Subscribe to Money Morning get daily headlines subscribe now! Money Morning Private Briefing today's private briefing Access Your Profit Alerts

Why You Shouldn't Hold Your Breath for the Keystone XL Pipeline

On Tuesday, Donald Trump signed executive orders to move forward on the Keystone XL and Dakota Access oil pipelines. Both projects have been very controversial and served as reminders that policy decisions in the energy sector have impacts well beyond it.

Of the two, the Dakota Access has been the more recent contest but also the one most fully advanced. About 90% of the line is completed and oil could begin flowing as early as the end of this year.

The route has been altered to address some of the Native American objections to having a pipeline crossing sacred land. But environmental concerns, especially over water reservoirs, remain.

In other words, the problems and protests in North Dakota will certainly remain.

Keystone XL has been a much longer, multiyear battle – and a very different matter. And regardless of what D.C. wants, there are some big hurdles to clear before the pipeline could be finished.

Here's why I wouldn't hold my breath…

The Existing Keystone Segments Are Already Helping

In fact, what's under discussion is the last of five Keystone segments, with the other four already in use. The entire system is designed to move Canadian heavy oil (mostly Alberta's oil sands) to petrochemical complexes on the U.S. Gulf Coast and elsewhere.

The stumbling block for XL was the additional approvals required from the U.S. Department of State, on the grounds that the pipeline would cross an international border. The primary issue has been environmental. Extracting oil from the Albertan oil sands creates far more pollution and environmental harm than standard oil production.

Five of the larger refineries in the Midwest have already completed multibillion-dollar refurbishments to upgrade and process the crude. The existing pipelines that feed them are currently running at capacity, but the refineries themselves could process much more oil. So there are ready buyers waiting for the additional crude that Keystone XL can transport.

The working sections of Keystone have already decreased the surplus crude stockpile glut at Cushing, Okla. That glut had been a contributing factor in depressing America's domestic oil prices for a simple reason…

"Pass-Through" Exports from Canada Won't Benefit Us

Cushing is the largest interconnection of transit pipelines in the country, and the location where the daily price is set for WTI (West Texas Intermediate, the benchmark crude traded in New York).

The additional throughput to the Gulf provided by existing Keystone segments has allowed a better overall pricing for oil products – especially gasoline – and has served to improve U.S. exports of gasoline, diesel, and other distillates. In fact, American refineries currently lead the world in the export of oil products.

And a bit over a year ago, Congress reversed a four-decade policy, finally allowing crude oil to be exported. At the time, the idea was to provide a boost to U.S. production by opening a new, and higher-priced, foreign market for U.S. oil companies.

That export market may start growing with Keystone XL's potential introduction of "pass-through" oil exports from Canada.

However, the process of moving oil out of the United States will take time. At present prices, exports are not cost-effective. And the heavier – and so much less valuable – oil from Canada would make that prospect even less likely.

But there are some even larger Keystone XL concerns…

Keystone XL Is Still Years Out

First, even if a renewed application to build the pipeline was filed by TransCanada Corp. (NYSE: TRP) tomorrow and approval in D.C. was expedited, Keystone XL would still not be completed until the end of the decade.

Second, the added demand that the pipeline be built using only American pipe will greatly increase the cost. The same provision applies to the Dakota Access pipeline. But as only 10% of that line remains to be built, it's not as much of an issue.

There are also the rather nebulous claims about how much the Keystone XL will help local economies. The pipeline should generate about 40,000 jobs during the construction phase (i.e., over the next two years or so). However, once the pipeline comes online, those jobs are gone.

Only 32-38 permanent jobs, spread over as many as six states, are expected to be created.

In addition, the situation has changed since Keystone XL first became a lightning rod for policy debates. The issue is no longer weaning the U.S. from dependence on foreign (that is, non-North American) oil.

Today, the issue is balancing the rapidly increasing domestic production from shale and tight oil. For example, moving more Canadian heavy oil into the United States does not automatically benefit U.S.-based oil producers. In fact, Keystone XL may end up costing more jobs in existing American oil companies than it will create.

Put simply, Keystone XL is and will remain a controversial political issue, even as it becomes unclear whether it's still necessary to build.

One clear advantage to building both the Keystone XL and Dakota Access pipelines is this: both will allow more crude producers in the Bakken and Williston basins in North Dakota to move to market.

But once the dust settles from this latest political tug of war, someone will have to decide whether that very local advantage is worth the bigger-picture costs…

P.S. Whichever pipeline ends up being finished (if any), one thing is for sure… there's a special situation developing in the U.S. oil market, and using hard data from over 45,000 data points, I can tell you that opportunity – and the impact – will be dramatic. To find out more, click here.

The post Why You Shouldn't Hold Your Breath for the Keystone XL Pipeline appeared first on Oil & Energy Investor.

Join the conversation. Click here to jump to comments…

About the Author

Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle

Read full bio

Leave a Reply

Your email address will not be published. Required fields are marked *

Some HTML is OK