Alberta investment in Keystone XL pipeline: damned if you, damned if you don’t

Keystone XL
Source: The Spokesman-Review.

Kenney has been a tireless advocate for Alberta oil/gas. The decision was an easy one for the Premier, but was it a smart one?

Alberta Premier Jason Kenney joined Prime Minister Justin Trudeau as the proud owner of a pipeline project Tuesday. The Alberta government is contributing $1.5 billion of equity and guaranteeing $6 billion of credit for the $11.5 billion (all Canadian currency) to the controversial and bitterly opposed Keystone XL (KXL) pipeline of Calgary-based Enbridge.

Jason Kenney, premier of Alberta.

“This investment in Keystone XL is a bold move to re-take control of our province’s economic destiny and put it firmly back in the hands of the owners of our natural resources, the people of Alberta,” Kenney said in a press release. “The Government of Alberta is confident that this is a wise investment.”

He earlier told reporters the financial support was ready to be announced just before the COVID-19 pandemic erupted: “This agreement marks the culmination of six months of negotiations and rigorous work by government officials and industry experts to ensure that we minimized risk for Alberta taxpayers and maximized the benefits of this historic agreement.”

What risks might the government have been mitigating?

Risks that argue against the investment

One, during the press conference, the Premier said that to his knowledge there were no offers to finance the 830,000 barrels per KXL, even before the start of the pandemic. Keep in mind that TC Energy had a record year in 2019, generating $4 billion in net income despite selling some assets. Free marketers like Kenney are fond of pointing to the markets as an indicator of investment risk. In this case, the markets are not sending happy thoughts to Russ Girling, TC Energy CEO.

Two, US environmental groups were quick to condemn the announcement and discourage any notions Canadians might have about KXL now being given a green light by opponents. “We must stop Keystone XL and once and for all diminish the industry’s ability to expand, while ignoring the costs to people and the planet,” Tamara Toles O’Laughlin of said in the environmental group’s press release.

Tamara Toles O’Laughlin,

The National Resource Defense Council, which has led many of the lawsuits against pipeline projects in the United States, said it has no intention of stopping its legal challenges just because the Alberta government is now an investor: “The Natural Resources Defense Council will continue to fight this project in the courts and support the efforts of Indigenous communities, farmers and ranchers along the Keystone XL route to protect their communities and stop this project,” Anthony Swift, director of the NRDC’s Canada Project, said in a press release.

Three, American voters head to the polls this fall and betting on President Donald Trump seems risky in light of his dismal performance managing his country’s COVID-19 crisis. Kenney noted in his presser that the “presumptive Democratic candidate” – Joe Biden – hasn’t gone on record opposing the project, but he is also the former VP of Barack Obama, who cancelled KXL in 2015. If the Democrats hold the House and the White House, Green New Deal advocates like firebrand Representative Alexandria Ocasio-Cortez will be pushing hard to deep-six KXL a second time.

Four, Kenney said several times during his presser that when the world and oil markets return to normal, KXL will be a huge benefit to oil sands producers, who will welcome 830,000 barrels per day of new shipping capacity to US Gulf Coast refineries. Will things return to normal?

Plenty of experts are speculating that the market shock created by the pandemic will disrupt markets, accelerating the decline of fossil fuels and spurring investment in renewable energy. The International Energy Agency now thinks peak oil demand will arrive in 2025, 10 to 15 years earlier than it was forecasting just a few years ago.

Risks that argue for the investment

While there is considerable risk if the Kenney government commits to KXL, there is also a significant risk if the Premier had not.

Source: Canadian Association of Petroleum Producers.

One, oil and gas investment in Alberta has fallen off a cliff since it passed $60 billion in 2014. The Canadian Association of Petroleum Producers threw a party – albeit prematurely, as it turns out – in January when forecasting a rise in capital expenditure of $2 billion to $37 billion in 2020. The primary culprit for the lack of interest in expansion is lack of “takeaway capacity,” – the current pipeline system is full.

Two, the Alberta government relies upon revenue from oil and gas extraction, as well as higher taxes when times are good. Well, times have been bad since 2014, the government has run budget deficits since then, and refuses to break its dependence on a cyclical and unstable revenue stream. Adding KXL to the 360,000 barrels per days Line 3 and the 525,000 barrels per Trans Mountain Expansion will provide Canada with enough pipeline space for 20 years, according to the Canadian Energy Regulator in its 2019 energy outlook.

Three, the risk of missing a market opportunity in the US Gulf Coast. The news from Venezuela this week is that production from Canada’s biggest rival in heavy crude oil markets has fallen below 400,000 barrels per day, down from 2.1 million barrels per day only a few years ago. Long-term decline of Mexican Maya supply combined with output reductions in several countries, most notably Russia, means the global heavy crude supply is tightening, which usually means higher prices.

Damned if you do, damned if you don’t

Speaking of markets, TC Energy’s stock price $63.36, dipped to 61.43, before recovering to $62.55 on the Toronto Stock Exchange. Once investors have had a chance to digest the KXL news, we’ll have a better idea of their opinion.

The jury is going to be out for some time on Kenney’s decision.

Under “normal” circumstances, pipelines are low risk and highly profitable, as TC Energy illustrates. But these aren’t normal circumstances – and probably haven’t been for years, as Energi Media has consistently argued.

The energy world is rapidly changing and in the midst of all that disruption and chaos, calling this one is tough. One can make a good argument for failure or success.

But, as TC Energy CEO Russ Girling said in his press conference remarks, Kenney has been a tireless advocate for Alberta oil and gas. The decision was an easy one for the Premier.

But was it a smart one?

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