Keystone reliance slows for producers

The Hardisty tank farm, which includes the TransCanada Corp. Hardisty Terminal 1, stands at dusk in Hardisty, Alberta, Canada, on Friday, Dec. 6, 2013. Canadian heavy crude reached its strongest level in more than two months on the spot market as a pipeline connection to the U.S. Gulf Coast began filling with crude ahead of its startup next month. Photographer: Brett Gundlock/Bloomberg
The Hardisty tank farm, which includes the TransCanada Corp. Hardisty Terminal 1, stands at dusk in Hardisty, Alberta, Canada, on Friday, Dec. 6, 2013. Canadian heavy crude reached its strongest level in more than two months on the spot market as a pipeline connection to the U.S. Gulf Coast began filling with crude ahead of its startup next month. Photographer: Brett Gundlock/Bloomberg

Now that the U.S. government has cleared the Keystone XL project of any dire environmental impact, attention is returning to why the pipeline was needed in the first place: to get more Canadian oil to U.S. refineries.

TransCanada Corp.’s Keystone promises to ease a bottleneck that’s limited how much Canadian crude oil can flow south. The lack of transportation has created a glut that deflated prices for producers in the country. After five years of waiting for U.S. approval, though, the need for Keystone isn’t as urgent for companies such as Suncor Energy Inc., Cenovus Energy Inc. and Canadian Natural Resources Ltd.

Producers have become less reliant on Keystone XL as new rail terminals increase their ability to ship oil on trains, said Todd Kepler, an analyst at Cormark Securities Inc. in Calgary. Support has grown for other pipeline proposals, including a separate TransCanada project that would carry crude from Alberta to the nation’s Atlantic Coast.

“I don’t think that a positive Keystone announcement would benefit these players to the same degree now that we thought it would have six to 10 months ago,” Kepler said.

While he estimated in May that U.S. approval of Keystone might boost Canadian Natural shares 20 percent, he revised that to 5 percent by December. After Keystone cleared the environmental hurdle on Friday, Canadian Natural rose just 1.2 percent. The S&P/ TSX Energy Index, which includes the largest Canadian oil producers, gained 0.3 percent. TransCanada gained 1.4 percent.

Reaction to the U.S. State Department report was muted because final approval rests with President Barack Obama, and the timing and outcome of his decision remain a guessing game. Canadian producers welcomed the positive step, while emphasizing that their options for transporting crude are widening.

Oil-sands producer Suncor views any increase in takeaway capacity as a good thing, including new pipelines such as Keystone to access Gulf Coast markets, said spokesman Sneh Seetal. At the same time, no single pipeline will affect Suncor’s ability to grow, she said.

Final approval of Keystone should be inevitable “if the decision is based on facts and science, like politicians are promising,” Paul Reimer, vice president of Cenovus, wrote in statement after the report was published. Still Cenovus, which has committed to sending 75,000 barrels of oil a day down Keystone, isn’t putting all its “eggs in one basket” and supports other pipelines too, Reimer said.

TransCanada first submitted an application for the pipeline, which now has a $5.4 billion price tag for the crossborder segment not yet completed, in September 2008. Opponents argue the project would stimulate production of Canada’s pollution-heavy oil sands and lead to higher greenhouse-gas emissions that contribute to climate change.

The U.S. report concluded Keystone XL wouldn’t worsen climate change to the extent its critics say. The approval process now moves on to a 90-day assessment of whether Keystone is in the U.S. national interest, a review that includes economic impact. There’s no deadline for Obama’s decision.

The report “is another important milestone in completing the regulatory review in what is a critical piece of North American energy infrastructure,” TransCanada Chief Executive Officer Russ Girling said during a conference call with reporters after the report was published.

Billionaire Tom Steyer, a Democratic Party donor and Keystone XL foe, called on U.S. Secretary of State John Kerry to begin a review of the “defective” environmental analysis on the pipeline. The final environmental impact statement on Keystone “has suffered from a process that raises serious questions about the integrity of the document,” Steyer wrote to Kerry in a letter.

The pipeline remains important for Canada’s economy. Oil is the country’s most valuable export, with shipments worth about $65 billion in 2012, according to the national statistics agency. Almost all Canadian crude exports go to the U.S., especially to Midwest refineries.

“We’re an oil and gas producer with only one customer,” Alberta Finance Minister Doug Horner said during a Dec. 5 conference call. “As our production continues to grow, we need other outlets to other markets to get better prices.”

Keystone XL, with startup planned for 2016, is one of the first steps needed to expand Canada’s exports. The pipeline would link oil-sands output in Alberta with the world’s largest refining center on the U.S. Gulf Coast.

“Going out the next decade, I think the industry needs every pipeline proposal that’s out there,” Lanny Pendill, an analyst at Edward Jones & Co. in St. Louis, said in an interview.

Keystone XL’s outcome will influence the price of Canada’s heavy crude oil. A lack of transportation has created a glut that led to a discount of as much as $42.50 a barrel on Canadian heavy crude oil against the U.S. benchmark, West Texas Intermediate.

If Keystone is built, Western Canadian Select is forecast to rise, narrowing the gap with the U.S. oil price to $12 a barrel, according to an October research report by CIBC World Markets Inc. Without the line, the price of Canadian heavy crude oil is set to fall to $63 a barrel, compared with $85 for West Texas Intermediate - a gap of $22.

Much of the new output from Canada will travel by rail, said John Stephenson, a portfolio manager who helps oversee about $2.8 billion at First Asset Investment Management Inc. in Toronto.

“Crude-by-rail has grown enormously over the last 20 months or so,” Stephenson said.

Business, Pages 28 on 02/04/2014

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