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Keystone XL Delayed Again; But Does It Even Matter?

By Robert Baillieul - Sep 3, 2013 at 10:42AM

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According to one oil executive, the Keystone XL pipeline is no longer relevant.

There was more bad news for TransCanada's (TRP 2.39%) troubled Keystone XL pipeline last week. The fate of the project is likely to be delayed until at least early 2014 following accusations of a conflict of interest during the project's environmental review. It's a big blow for the energy industry, where chronic shortages of transit capacity have stifled growth.  

But according to one oil executive, Keystone no longer matters. "It's not critical any longer," Harold Hamm, CEO of Continental Resources (CLR 3.16%), told the National Review last week. "They just waited too long. The industry is very innovative, and it finds other ways of doing it [shipping crude] and other routes." When one of the world's most successful oil prospectors speaks, investors should listen.

Is Keystone still relevant?
While Keystone remains mired in political purgatory, other midstream names are stepping up to add capacity in North Dakota. 

Since 2011, Enbridge (ENB 0.96%), the largest operator in the region, has nearly doubled Bakken capacity and now moves 475,000 barrels per day.  The company plans to add an additional 225,000 barrels per day of capacity in the state by 2016. 

And while pipeline capacity has generally lagged production growth, rail transit has stepped up to cover the gap. According to the Association of American Railways, crude-by-rail shipments have increased from under 100,000 barrels per day in 2010 to over 620,000 barrels per day today. By many estimates, the combination of pipelines and rail should be enough to keep up with surging Bakken production with or without Keystone. 

Things are looking up for the oil sands as well. Enbridge, also responsible for shipping two-thirds of Western Canadian crude exports, has been silently adding capacity through its market access initiatives. Management estimates that it can add 1.7 million barrels per day of export capacity by mid-2015 through the elimination of bottlenecks within its system and reversing the Line 9 route. 

Entirely new pipeline options are emerging as well. In May, Kinder Morgan submitted a proposal to regulators to triple capacity along its Trans Mountain route, potentially adding 593,000 barrels per day of capacity to Canada's lower West Coast.

Last month, TransCanada announced its proposed Energy East pipeline, which if approved could ship 1.1 million barrels of bitumen from Alberta to Quebec and New Brunswick. And as it has in the Bakken, crude by rail is making up for the gaps in the pipeline industry.

When Keystone was proposed in 2008, few of these other alternatives were on the table. But with so much transit capacity now under construction, Keystone XL is becoming less relevant. 

Buy, sell, or hold?
Bakken producers like Continental Resources are the biggest beneficiaries of this trend. Ample transit capacity will relieve bottlenecks in the supply chain, ensuring Bakken crude prices stay aligned to other North American benchmarks.

But there could be another advantage for upstream players as well. With pipe and rail competing to move product, a shrewd negotiator like Harold Hamm could play these shippers against one another, reducing the company's transit costs over the long term. Indeed, his comments to the National Journal may be part of a public effort to pressure Continental's midstream partners. 

Already taking its toll
New shipping capacity has already decimated the earnings of Midwest refineries. Last month, Marathon Petroleum (MPC 2.64%), the largest refiner in the region, saw its second-quarter earnings fall 27% year-over-year. For two years, Marathon took advantage of bottlenecks in the energy supply chain, which allowed it to buy Bakken crude at rates well below international blends. But as those tailwinds dissipate, Marathon and its peers will have to eat higher input costs.

Foolish bottom line
Harold Hamm might be right. With new pipeline and rail capacity coming online, the Keystone XL pipeline is no longer critical to the future of the Bakken or the oil sands. This is bad news for TransCanada shareholders as it reduces the pressure on the U.S. State Department to approve the project. 

 

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Stocks Mentioned

Marathon Petroleum Corporation Stock Quote
Marathon Petroleum Corporation
MPC
$87.94 (2.64%) $2.26
Enbridge Inc. Stock Quote
Enbridge Inc.
ENB
$42.18 (0.96%) $0.40
TC Energy Corporation Stock Quote
TC Energy Corporation
TRP
$53.03 (2.39%) $1.24
Continental Resources, Inc. Stock Quote
Continental Resources, Inc.
CLR
$67.28 (3.16%) $2.06

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