TransCanada Corp. said it will spend $2.3-billion to immediately build the southern leg of its proposed Keystone XL pipeline, aiming to fill a shortage of crude supply to refineries while the company works to make the full Alberta-to-Texas line a reality.
Calgary-based TransCanada plans to connect the major North American oil hub at Cushing, Okla., to the Texas Gulf Coast, where giant heavy oil refineries are running under capacity due to shipping constraints from Cushing. The bottleneck has weighed on prices for crude shipped to Cushing, as supplies in storage grow.
The move to build the southern leg will allow TransCanada to begin meeting refiners' demand for crude, while getting on with a key piece of the full Keystone XL plan to link Alberta's oil sands to the Texas refineries. The plan was derailed late last year when the U.S. government ruled against the line's route through an environmentally sensitive area of Nebraska.
TransCanada is working on a new route and said it intends to reapply for permission to build the entire controversial project within weeks.
Russ Girling, the pipeline company's chief executive officer, said the company still needs a handful of permits to build the Cushing-Texas leg, which isn't expected to meet stiff regulatory resistance.
Pipeline proponents argue the energy industry and consumers in both Canada and the United States will benefit from the entire project. In Canada, the oil sands will have more export capacity – something it is expected to run short of around 2014. In the United States, the line could move oil out of North Dakota and Montana, encouraging oil production in the Bakken shale formation. Jobs on both sides of the border, as well as energy security from growing North American supply, have also been touted. However, opponents argue the pipeline further extends North America's reliance on fossil fuels and the development of carbon-emitting oil sands projects.
"I don't expect for one minute that the opposition will let up on our project," Mr. Girling said in an interview. "They told us … their issues aren't with our pipeline. Their issues are with the development of the Canadian oil sands."
But despite the battle, he believes support from Washington will come early 2013. "I think when the project was delayed or denied, it was clearly stated that denial wasn't on the merits of the pipeline."
TransCanada's first application was tripped up in Nebraska where the company planned to cut through the sensitive Sand Hills region. The company is still working on an alternative route, which will be the key part of its revised application. "As soon as it is ready, we will make the application, and I would say it's in the coming weeks," Mr. Girling said. TransCanada wants the southern portion to be shipping oil in 2013, and the entire pipeline moving crude around 2014 or 2015.
The delays and revisions have cost TransCanada, even though most of its supplies and labour were locked in before the pipeline's future wobbled. "The delay always costs money. Just the carrying costs of money alone is very expensive for both us and our shippers," he said. "There will be cost adjustment required for the reroute in Nebraska." However, the company has not pinpointed how much Keystone XL's expenses have climbed. He is still "comfortable" with the company's original estimate for the entire pipeline, which rings in at $7.8-billion.
TransCanada's decision to proceed with the Oklahoma-Texas connection has risks. Part of the company's original pitch was that the line would ease the glut of oil at Cushing while feeding Texas refineries. The U.S. Department of State in a report to Congress in January noted there is "excess cross-border pipeline capacity, but limited connections to the U.S. Gulf Coast refineries." Should TransCanada's southern pipeline ease State's concern about refineries on the Gulf Coast, the government may not see the need for the northern portion, said Andrew Leach, a professor of natural resources, energy and environment at the University of Alberta's School of Business.
However, while the southern portion would ease the glut in Oklahoma, it is not ideal for refineries in Texas because they run best when processing heavy oil. A mismatch in oil quality could make refining more expensive, thus pushing up the price of products like gasoline, noted Chad Friess, an analyst at UBS Securities Inc.