APPROVED!…But…Bittersweet Keystone Win Means Canada’s U.S. Dependence Deepens

Here is one thing Keystone XL won’t do for Canada: wean the country’s oil industry off its dependence on the U.S.

While approval of the project in Nebraska was welcomed by Alberta and its producers, it came also as a reminder that Canada hasn’t been able to clear two crucial projects within its own soil, to ship crude to other markets from its own ports. Meanwhile, TransCanada Corp.’s Keystone XL ties the country’s industry even more to its southern neighbor.

As Nebraska’s Public Service Commission voted to approve Keystone XL’s route through the state early Monday, Kinder Morgan Inc.’s Trans Mountain expansion to British Columbia’s Pacific Coast remained mired in regulatory delays and legal challenges even after gaining federal approval last year. The decision in Nebraska also came after TransCanada’s Energy East project, which would have linked Western Canadian producers to the Atlantic Coast, was canceled last month amid fierce opposition from Quebec.

The U.S. has become a “monopoly buyer” of Alberta’s oil, Alberta Premier Rachel Notley said at a speech in Toronto Monday. “We continue to urge Canadian decision makers to follow this example so we can have access to global markets from Canadian ports, supporting good Canadian jobs.”

Canada sent about 99 percent of its crude exports to the U.S. last year with the remainder mostly going to the U.K., Italy and Spain from oil platforms off the coast of Newfoundland and Labrador, Statistics Canada data show. While the existing 300,000-barrel-a-day Trans Mountain line is the only export pipeline that connects to a Canadian port, nearly all of the crude it carries supplies refineries in Washington state.

New Markets

“Pipeline infrastructure to new markets is critical,” Sneh Seetal, spokeswoman for Suncor Energy Inc., Canada’s biggest oil company, said in a phone interview. “Expanded connection to the U.S. is critical but so is access to new markets.”

Another project that’s set to send more Canadian crude to the U.S. is Enbridge Inc.’s replacement and expansion of Line 3, which runs from Alberta to Superior, Wisconsin. While construction is still awaiting the go-ahead from Minnesota, Enbridge Chief Executive Officer Al Monaco said in September that the company is confident approval will be granted.

Meanwhile, a plan to expand Trans Mountain to 800,000 barrels a day by December 2019 could be delayed by nine months, the company warned last month. On Oct. 26, Kinder Morgan asked the National Energy Board for permission to start work as the company waited permits from the city of Burnaby, British Columbia, the end point of the line in Canada and a center of opposition to the project.

Access to Asia

Canadian oil producers say expanding Trans Mountain is crucial to gain access to Asia, where demand for heavy oil is growing. While line 3 may be expanded by late 2019, “Trans Mountain is still having issues,” Kevin Birn, a director at IHS Energy in Calgary, said in a phone interview.

While Keystone XL would likely increase the price for Canadian crude by allowing more volumes to reach the U.S. Gulf Coast refining center, Trans Mountain would have the added benefit of opening access to customers in Asia, said Mike Walls, a Boulder, Colorado-based crude oil analyst at Genscape Inc.

“The transportation economics from Western Canada are much stronger” to Asia, he said. The price of heavy Canadian crude is “just going to be bid up that much more.”

Heavy Western Canadian Select crude, the benchmark for the oil sands, would trade at a discount of less than $10 a barrel to West Texas Intermediate futures from almost $16 a barrel currently after Line 3, Keystone XL and Trans Mountain are all operational, according to Walls and  Tim Pickering, chief investment officer at Auspice Capital Advisors Ltd.

WCS’s discount has widened over the past two months as pipelines out of Western Canada fill up and new oil sands production enters the market from Suncor’s new Fort Hills mine and Canadian Natural Resources Ltd.’s expanded Horizon mine and upgrader. The bigger discount is necessary to offset the higher costs of shipment crude by rail.

The Keystone XL project still faces potential legal challenges. The Nebraska panel that approved the project also mandated an alternative route that was immediately targeted by the project’s opponents as lacking adequate vetting.

“This may have some positive effect but not to the same extent as if we have tidewater access,” Pickering said by phone. “Trans Mountain is mission critical for Canada.”