Keystone XL: Good news as oil production ramps up in Western Canada

By Bryan Livingston
Managing Partner

Canadian oil producers have experienced their share of setbacks to expand pipeline capacity amid growing oil & gas production, but Nebraska’s recent approval of the Keystone XL has us feeling bullish about Western Canadian oil economics.

Keystone XL, or KXL for short, is TransCanada’s plan to expand its heavy oil transportation capacity by 800,000 barrels a day from the oil sands and unconventional shale plays in Western Canada to the Gulf of Mexico.

The new pipeline would stretch from the city of Hardisty, Alberta, through Montana, South Dakota and Nebraska, before tying into the existing Keystone pipeline, which goes south through Kansas, Oklahoma and Texas, to terminals in Houston and Nederland. KXL would also tie into an existing Keystone pipeline at Steele City, Nebraska, which carries oil east into Illinois.

KXL is a good news story for oil producers in Western Canada, who have sought additional export capacity for the country’s growing production for several years, but have experienced some recent setbacks:

  1. TransCanada abandoned its plans for the Energy East pipeline amid Canada’s uncertain regulatory environment. The 1.1 million-barrels-per-day pipeline would have carried crude from Alberta in the west to New Brunswick in the east to the Atlantic Ocean. The pipeline would have given direct export capability to Canadian producers without having to pass through the United States.
  2. The Pacific Northwest LNG project, the Northern Gateway pipeline, and Nexen’s Aurora LNG project have also all been canceled.

But there’s also good news with two other projects that have been green-lighted and are being pursued:

  1. The Trans Mountain expansion project is on track, twinning an existing pipeline from the Edmonton, Alberta terminals to the Port of Vancouver. Capacity is scheduled to rise from 300,000 to 890,000 barrels a day. The majority of the new pipeline will be built using existing right-of-way. The existing pipeline will carry refined products and light crudes, while the new line is expected to carry oil sands heavy oil. Some political opposition to Trans Mountain continues in British Columbia, which earlier this year inaugurated an NDP-Green coalition government. On the other hand, local efforts to stop the project in the town that hosts the Trans Mountain terminal, Burnaby, BC, were overruled in court on December 7. We see this as an encouraging sign that the project’s Federal support will win the day.
  2. Enbridge has embarked on a multimillion-dollar Line 3 pipeline replacement program between Hardisty and Superior, Wisconsin, the largest replacement project in the company’s history. An existing 34-inch pipe will be replaced with a 36-inch pipe for much of the route. The pipeline will increase the reliability of transporting Western crude to refinery markets in the U.S. and Eastern Canada.

Certainly, these projects — KXL, Trans Mountain and Enbridge Line 3 — still have some regulatory hurdles to cross, but we see the outlook brightening for Western Canadian oil producers. KXL, halted under the Obama Administration, is the latest to gain new life.

Canada currently exports about 2.5 million barrels per day via existing Enbridge and TransCanada pipelines and through Trans Mountain’s pipeline that goes to the Port of Vancouver. However, these existing pipelines are inadequate to handle Canadian oil production that is expected to ramp up by 40% or 50% over the next three years.

KXL could potentially be the first to come online, before Enbridge and Trans Mountain. However, Nebraska’s approval of the pipeline also requires TransCanada to use a non-preferred alternate route. That could open the door to delays and will require negotiations with a new group of landowners. TransCanada said it will make a final investment decision concerning the KXL sometime in December.

In the meantime, we remain hopeful that these projects will continue to move forward and eventually boost the economic future for Western Canadian oil & gas producers in a significant way.

Capital Alliance Corporation is a Dallas-based investment banking firm with an extensive international reach and a 40-year history of providing trustworthy advice to private company shareholders who want to sell their businesses. Our team has deep operational and M&A experience across many sectors, including energy infrastructure.

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