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Essential Energy Insights - June 11, 2020

TC Energy gets green light from Trump to boost Keystone oil shipments

The Trump administration issued a new presidential permit for TC Energy Corp.'s existing Keystone pipeline network, allowing the Canadian midstream giant to boost cross-border shipments on the network by as much as 170,000 barrels per day.

President Donald Trump issued the authorization, required for infrastructure projects that cross U.S. borders, July 29 along with permits for three other rail and pipeline projects.

While TC Energy does not immediately plan to use all of the capacity bump, the increase would accommodate new shipments secured through a 50,000-bbl/d open season for Keystone, President, CEO and director Russ Girling said on a July 30 conference call. The decade-old Keystone system, which connects the oil sands center of Hardisty, Alberta, with a hub in South Dakota that has links to the Midwest and Texas, was designed to operate at higher pressures than it currently runs. This makes increases in oil transportation capacity possible through the addition of pumping power.

"We are very pleased with yesterday's decision by President Trump to sign a new presidential permit for the base Keystone system," Girling said on the call to discuss second-quarter earnings. The company expects to start increasing the flows in 2021, the executive said.

The new permit will allow TC Energy to boost cross-border shipments on its Keystone system to 760,000 bbl/d from 590,000 bbl/d, which would ease some of the pressure on Canadian oil producers from pipeline capacity constraints.

The Trump administration's action came amid challenges to another TC Energy project, the 830,000-bbl/d Keystone XL pipeline project. The methodology the U.S. Army Corps of Engineers used to approve water crossings for the project was suspended by a Montana judge earlier this year. An appeals court reinstated the Army Corps' permit program, known as Nationwide Permit 12, pending further action, but Keystone XL was specifically exempted from that action.

SNL Image

TC Energy's oil pipeline control center oversees the operation of the Keystone pipeline network.
Source: TC Energy

Development of Keystone XL has continued despite the setback, with construction underway in Canada and in locations in the U.S. where such work is permitted. The project received a US$1.1 billion equity boost from the government of Alberta that would cover 2020 construction costs. The province, the largest oil producer in Canada, is anxious to see the pipeline built to bolster oil sands exports. TC Energy has not altered its plan to have the system in service by 2023, and it anticipates that the project will add US$1.3 billion per year in incremental EBITDA when it is in service.

"In Canada, construction activities at our pump stations along more than 100 kilometers of the mainline right of way have continued to advance," Girling said. "In the U.S., we are making progress on a revised 2020 construction plan which is focused in areas where all of our permits and approvals are in place and includes facilities and pre-construction activities."

"At the same time, we continue to seek authorizations from the U.S. Army Corps of Engineers for the necessary permits and approvals to reconvene U.S. mainline pipeline construction in 2021," Girling said.

Second-quarter earnings were largely unaffected by the impacts of the coronavirus pandemic because TC Energy mostly operates critical infrastructure, Girling said.

"With a few exceptions, flows and utilization levels remain in line with seasonal norms, underscoring the critical nature of our energy infrastructure assets," Girling said. "With approximately 95% of the comparable EBITDA in our company coming from regulated or long-term contracted assets, we continue to be largely insulated from the short-term volatility associated with volume throughput and commodity prices."

Separately July 30, TC Energy reported second-quarter comparable earnings of C$863 million, or 92 Canadian cents per share, down from C$924 million, or C$1.00 per share, in the same period a year earlier. The S&P Capital IQ consensus normalized EPS estimate for the second quarter was 93 cents.