TransCanada receives approval for Keystone XL pipeline

On Monday, 20 November, TransCanada received regulatory approval from the Nebraska Public Service Commission to proceed with building its Keystone XL pipeline after almost a decade of environmental and regulatory hurdles. The 1,179-mile pipeline will transport oilsands from Alberta through Montana and South Dakota to Nebraska, where it would connect with existing pipelines that feed Texas Gulf Coast refineries.

Commenting on the decision, Zachary Rogers, refining and oil markets research analyst at Wood Mackenzie, said:"Nebraska's decision today greatly diminishes the political risk for the project, likely clearing the way for increased volumes of West Canadian heavy crude (WCS) to reach the Gulf Coast. The pipeline's commercial viability is strengthened as declining heavy oil production in Mexico and ongoing Venezuelan risk has recently tightened the heavy-crude market in the Gulf Coast."

TransCanada will now go back and evaluate the results of their open season before making a final investment decision. Their latest earnings call had some comments suggesting that the company is satisfied with current commitment levels. The government of Alberta has also expressed interest in committing to the line, demonstrating the heightened importance level this pipeline has for Alberta and the producers within the region.

Mr. Rogers added: "Assuming Keystone XL gets built, the biggest winners will likely be West Canadian producers. By ensuring a cheaper, more efficient route to the US Gulf Coast, WCS would likely not need to be discounted to the extent we've seen over the past few years."

For years, West Canadian crude producers have been held captive by geography and lack of adequate transportation infrastructure. The marginal WCS barrel has frequently been shipped on rail, as supply exceeded pipeline takeaway capacity. This expensive transportation option required producers to discount prices, widening the differential between lighter grades and Western Canadian crudes, providing substantial margin benefits to heavy refiners in West Canada and the US Midwest.

"With one project now in the clear, the two main remaining West Canadian pipeline projects could substantially increase takeaway capacity over the next few years. Our current forecast points to takeaway capacity potentially exceeding crude supply in the early 2020s, putting additional upward price pressure on WCS and negatively impacting heavy refiners, especially in the US Midwest," Mr. Rogers said.

A recent analysis by Wood Mackenzie, "Could Western Canadian pipeline projects substantially hurt US Midwest refiners?" looked at the potential impact TransCanada's Keystone XL pipeline, Kinder Morgan's Trans Mountain Expansion, and Enbridge's Line 3 Expansion could have on the WTI/WCSdifferential and heavy refiners in Western Canada and US Midcontinent. Below are some key highlights from the analysis.

• Western Canadian production could be outstripped by pipeline takeaway capacity by 2020 if current pipeline projects come online on schedule.
• The overcapacity would likely narrow the WTI-WCS differential, exposing certain refiners who are largely dependent on the light-heavy spread.
• Heavy crude refining margins would likely face downward pressure, leading to substantial margin exposure for US Midwest refiners in 2021.