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Keystone XL court ruling delays pipeline projects, but could help balance oil market

Highlights

Delays could help balance global crude markets through 2023

Court ruling stalls expedited federal review permitting for new pipelines

Future of Keystone XL crude pipeline remains in flux

Houston — A US appellate court ruling Thursday that may delay crude oil pipeline construction nationwide could also play a role in helping to balance global supply and demand in the next couple of years as the energy sector recovers from the coronavirus pandemic.

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The court ruling is specific not only to the controversial Keystone XL crude pipeline from Canada to the US, but it also extends to stalling the US Army Corps of Engineers expedited review system for new pipeline construction.

While the longer-term regulatory and legal hurdles for the midstream sector will remain a critical source of woe for the industry in the years ahead, the shorter-term impacts could "perversely" help the oil sector recover a bit now and in the next couple of years, said Ethan Bellamy, an energy analyst with Robert W. Baird & Co. That's primarily because it's going to take a long time to work through the massive oversupplies of crude built up worldwide during the pandemic.

"If legal issues keep Canadian oil out of US and international markets, every other producer benefits," Bellamy said. "And spending on infrastructure has already been cut dramatically as hydrocarbon supply chain activity has slowed."

US crude oil infrastructure is currently overbuilt and will be increasingly underutilized as US oil output remains on the decline, he said.

"We have plenty of time to work through pipeline permitting issues before production growth and demand return," Bellamy added.

Without additional delays, the XL pipeline could have been completed ahead of schedule in 2022, analysts said, but now won't be built until 2023 at the earliest, and if ever.

Of course, none of this means the industry welcomes these legal rulings that could set long-term precedents to make it harder to build new pipelines.

Now, TC Energy's Keystone XL project will need to win on appeal or the Army Corps will have to issue localized permits rather than using the broader, fast-tracked approval process, said Matthew Taylor, a midstream analyst with Tudor, Pickering, Holt & Co.

"This is disappointing from a broader perspective. The intent was to streamline approvals for infrastructure projects but, for the time being, those utilizing the permit will have construction over waterways put on hold," Taylor said.

"The legal risk for building pipeline projects has dramatically increased in recent years as opponents have found success in appealing every permit," Taylor said.

LEGAL ISSUES

The US appeals court in California Thursday refused to stay the yanking of an environmental permit for the Keystone XL pipeline.

That decision came after a federal judge in Montana in April had pulled the key water permit for the project, which has already completed preliminary construction near the Canada-Montana border. In doing so, the judge also barred the Army Corps' expedited review process of other pipeline projects championed by the Trump administration, arguing the reviews did not properly account for potential risks to endangered species and the environment. The expedited permitting process is called Nationwide Permit 12.

So now the legal process will take longer to unwind as the Keystone XL project and other pipelines are prevented from moving forward with construction across certain waterways.

TC Energy and the Alberta government, which is providing financial support for the pipeline project, confirmed Thursday they remain committed to building the 1,200-mile XL pipeline from Alberta to Nebraska that would connect to the existing Keystone system and move up to 830,000 b/d of heavy Canadian crude ultimately to Texas through the entire system.

But TC Energy spokesman Terry Cunha said the company is reviewing how the ruling will affect its 2020 construction timeline. TC Energy had hoped to start heavy construction this summer.

Just last week, presumptive Democratic nominee Joe Biden said he would yank the federal Keystone XL permit if he's elected over Trump in November. The pipeline was previously rejected by President Obama only to be brought back to life by Trump.

At the end of March, TC Energy made the surprising announcement to quickly proceed with the Keystone XL project after it secured $1.1 billion in taxpayer support from the conservative Alberta government — as well as $4.2 billion in potential government loans — even though Canadian crude grades were valued near record lows because of the collapse in global demand as a result of the coronavirus pandemic.

The $9 billion Keystone XL project, which has been in the works for more than a decade, is not expected to come online until 2023, and TC Energy acknowledged legal and other delays could last a year or so.

The decade-old project became a focus for environmental protests and the so-called "keep-it-in-the-ground" anti-fossil fuel movement during the Obama administration. And that opposition is not going away.