U.S. President Joe Biden’s rejection of the Keystone XL pipeline is a blow to the psyche of Canada’s oil patch as it seeks to recover from last year’s oil-price crisis, but it is not a knockout punch.
The biggest surprise is how surprising this was to many Canadians given Mr. Biden’s long-stated opposition to the project. It is symbolic of his new administration’s emphasis on pulling the United States back into the global climate-change fight – regardless of the actual impact on emissions Keystone XL might have had.
The environmental wing of the Democratic Party is one he has courted enthusiastically, and for that group the US$11.5-billion TC Energy Corp. (TRP-T) project has long been a target of derision.
The quest to build it is worthy of a Russian novel. It has been in the works for 13 years, facing regulatory reviews, federal and state legal challenges, demonstrations, rejection, approval and now rejection again. The company has for years touted its job-creating ability and relative safety in comparison with moving oil by rail.
But in that time the market evolved. The Canadian oil industry has gained other options for moving crude to its biggest customer and is also dealing with the growing realization that a transition from fossil fuels – gradual though it may be – is under way.
“The degree of unilateral pipeline dependency that the Canadian oil patch used to have on Keystone XL as a bridge to energy prosperity is no longer the case, because we have multiple pipelines on the docket,” said Michael Tran, an energy market strategist for RBC Capital Markets.
Other pipeline routes have allowed Canadian crude to get to the U.S. Gulf Coast. New ones, including the replacement for Enbridge Inc.’s Line 3 to the Midwest and the Trans Mountain Expansion Project to the Pacific, are under construction and will add 860,000 barrels a day of capacity. Meanwhile, expectations for production gains from the oil sands have been tempered since the industry pulled back on spending after oil prices tumbled and returns were squeezed.
On Wednesday, Mr. Biden made cancelling the project to ship Canadian crude to Nebraska a Day 1 priority. Alberta Premier Jason Kenney angrily demanded that Canada retaliate by imposing economic and trade sanctions on the United States. After risking $1.5-billion, plus billions more in loan guarantees, on a stake in Keystone XL, the political fallout for Mr. Kenney is potentially very damaging.
It is doubtful that Prime Minister Justin Trudeau will follow his predecessor, Stephen Harper, in letting the pipeline colour his relationship with Canada’s biggest trading partner, however.
Keystone XL was designed to carry 830,000 barrels a day to Nebraska, where it would then be routed to the massive Gulf Coast market and compete with imported crudes from suppliers such as Venezuela and Mexico – both of which have suffered declining output.
Former president Donald Trump used an executive order in 2017 to overturn its rejection by President Barack Obama, but it remained the subject of federal and state court actions, some of which are still in progress.
Nonetheless, construction began last year – even after Mr. Biden said he would revoke the permit if he was elected. TC Energy suspended the work this week and laid off more than a thousand workers.
When the project was first proposed in 2008, crude oil had rocketed to US$140 a barrel and the industry planned numerous multibillion-dollar oil sands projects, even as costs skyrocketed. Crude prices tumbled in late 2014 and in Canada have remained under pressure, prompting producers to shelve most of the major oil sands projects.
In 2020, Teck Resources Ltd. scrapped its proposed $20.6-billion Frontier development in a move that was seen as the end of an era of megaprojects. Weeks later, the pandemic and an oil price war pitting Saudi Arabia against Russia crushed global prices, forcing many producers to rethink their approaches to risking capital.
Another big development has been the massive increase in U.S. shale oil production, which allowed producers there to recover costs much quicker, said independent energy analyst Samir Kayande. With the slowdown in oil sands development, however, costs have fallen and the economics for the most efficient projects have improved.
“The strategy question is: Now what do you do? Do you keep fighting for something that, even if you got it, wouldn’t help you very much? That is Keystone XL,” Mr. Kayande said.
“Yes, it sucks, and it’s hypocritical of the U.S. to tell us that we can’t produce our oil while it is increasing production. Those things are still true. But given all that, where are we going to spend our time and energy?”
The Globe and Mail
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