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Keystone XL cancelling will stifle Canada’s oil industry for years: experts

Click to play video 'Trudeau faces pressure to change Biden’s mind on Keystone XL' Trudeau faces pressure to change Biden’s mind on Keystone XL
WATCH: Trudeau faces pressure to change Biden's mind on Keystone XL – Jan 21, 2021

Western Canada’s oil producers will likely cope better with Joe Biden’s cancelling of the Keystone XL presidential permit than they did with the same move by ex-president Barack Obama in 2015, an industry analyst says.

But Phil Skolnick, a New York-based analyst for Eight Capital, agreed with other observers that the end of the pipeline will stifle investment and production growth for years in the Canadian oilpatch.

Shortly after being inaugurated on Wednesday, President Biden, who was Obama’s vice-president, fulfilled a campaign promise and again took away the pipeline permit that former president Donald Trump gave back to builder TC Energy Corp. in 2019.

Read more: Biden revokes presidential permit for Keystone XL pipeline expansion on 1st day

The difference between now and five years ago is that producers have two promising alternative pipelines — the Line 3 replacement and the Trans Mountain expansion, together providing nearly one million barrels a day of export capacity — to pin their hopes on, said Skolnick.

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And, he added, after more than five years of poor oil prices and a lack of access to capital markets to raise money, their expectations for growing their oil production have been greatly diminished.

Click to play video 'Alberta Premier Jason Kenney blasts President Biden on revoked Keystone XL permit' Alberta Premier Jason Kenney blasts President Biden on revoked Keystone XL permit
Alberta Premier Jason Kenney blasts President Biden on revoked Keystone XL permit – Jan 20, 2021

“It was worse when it happened in 2015 .. that was bad back then because we didn’t have the big rail buildout and we really didn’t have Line 3, no one really knew about that,” said Skolnick.

“This is bad because (the government of) Alberta spent the money on it but, looking through the lens of the producers, not as big of a deal as some people might think.”

Read more: Revoking presidential permit for Keystone XL a ‘gut punch’ for Alberta: Kenney

Incremental capacity additions to pipelines, technology that makes oil transport more efficient and crude-by-rail capacity that hit a record of 412,000 bpd last February mean the system will be “pipe neutral” — with capacity matching demand — in the first half of this year, he said.

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TC Energy approved spending US$8 billion in the spring of 2020 to complete Keystone XL after the Alberta government agreed to invest about US$1.1 billion (C$1.5 billion) as equity and guaranteed a US$4.2-billion project loan.

Alberta Premier Jason Kenney has said the province has about $1 billion at risk if the project is killed.

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Kenney’s call for trade sanctions over Keystone a political distraction: political studies prof – Jan 21, 2021

The 1,947-kilometre pipeline is designed to carry 830,000 barrels a day of crude oil from Hardisty, Alta., to Steele City, Neb., where it connects with the company’s existing facilities to reach the U.S. Gulf Coast refining centre.

The two other export pipelines will provide enough capacity to allow oil production to grow into the second half of this decade, said Richard Masson, an executive fellow and energy expert at the University of Calgary’s School of Public Policy.

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Read more: TC Energy cutting more than 1,000 Keystone XL construction jobs as work halted

Click to play video 'White House defends revoking Keystone XL permit, says Biden committed to clean energy jobs' White House defends revoking Keystone XL permit, says Biden committed to clean energy jobs
White House defends revoking Keystone XL permit, says Biden committed to clean energy jobs – Jan 21, 2021

But uncertainty about future capacity make it impossible for producers to make decisions about new multibillion-dollar oilsands projects, which could take five years or more to plan and build, despite growing demand for heavy oil from U.S. refiners seeing dwindling imports from Venezuela and Mexico.

“It puts a damper on investment expectations,” Masson said, noting that Canadian oil and gas capital spending fell from more than $80 billion in 2014 to about $24 billion last year, a factor in the economic slump gripping the Calgary and Alberta economies.

“For something to be started up after 2025, you really have to start working on it today.”

Excess space in the oil transport system is vital to provide optionality, energy security and stable pricing, said Canadian Energy Pipeline Association CEO Chris Bloomer, who agreed Keystone XL is needed to ensure future growth rather than short-term demand.

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“We want to be somewhat long in takeaway capacity and access to markets rather than short, which creates (price) discounting,” he said.

Click to play video 'Will the Keystone XL cancellation impact other cross-border pipelines?' Will the Keystone XL cancellation impact other cross-border pipelines?
Will the Keystone XL cancellation impact other cross-border pipelines? – Jan 21, 2021

On Wednesday, Kenney warned that Biden’s decision to cancel Keystone XL after construction had already started sets a “precedent” that could put existing pipelines at risk of “retroactive” shutdowns.

But neither Skolnick nor Masson agreed shutting operating pipelines is a likely scenario given the potential damage that could result for oil consumers in the U.S.

Read more: Trudeau, Biden to speak Friday in 1st foreign call of new presidency

Bloomer said that’s not something his members are worried about.

“Existing operating pipelines? The economy would come to a grinding halt and there would be massive devastating economic impacts if that were to happen,” he said.

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In early 2016, TC Energy (then called TransCanada) launched legal action against the U.S. seeking US$15 billion in damages under the North American Free Trade Agreement. The claim was withdrawn after Trump was elected.

In a report on Thursday, analysts with Tudor Pickering Holt and Co. said they expect the company to make a similar trade appeal this time, but with damages of US$17 billion to account for spending on the project since then.

The report also suggests TC Energy will likely look to recover some of its losses on the pipeline from the shippers who signed agreements to guarantee space on the line.

The company warned Wednesday it will likely post “substantive” mostly non-cash writedowns in its first-quarter financial results.

Earlier Thursday, TC Energy said it planned to eliminate more than 1,000 construction jobs related to its decision to halt work on Keystone XL.

The company had previously warned that blocking the project would lead to thousands of job losses.