Keystone XL: Winners and Losers

By David Dittman • November 17, 2011 • Canadian Edge Weekly

If you take TransCanada Corp (TSX: TRP, NYSE: TRP) at its word waiting 12 to 18 months to start major construction on its Keystone XL project would be a net positive for the company.

Executive Vice President Don Marchand’s statement to a gathering of investors in Toronto that the delay would allow TransCanada time to scrimp and save and fund the extension to its existing Keystone Pipeline System from its cash reserves is the kind of thing that tends to render basketball and other sports-related analogies irrelevant, particularly where corporations and politics collide, because in these games there are no real scoreboards or clocks and the rules are ever-shifting.

In the long run TransCanada’s flexibility–which now includes an agreement with Nebraska legislators to re-route XL away from the critical Ogallala Aquifer–is going to serve it well.

From the very beginning local opposition to the 1,700-mile project was based on potential threats to the regional water supply. The Ogallala Aquifer yields about 30 percent of the nation’s groundwater used for irrigation, and it provides potable water to more than 80 percent of the people inside its footprint, which covers eight states in the Midwest. Democrats as well as Republicans opposed new pipeline construction because of immediate and long-run threats to what is at least as critical a resource as oil.

Nebraska lawmakers will proceed with legislation authorizing a study of all possible routes for Keystone XL through the Cornhusker State. In the meantime, because it will bypass the Sandhills, an already uneasy political coalition might be broken.

TransCanada’s smile-and-nod approach may yet yield a positive response from an administration tripping over itself to preserve support from environmentalists opposed to anything that encourages consumption of fossil fuels as well as unions keen on new work such an infrastructure project is sure to provide. In the short run it may force President Obama onto his heels and into a position where he has to make a decision he’s doing everything possible to avoid ahead of the Nov. 6, 2012, election.

Mr. Marchand and CEO Russ Girling look like problem-solvers ready to not only put people to work but also alleviate a Midwest oil glut and unlock the full potential of North American oil production and refining.

During the same conference Mr. Marchand made his comments about the benefits for TransCanada of delay Mr. Girling opined that approval from the US State Dept could actually come within six to nine months, depending on the progress of three-way negotiations among the company, Nebraska and the federal government. “We can re-route this pipeline easily,” he added, noting that contracted producers and refiners remain committed to it.

Mr. Obama, for his part, may be left to stand with a group that will easily be characterized by his political opponents as fringy far-leftists more interested in trees than jobs.

And what a Quixotic trip that’ll be: TransCanada itself announced, too, this week that it could proceed with the southern, non-Sandhills portion of XL to connect the glutted terminal at Cushing, Okla., to refining capacity on the US Gulf Coast, laying the foundation for future oil sands development, and competitor Enbridge Inc (TSX: ENB, NYSE: ENB), along with its partner Enterprise Products Partners LP (NYSE: EPD), revealed a plan to reverse the flow of its Seaway pipeline to accomplish the same thing.

These and other plans–including efforts to move output westward to British Columbia for eventual transport to Asia as well as refineries on the US West Coast–point to the inevitability of oil sands production.

Until we’re ready to transition from fossil fuels, and as we prepare, we must facilitate the efficient exploitation of a resource that continues to be the most critical variable in the domestic economic equation. Consistent, easy access to cheap oil is the single greatest contributor to the post-World War II US-led boom. Its current and apparently permanent elevated station well above what US consumers are accustomed to is only the most obvious sign of a radically altered global supply-demand equation for all commodities.

Managing the decline of the resource and at the same time fostering development of replacement technology simply won’t be as easy and painless as Margot Kidder, et al., would have you believe.

The State Dept, meanwhile, is sticking with a game plan that will allow Mr. Obama to make a decision after voters determine his fate. “Based on the total mileage of potential alternative routes that would need to be reviewed,” wrote a State Dept spokesperson in response to a question from the Associated press, “we anticipate the evaluation could conclude as early as the first quarter of 2013,” as any new route would require a supplemental environmental impact statement that likely would take more than a year to complete.

Alex Pourbaix, TransCanada’s president for energy and oil pipelines, has said a new route would likely include about 30 to 40 additional miles of pipe and an additional pumping station. A new path for XL hasn’t been laid out, but Mr. Pourbaix–who has also said “it has always been a priority of TransCanada to listen to our stakeholders”–noted that Nebraskans will play a key role in determining it.

Canadians generally weren’t pleased with these developments. Prime Minister Stephen Harper reiterated to President Obama, face to face during a meeting last weekend at the 2011 Asia-Pacific Economic Cooperation Summit in Hawaii, Canada’s intention to seek alternative markets for its oil sands production.

“I did indicate to him,” said Mr. Harper to a press gathering at the APEC Summit, “as I did to the president of China yesterday [Saturday], as our government has indicated, this highlights why Canada must increase its efforts to ensure it can supply its energy outside the US and into Asia in particular.”

The folks who joined hands to form their own line around the White House in opposition to Keystone XL can congratulate themselves on a short-term victory. But forces are already in motion that will bring more similar infrastructure to North America. Maybe over the medium run they’ll realize some disappointment because of what Enbridge and Enterprise Products are doing or when TransCanada gets the go ahead to move on the crucial southern leg of the XL extension.

Oil sands crude, efforts to make its production more efficient and the people who advocate in this behalf are not enemies of progress. The current economy is built to run on reasonably cheap, relatively easy-to-produce fuel, and right now oil and gas are it, the only stuff capable of getting us across the bridge to a green future. TransCanada, whether Keystone XL gets built in something resembling its present form or not, will profit from the continuing and necessary exploitation of local energy resources.

The Roundup

Third-quarter earnings reporting season has now concluded for Canadian Edge Portfolio Holdings. Here’s where you can find analyses. We’ll have a full overview and context as we enter the final weeks of 2011 and prepare for 2012 in the December CE, available at www.CanadianEdge.com on Friday, Dec. 9.

Conservative Holdings

Aggressive Holdings

Stock Talk

Comments Guidelines

Add New Comments

You must be logged in to post to Stock Talk OR create an account