Has Keystone XL Become Obsolete?

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By Irina Slav, Oilprice.com

Keystone XL may have become obsolete before it was even built, at least according to some sources close to TransCanada, which has gone on a hunt for clients. A Wall Street Journal analysis quotes these sources as saying Canadian producers and U.S. refiners are just not interested in the pipeline that is supposed to carry 830,000 barrels daily of Alberta heavy crude to Gulf Coast and Midwest refineries.

This lack of interest seems to be driven by TransCanada’s quest for long-term commitments, with producers and refiners seemingly unwilling to make such commitments in the current price environment. Also, according to the WSJ, Canadian crude comes at a higher cost than alternative heavy crude blends, which is contributing to the lack of enthusiasm for long-term commitments. That is likely to change over the long term, however, when declining imports from Mexico and Venezuela will benefit Canadian crude.

The company behind the project itself seems upbeat. Already having spent US$3 billion on the project and planning to spend another US$5 billion before it is completed, TransCanada remains confident that it will find enough customers to fill Keystone XL at 90 percent of capacity over the next few months.

For the time being, producers and refiners are moving the oil by rail – a much more expensive and riskier option than pipelines. According to the WSJ sources, companies are opting for railway transportation, even with the added expense, because it does not require long-term commitments. It’s not an easy choice; railway rates for a barrel of oil are two to three times higher than pipelines, Bloomberg notes. This is an additional burden on already strained budgets.

Oilprice wrote last month about a looming pipeline capacity crisis in North America, which is likely to result in an increase in railway oil shipments. If Goldman Sachs is any indicator, railways have a bright future as an alternative to pipelines, although its long-term sustainability at current oil prices is questionable.

TransCanada is ready to start the construction of Keystone XL in 2018, with hopes of completing it by 2020. By then, Canadian crude production will have increased thanks to investments that were made over the last couple of years despite the price crash. U.S. shale production is also widely expected to continue rising, although doubts are starting to emerge that if prices remain subdued, this, too, can change.

What is unlikely to change, though, is U.S. Gulf Coast refineries’ need for a combination of light and heavy crudes to operate. Canadian crude may not be their only choice, but as producers north of the border focus on bringing down production costs just as much as their peers south of the border, it may become more competitive.

Keystone XL still needs the green light from Nebraska before construction begins. The state’s Public Service Commission held a public hearing on the project last month, saying it would make its final decision by November 23 at the latest. There is a lot of opposition against any pipeline projects in general, and against Keystone XL specifically, so the commissions’ decision is not yet a done deal. If it decides against the project, Canadian producers, which next year are seen to extract 4.2 million bpd in Western Canada, will find themselves in a tighter spot: the pipelines servicing the oil-rich region only have a capacity of 3.3 million bpd.

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