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TransCanada's Keystone XL oil pipeline sees new court setback, may delay Q2 2019 construction start

Washington DC — The US Department of State must conduct another environmental review of the 870,000 b/d Keystone XL heavy oil pipeline, potentially delaying TransCanada's second-quarter 2019 target for starting construction.

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Canadian producers are still looking to the decade-old pipeline proposal in the face of steep discounts for Western Canadian Select.

"This is purely a supply-push pipeline to bolster netbacks for Canadian producers," Baird analyst Ethan Bellamy said Thursday. "They need one or both of Trans Mountain and Keystone XL to make sure they can get their oil to market."

Bellamy said the chances for Keystone XL to be built remain highest while President Donald Trump is in office, but the path ahead is uncertain regardless.

"If it's going to happen, Keystone XL needs to get past the point of no return on construction and permitting with Trump in the White House," he said. "Whatever happens, I'd expect Dakota Access-like protests to consume the route. It will be expensive, troublesome, litigious and politically toxic as it proceeds."

TransCanada did not immediately respond to a request for comment.

A US district court judge in Montana ordered the new review Wednesday in a lawsuit brought by the Indigenous Environmental Network. The case focused on Nebraska regulators' decision in late 2017 to deny TransCanada's preferred route but approve its "mainline alternative" route.

US District Court Judge Brian Morris ordered the State Department to supplement its 2014 review to consider the route approved by Nebraska. He declined to vacate the presidential permit "at this time."

Morris directed the State Department to file a proposed schedule for completing the new review before TransCanada's planned Q2 construction start. But he said he would consider "further remedies if circumstances change that do not allow" the review before TransCanada's planned construction activities.

TransCanada said in January the project drew 500,00 b/d in firm 20-year shipper commitments during a 2017 open season, but the company has nevertheless yet to make a final investment decision, given the ongoing uncertainties. The company expects construction to take two years.

Proposed in 2008, the 36-inch-diameter Keystone XL pipeline would carry Canadian crude from Alberta oil sands operations 1,200 miles to Steele City, Nebraska. Bakken crude would enter the system from an "on ramp" in Montana. It would link in Nebraska with the existing 600,000 b/d Keystone pipeline that runs through Cushing, Oklahoma, and onto the Texas Gulf Coast, where the oil would be refined or exported.

The project would compete with crude imports from Mexico and Venezuela currently used by Gulf Coast refineries configured to process heavier grades. Keystone XL oil could also flow onto the export market from Gulf Coast terminals, an option not available when the project was unveiled long before the US eased crude export restrictions in 2015.

--Meghan Gordon, meghan.gordon@spglobal.com

--Edited by Keiron Greenhalgh, keiron.greenhalgh@spglobal.com