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Nebraska approves alternate route for Keystone XL pipeline

Oil producers in the Alberta oil sands and elsewhere in Western Canada are facing pipeline bottlenecks as production grows.

by Andrew Harris, Meenal Vamburkar and Robert Tuttle 

Nebraska’s approval of an alternative route could throw more uncertainty into the mix for the long-delayed Keystone XL oil pipeline. 

The Public Service Commission approved TransCanada Corp.’s project on a three-to-two vote, removing one of the last hurdles to the Calgary-based company’s construction of the $8 billion, 1,179-mile (1,897-kilometer) conduit, which has been on its drawing boards since 2008. The decision, though, wasn’t wrinkle-free: The panel mandated an alternative route that was immediately targeted by the project’s opponents as lacking adequate vetting. 

TransCanada is now "assessing how the decision would impact the cost and schedule of the project,” Russ Girling, TransCanada’s chief executive officer, said in a statement. The company’s shares rose 1.3% to C$63.35 at 12:24 p.m. in New York trading.

The uncertainty expressed by Girling was quickly reflected in analyst notes.

Related content: PSC approves Keystone XL alternative mainline route

"While today’s Keystone XL pipeline approval is an important milestone, it does not provide certainty that the project will ultimately be built and begin operating," said Gavin MacFarlane, a vice president at Moody’s Investors Service. “Pipeline construction would negatively affect TransCanada’s business risk profile through increased project execution risk, and would likely put pressure on financial metrics." 

Jane Kleeb, president of the environmental advocacy group Bold Alliance, said green-lighting the alternative may have helped the commission reach a "middle ground solution.” But it opens new questions that she said her group would likely explore in federal court. 

That view mirrored a dissenting opinion from Commissioner Crystal Rhoades, who spoke before the final vote. The alternative route needed more study on both the state and federal level, she said, and it failed to give landowners along that different path the ability to address the commission.

‘Never Intended’ 

As an example, Rhoades said Nebraska’s Department of Environmental Quality didn’t analyze the alternative route at all in its 2013 report. "It is clear” TransCanada “never intended it to be considered," she said.

In its post-hearing brief, TransCanada told the panel its "preferred route was the product of literally years of study, analysis and refinement by Keystone, federal agencies and Nebraska agencies," and that no alternate route, even one paralleling the Keystone mainline as the approved path does, was truly comparable. 

Oil producers in the Alberta oil sands and elsewhere in Western Canada are facing pipeline bottlenecks as production grows, forcing increased volumes onto rail cars. Since rail is a more expensive form of transport, Heavy Canadian crude prices will need to trade at a bigger discount to West Texas Intermediate futures.

That discount has widened to more than $15 a barrel today from less than $10 a barrel in August. Keystone XL construction, along with Kinder Morgan Inc.’s Trans Mountain expansion and Enbridge Inc.’s Line 3 expansion, could narrow the discount to less than $10 by early next decade, Tim Pickering, chief investment officer at Auspice Capital Advisors Ltd., said in a telephone interview.

Mexico, Venezuela

The pipeline may also be more commercially viable given declining heavy oil production in Mexico and ongoing instability in Venezuela, said Zachary Rogers, a refining and oil markets research analyst at Wood Mackenzie, said in a statement. Canadian producers are an alternate source of heavy crude for U.S. Gulf Coast refiners.

Bret Harris, a spokesman for Calgary-based Cenovus Energy Inc., a committed oil-sands shipper on the proposed pipeline, said the approval “is in the best interest of the industry, best interest of Canada and the best interest of the U.S. as well. We are pleased to see that decision.”

Dennis McConaghy, former executive vice president of corporate development at TransCanada, said he would expect senior management to announce they will go ahead with the project by year’s end with construction by the later half of 2019. Completion of the line would come a couple years later.

“The project could have been very seriously set back if they hadn’t got this approval today,” he said.

Volume Needed

McConaghy said he believes the company has secured the volume needed to make the project economically viable. But he added that “there is no question there is going to be all kinds of legal obstruction that will be resorted to by opponents.”

The panel’s decision overrode the objections of environmental conservationists, Native American tribes and landowners along the pipeline’s prospective route. The project had the support of the state’s governor, Republican Pete Ricketts, its chamber of commerce, trade unions and the petroleum industry.

With Nebraska’s go-ahead in hand, TransCanada still must formally decide whether to proceed with construction on the line, which would send crude from Hardisty, Alberta, through Montana and South Dakota to Nebraska, where it will connect to pipelines leading to U.S. Gulf Coast refineries. The XL pipeline would add the ability to move 830,000 barrels a day, more than doubling the existing line’s capacity.

The company’s open season for gauging producers’ interest closed late last month, and TransCanada executives have indicated that they’ve secured enough shipping commitments to make the project commercially worthwhile.

President Barack Obama’s administration rejected TransCanada’s bid for permission to build across the U.S. border in 2015. President Donald Trump vowed to reverse that determination and, in January, invited the company to reapply. Approval was quickly granted. He also championed completion of the Energy Transfer Partners LP-led Dakota Access Pipeline, which runs from northwestern North Dakota to Illinois via South Dakota and Iowa.

Four-Day Hearing

The panel heard testimony and took in evidence during a four-day August hearing. Its power over the project is drawn from the state’s constitution.

The U.S. State Department found the KXL project would support about 42,100 jobs and contribute $34 billion to the economy -- including millions of dollars of new economic activity, millions of dollars in annual property tax revenue and hundreds of jobs for Nebraskans -- according to the company’s filing.

Omaha attorney David Domina, who’s been fighting construction of the Keystone XL for more than seven years, represented more than 90 landowners in the case, many of whom had fought the project to a standstill two years ago. He urged the commission to reject the project, contending TransCanada’s lawyers hadn’t met their burden of proof.

Native American tribes claimed it threatened their historic lands and cultural sites.

The case is In the Matter of the Application of TransCanada Keystone Pipeline LP for Route Approval of the Keystone XL Pipeline Project, 0p-0003, Nebraska Public Service Commission (Lincoln).

To contact the reporters on this story: Andrew Harris in Washington at [email protected]; Meenal Vamburkar in New York at [email protected]; Robert Tuttle in Calgary at [email protected]

To contact the editors responsible for this story: Reg Gale at [email protected]; David Glovin at [email protected]

Carlos Caminada

© 2017 Bloomberg L.P

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