By now, you have probably heard about TransCanada's (NYSE:TRP) Keystone XL pipeline. For even the most casual observer of the energy industry, this project has been the spark that has ignited poltical debates ranging from environmental hazards, emission of greenhouse gasses, and North American energy independence. In last Tuesday's speech on climate change, President Barack Obama made a point to address the fate of the Keystone XL: "Allowing the Keystone XL pipeline to be built requires a finding [from the Department of State] that doing so will be in our nations interest...".
There are clear environmental concerns that several people have regarding the construction of this pipeline, but the story is so much more than that. To help better understand the entire story of the Keystone XL pipeline, we at the Motley Fool want to give investors a better look at what the Keystone XL means for all parties involved. In this part of a series, we will take a look at what the approval or rejection of the pipeline will mean for midstream companies in the U.S. and Canada.
Who will feel an effect?
There are two ways to look at competing pipeline companies: there are the companies that are already transporting heavy oil to the U.S., and there are the companies looking at constructing or expanding pipelines for heavy oils.
In total, the current capacity for oil pipelines delivering all types of crude to the U.S. is about 3.4 million barrels per day. These pipelines are all operated by four companies.
|Express-Platte||Spectra Energy (NYSE:SE)||280,000 bpd||Wood River, Ill.|
|Keystone||TransCanada||590,000 bpd||Cushing, Okla.|
|Enbridge and Lakehead System||Enbridge (NYSE:ENB) and Enbridge Energy Partners (NYSE:EEP)||2.5 million bpd||Multiple, but 190,000 bpd to Cushing, Okla.|
For the existing Canada-U.S. pipelines, there is probably little to no effect whether the pipeline gets built or not. The capacity for these pipelines is already contracted out, and a majority of the oil from these pipelines goes to either the Midwest or Rocky Mountain regions.
What is of probably greater concern is any proposed additional pipeline or expansion project that are in the works. Enbridge is in the process of expanding its mainline capacity through three separate projects: Alberta Clipper, Flanagan South, and Seaway.
|Enbridge Pipeline Projects||Capacity||Origin to Destination|
|Alberta Clipper||400,000 bpd expansion of existing infrastructure||Hardisty, Alberta to Superior, Wis.|
|Flanagan South||600,000 bpd||Flanagan, Ill. to Cushing, Okla.|
|Seaway (joint venture with Enterprise Products Partners (NYSE:EPD)||850,000||Cushing, Okla. to Houston|
Since this project is broken up into three separate pieces, the only one that is at risk is the Alberta Clipper project because it crosses the U.S.-Canada border and is therefore subject to approval from the U.S. State Department. Flanagan South is about to start construction, and the Seaway pipeline has already started limited flows to the Gulf Coast. With large amounts of crude coming into Cushing, it's hard to believe that Enbridge and Enterprise Products Partners will struggle to contract out the entire seaway pipeline regardless if the Alberta Clipper project gets approved or not.
The fate of Keystone XL will have great bearing on the outcome for the Alberta Clipper project as well as any other potential pipeline project that would cross the U.S.-Canada Border.
If Keystone XL gets built
The approval of this pipeline would certainly make it easier for other possible projects to get approved, especially the most current one from Enbridge. Based on projections for Canadian oil sands production, though, it's pretty likely that we will cross this bridge again. By 2020, it's very likely that production of Western Canadian Select and Bakken crude will exceed the additional takeaway capacity that is proposed today.
Then of course there is the actual owner of the pipeline, TransCanada. Current market prices to bring barrel of oil from Hardisty, Alberta, to the Gulf Coast range from $7 to $11. If TransCanada could contract out the entire pipeline for the whole journey, then the pipeline would probably garner somewhere in the range of $2 billion-$3 billion in revenue annually.
If Keystone XL is rejected
Well, from the American standpoint, it's hard to say at this point. Does one rejection mean that we are more likely to refuse any other pipeline projects? Or is it possible that the need for Canadian oil sands will grow over time and resistance to new pipelines will weaken over time? One thing is for sure, companies that have given thought to building new cross-border pipelines will certainly rethink those plans if this project is rejected.
In the case of TransCanada, it would be a lot of time and effort spent, but there is one small consideration. The Cushing Marketlink part of the project that brings oil from Cushing to the Gulf Coast will be built, so the company will still see some revenue growth from that half of the project. In all likelihood, with Canadian oil sands production increasing, TransCanada would try again to get some other project up and running.
What a Fool believes
Pipelines are critical pieces of the energy puzzle in the U.S. If we ever hope to get anywhere near to some semblance of energy independence, we will need them to make it possible. But, we are discovering that pipelines are not necessarily the only way to transport oil. Check back to Fool.com to learn how the Keystone XL decision could have an impact on the railroad industry.
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