TransCanada Corporation’s decidedly lukewarm commitment to the Keystone XL pipeline suggests the project is running into serious headwinds, retired fossil executive Ross Belot argues in his latest post on iPolitics.
In fact, the economics of new pipeline construction are so tenuous that Belot compares Canada’s no-holds-barred boosterism for the industry to U.S. Energy Secretary Rick Perry’s now-famous confusion over the laws of supply and demand as they apply to his country’s dying coal industry.
“Between the federal and several provincial governments, a consensus has emerged that seems impenetrable to common sense—the idea that any pipeline is a good pipeline, and the only thing ailing the sector is a lack of pipeline access to tidewater,” Belot writes. “But in many respects, what happened to coal is what’s happening to the oilsands now: a cheaper fuel source (fracking) is attracting the capital, while prospects for older, more expensive supply sources languish.”
In a post published during the week of Alberta Premier Rachel Notley’s cross-country promotional tour for the Kinder Morgan pipeline, and just days before TransCanada’s expected update at its investors’ day November 28, Belot sees little need for the 1.8 million barrels per day of new capacity available from the three new pipelines currently in various stages of planning, approval, or post-approval litigation and protest.
“Pipelines do not exist outside of that law of supply and demand Perry finds so confusing,” he writes. “Pipeline projects are an outcome of the economics of oil production—it doesn’t work the other way around. If the market anticipates a price for oil that supports investment in oil production, then market players invest in production.”
But “these pipeline companies aren’t just betting on the production being there once the pipelines are built,” he adds. “They require up-front commitments from shippers,” who “only make these commitments if they believe they will have the volume to ship.”
That explains the tepid outcome of the “open season” process TransCanada initiated through the fall, aimed at tying down capacity contracts with potential shippers. The company indicated it had commitments for 500,000 barrels per day of production, far below the 80% of capacity a pipeliner would normally require before committing to a big, expensive construction project. It’s also unusual, Belot says, that TransCanada has accepted as-yet undisclosed conditions from the shippers that probably shift more of the project risk to TransCanada.
“The most telling fact we know about TransCanada’s degree of commitment to Keystone XL is the company’s decision to pressure the Alberta government itself to buy pipeline capacity,” he writes. “If you’re looking outside the private sector for support, that’s never a good sign.”
TransCanada is expected to deliver a project update tomorrow, “but in the meantime, there’s just one question you need to ask yourself: If it was your money, would you be putting it into a new pipeline right now?” Belot asks. “If so, I’m sure you can pick up shares in a coal mine while you’re at it…dirt cheap.”