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Keystone XL to Come Online

Brian Hicks

Written By Brian Hicks

Posted December 4, 2013

Nothing new has really changed when it comes to the border-crossing issue of Keystone XL. TransCanada (NYSE: TRP), the operator of Keystone XL, can begin construction with direct approval from President Obama, but this has not happened.

But the southern portion of XL will come online in January 3 of next year, extending from Cushing, Oklahoma to Port Arthur, Texas.

Keystone XL MapThis will finally provide the relief to the glut in Oklahoma that producers and investors have been waiting, and it will allow more oil to be processed in the Gulf Coast.

It is exactly the kind oil infrastructure we need as a nation to keep the shale oil boom going forward.

President Obama gave approval for southern XL, but trouble started when the Sierra Club and other environmental groups sued the Army Corps of Engineers, arguing that the southern pipeline posed the risk of significant environmental damage. But the 10th U.S. Circuit Court of Appeals in Denver rejected that argument and allowed construction to commence.

And since the southern part is being constructed within U.S. borders, TransCanada does not require State Department approval.

Essentially, Keystone XL has been split in half ever since the president and Governor Dave Heineman of Nebraska expressed concern over the pipeline crossing into environmentally sensitive lands. But the pipeline plans were rerouted, and the governor sent a letter to the White House and former Secretary of State Hillary Clinton giving his approval of the project.

Despite this, environmental groups are against the project as a whole, which is why the president has been so hesitant to give approval. And he is not certain the pipeline will be a significant job creator.

Baby Steps

Regardless of the president’s reservations, it appears the entire XL project may be approved, but in chapters.

Since the southern end of XL is constructed, there is a higher likelihood of the entire project being approved – whether Obama is in the White House or not. And even if the next administration does not give the green-light, there is a strong chance that Congress will approve the pipeline. There is already a groundswell of support in the House.

But with southern XL, you can expect to see relief to the Cushing glut and a significant surge of WTI crude catching up with Brent crude.

TransCanada will transport roughly 700,000 bpd of crude in this southern portion, and it will certainly come as some relief to the company, since the entire XL project costs $5.4 billion – not to mention the revenue stream it could have collected from crude transportation.

But TransCanada may be losing more than money. There is speculation that a number of producers who were committed to Keystone XL are looking for alternative routes. TransCanada has denied these claims, stating that all of its producers are still on board when the entire XL pipeline comes online.

This has followed several contract renegotiations, and TransCanada believes 2016 will be a more realistic date for XL construction. But TransCanada believes full-scale approval will arrive in 2014. In fact, the company is expecting the go-ahead in the first quarter.

And the Canadian company has options.

TransCanada also has another pipeline in Canada that will move crude from western Canada to eastern terminals.

With a portion of XL being constructed, it gives TransCanada more of an incentive to stay invested in the region.

But even if the northern portion of XL never sees the light of day, this will not slowdown production. Sure, we may see some gluts, but the lack of major pipeline infrastructure isn’t anything new to the U.S. and Canada. Smaller pipelines are getting approved, and more producers are switching to railway transportation as an alternative means.

South XL Investing

On Tuesday, WTI crude was trading at $96.04 on the market compared to Brent’s $112.62, narrowing the spread.

But this is just a picture of what greater infrastructure in the Gulf region can do. If Keystone XL is approved, we will see some relief not only in the state of Oklahoma, but in the Bakken region as well.

More infrastructure like XL means North American producers will not have to sell oil at discounted prices. And it is great for you as an investor, since companies will be able to ship and process crude faster on a higher priced market.

More crude will be processed in the Gulf Coast where Valero (NYSE: VLO) and Total (NYSE: TOT) have refineries there, Bloomberg reports.

Suncor Energy (NYSE: SU) will directly use the pipeline, planning to increase capacity form 50,000 bpd to 75,000 into next year.

Throughout 2013, it seemed XL would be forever stuck in limbo, but things are beginning to look up for producers and energy investors. I have a feeling 2014 will be a big year for the energy world.


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