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The Great Oil Pipeline Debate: Will These Companies Hit Liquid Gold or Get Slicked?

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With the southern portion of TransCanada's (NYSE: TRP  ) Keystone XL pipeline opening last Wednesday, the great oil pipeline debate continues on in the United States and Canada. Energy companies seeking to generate maximum profits by getting the highest cost for their oil and moving it in the most cost effective manner continue to square off with environmentalists and affected landowners.

The pipelines
The southern portion of the Keystone XL pipeline will pump oil from Cushing, OK, directly to gulf coast refineries. However, the remaining main portion of the pipeline that will ship oil from Alberta to Steele City, Nebraska, is still seeking final approval from the White House. There is heavy opposition from environmental groups concerned with oil spills and higher greenhouse gas emissions and landowner complaining of strong-armed tactics on the part of TransCanada. TransCanada has already spent roughly $2.3 billion on the southern portion of the project and estimates that it will spend roughly $5.4 billion on the northern portion with cost estimates likely to rise as the company is forced to maintain pipes and equipment already in the field. 

According to TransCanada, the pipeline is critical for the energy security of the United States and will allow American oil producers better access to the large refining markets found in the American Midwest and along the United States Gulf Coast. The Keystone XL Pipeline will have the capacity to transport 830,000 barrels per day of crude oil from Canada and the United States to refineries on the Gulf Coast, which will greatly reduce their reliance on the higher-priced oil they currently import from overseas.

Enbridge's (NYSE: ENB  ) proposed $5.5 billion Northern Gateway Pipeline aims to connect Canada's oil sands to its west coast, which will provide access to the Pacific Rim's international markets and higher pricing opportunities. Currently, nearly all of Canada's petroleum is exported to the United States, which means that the prices Canadian oil producers get are largely determined by what United States refiners are willing to pay.

The Northern Gateway Pipeline has been heavily criticized by First Nations and Environmental groups in British Columbia and Alberta who fear environmental damage to land and waterways. Since the proposed pipeline route crosses through numerous First Nation lands, it is expected that many legal challenges will be brought by affected First Nations. Proponents of the Northern Gateway Pipeline assert that the economic benefits from access to higher paying Asian markets outweigh environmental risks.

Kinder Morgan (NYSE: KMI  ) has filed an application with the National Energy Board in Canada to twin its existing oil pipeline from Edmonton, Alberta to Burnaby, British Columbia at an estimated cost of $5.4 billion. If completed the project would roughly triple the capacity of the pipeline from 300,000 to 890,000 barrels per day. Public opposition to this project does not appear to be as great as that of Keystone XL or Northern Gateway, although environmental groups and First Nations are concerned about the increased number of oil tankers in Burrard Inlet and the increased possibility of a pipeline spill.

Final thoughts
The opening of the southern portion of TransCanada's Keystone XL pipeline is being touted by TransCanada as a positive step toward approval of the key northern portion of the pipeline. While approval is not a certainty, prospects appear more likely than before. Enbridge's Northern Gateway pipeline seems less certain, especially given the amount of resistance from First Nations groups whose land the pipeline would cross. Despite heavy opposition, energy companies are determined to transport their oil in the most economically viable method and will surely continue to seek out the highest prices for their products.

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Charles Sherwood

Charles is a long term buy and hold investor who is fascinated with investing and the marketplace.

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