Keystone XL's Doom Clouds Regulatory Landscape for Pipelines

In keeping with his campaign promise, the new U.S. President Joe Biden revoked the permit of Keystone XL pipeline — TC Energy (NYSE:TRP)’s TRP contentious project that would have transported crude from the oil sands region of Canada to the American markets.

Designed to carry 830,000 barrels of crude a day from Alberta’s oil sands to U.S. Gulf Coast refineries, the 1,947-kilometer conduit was seen as a solution to the takeaway constraints in Canada.

The Project Faced a Barrage of Headwinds

The long-delayed pipeline — first announced in 2008 and approved by Canada’s National Energy Board in March 2010 — encountered significant regulatory, legal and environmental setbacks over the year. It is strongly opposed by environmentalists and politicians, owing to the risk of emitting greenhouse gases in transporting bitumen and crude to the United States.

TC Energy (then TransCanada) filed the first application in January 2012 for a permit to build and operate the massive pipeline that was denied by then-U.S. president Barack Obama, prompting the Canadian firm to put forth a new route plan and application with the U.S. State Department. In November 2015, president Obama again rejected TC Energy's application to construct the Keystone XL pipeline on fears that it would weaken United States’ position in international climate change negotiations. However, in 2017, the project was cleared by President Trump as he had signed an executive order for it to be completed.

Final Nail in the Coffin

With the White House rescinding the Keystone XL presidential permit, the embattled project has finally fallen off the table. This came despite promoter TC Energy’s last-ditch effort to save the initiative by promising to make it the first pipeline to be fully powered by renewable energy. To make the project palatable to American environmentalists, the company also struck a deal with indigenous communities for an equity stake in the pipeline and reached agreements with four major labor unions.

Winners & Losers

As sponsor and operator of Keystone XL, the primary loser from Biden administration’s decision is TC Energy. The $8 billion development was the Calgary, Alberta-based midstream company’s flagship project and its cancelation is likely to hurt TC Energy’s long-term outlook.

While the company could appeal the rejection through the courts or through the New North American trade deal, it seems that TC Energy has essentially given up on the project. In a press release, the company expressed “disappointment” with the action and said that it will halt work on the pipeline. With the project construction already starting last year (after the Alberta government took an equity interest of $1.1 billion), the executive order meant that TC Energy will have to let go in excess of 1,000 workers. At the same time, some industry observers see the scrapping of the pipeline as a blessing in disguise for the company as it minimizes extensive execution risk.

If TC Energy is the major casualty, larger rival Enbridge (NYSE:ENB) ENB appears to be the main beneficiary from Keystone XL’s fate. Apart from the ownership of Canada’s biggest oil export system, Mainline, Enbridge has the Line 3 expansion project –– a 1,097-mile pipeline to shuttle crude from Alberta to Wisconsin –– which has got all permits in hand and is set to come online by the end of this year. In other words, Enbridge is well positioned to fill the void left by Keystone XL’s rejection with adequate infrastructure assets to take Canadian barrels to U.S. refineries. Further out, there is the Trans Mountain expansion project that the Canadian federal government purchased from Kinder Morgan (NYSE:KMI) KMI in 2018.

Life Without Keystone XL

While oil production is surging in a country with the world’s third-largest reserves, Canada's exploration and production sector has remained out of favor, primarily due to the scarcity of pipelines in part due to the political and legal hurdles. In short, pipeline construction in Canada has failed to keep pace with rising domestic crude volumes.

Following the Keystone XL axe, Canadian oil sands producers would have to wait a little longer for the takeaway capacity issue to be resolved. However, the coronavirus-induced slump in production and the impending Enbridge expansion should solve most of the issues surrounding the availability of export pipeline in the near future.

From the U.S. refiners’ perspective, the situation looks much better now with them becoming more flexible and utilizing the light oil from domestic shale fields thereby lowering the dependence on Canadian imports.

Other Projects in the Crosshairs

Following the Keystone XL move, all eyes are now on Energy Transfer (NYSE:ET)’s ET Dakota Access Pipeline, where environmentalists are demanding President Biden to take back an approval that allows the system’s continued operation. Encouraged by his push to lower carbon energy sources, pro-climate activists also want him to come down hard on Enbridge’s Line 3 program to replace and expand its aging pipeline. Equitrans Midstream (NYSE:ETRN) Corporation’s ETRN Mountain Valley Pipeline project in the Appalachian Basin is another controversial piece of infrastructure that might go the Keystone XL way.

As it is, the project has already found itself on the wrong side of states and environmental groups on multiple occasions.

On the other hand, some analysts believe that the Keystone XL decision was a one-off. They see it as a follow through on a pledge that Biden had committed long back in his campaign trail. Whatever the case may have been, there’s no denying that pipelines are expected to face increased scrutiny under the new administration.

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