TC Energy commits to Keystone XL but uncertainty looms for delayed Canada-US oil pipeline

Washington — TC Energy announced a final investment decision Tuesday to build the controversial, 830,000 b/d Keystone XL heavy crude pipeline from Alberta to Nebraska, but legal and market uncertainties still loom for the 11-year-old project.

The company aims to put the system into service in 2023, adding roughly a year to the timeline to account for construction issues with the ongoing coronavirus pandemic as well as any remaining legal and regulatory hurdles.

The 1,200-mile pipeline would connect to the existing Keystone system to ship Canadian crude to the Gulf Coast refining network in Texas and Louisiana that processes heavy crude.

The timing of the decision is highly unusual because the Western Canadian Select benchmark for oil is trading near all-time lows of about $5/b - and at a $16 discount to NYMEX WTI - during the virtually unprecedented collapse in global oil demand caused primarily from the pandemic. But TC Energy is putting the initial financial risk on the backs of Canadian taxpayers with the Alberta government agreeing to provide substantial equity backing.

"It's very surprising. But, if you're planning to build a project like this that's $8 billion, then it's going to take an enormous amount of time," said Matthew Taylor, a Calgary-based energy analyst with Tudor, Pickering, Holt & Co. "They want to do this while they have strong backing from the Alberta government, so they're going forward even with a lot of uncertainty. But it feels like it's been many months in the making."

It's also a big decision from Alberta Premier Jason Kenney. And TC Energy wants to start construction while a US president is in office who strongly supports the pipeline project. President Donald Trump is up for reelection in November.

"It's a clear message to the taxpayers and customers in the US that Alberta is open for business," Taylor said. "And they want to start building before the US election. It's a massive part of the deal."

Funding details

TC Energy, formerly called TransCanada, said the decision was underpinned by 575,000 b/d in new, 20-year transportation contracts, along with agreements to shift 115,000 b/d from the existing Keystone line under renewed 20-year deals.

The Alberta government has agreed to invest $1.1 billion as equity in the project, which the company said "substantially covers planned construction costs through the end of 2020." TC Energy will push back the rest of the funding until 2021 and 2022 as the Canadian pipeline giant bets on an improved pricing environment.

The Alberta government also is offering up to $4.2 billion in loans to help fund additional construction. Once the project is completed, TC Energy plans to buy out the government's equity stake and refinance the loans.

"Strong commercial and financial support positions us to prudently build and fund the project ... in a manner that is consistent with maintaining our strong financial position and credit metrics," TC Energy CEO Russ Girling said in a statement.

Before the oil demand crisis, Gulf Coast refiners' reliance on Canadian crude was on the rise as they increasingly blended heavy barrels with light sweet barrels from the Permian Basin to create medium sour blends.

In February, Enbridge CEO Al Monaco predicted that Canadian heavy crude would continue to displace Mexican and Venezuelan imports to the US Gulf Coast and meet more than half of the region's demand for heavy sour barrels by 2030, expanding from 30% in 2018.

Additional roadblocks

How the project will fare during the oil price collapse remains to be seen, but it has already faced a wave of challenges in state and federal courts and sustained public opposition in the US.

In February, the project got approval from the US Bureau of Land Management to build on federal lands. However, some litigation remains pending in Montana and final approval is still required from the US Army Corps of Engineers.

The Keystone XL project became the epicenter of environmentalists and the so-called "keep-it-in-the-ground," anti-fossil fuel movement during the Obama administration. And that opposition isn't going away.

"This desperate attempt by Alberta's government to push through the failing Keystone XL pipeline during a global pandemic is beyond the pale," said Collin Rees of the Oil Change International environmental group. "We need billions of public dollars invested directly in vulnerable communities dying from COVID-19, not spent propping up massive oil companies and unneeded projects that would trample indigenous rights and exacerbate the climate crisis."

And, now, even building the pipeline isn't a guarantee of its success.

The controversial Dakota Access Pipeline, which was completed three years ago amid a wave of protests and arrests, is now facing new legal difficulties. Although the pipeline is even slated to be expanded, a federal judge ruled last week that the proper federal environmental reviews were never completed and that additional work is still required. The appeals process will now drag on, putting the pipeline's future in question.