVX)–Nov. 10
• Trinidad Drilling (TSX: TDG, OTC: TDGCF)–Nov. 4
• Vermilion Energy (TSX: VET, OTC: VEMTF)–Nov. 5
• Yellow Pages Income Fund (TSX: YLO-U, OTC: YLWPF)–Nov. 3