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TransCanada gets Keystone XL approval—but there’s a catch

Nebraska regulators rejected the pipeline builders preferred route, but ok’d an alternative, handing the company a complicated victory

Nebraska's Public Service Commission cleared a path for TransCanada's proposed Keystone XL pipeline on Monday when it granted final approval in a narrow 3-2 vote for the line to pass through the state, removing a major regulatory barrier for the project. 

The approval, though, came with a hitch. The Commission rejected TransCanada's preferred route for the project, as well as the original one which would have passed through the ecologically sensitive Sandhills region, instead approving the "alternative mainline route".

The alternative mainline route would send Keystone XL, which aims to ship 0.83m barrels a day of heavy oil from Canada's oil sands to the Gulf Coast, into counties further east in the state where it would run nearer to the existing Keystone pipeline's route.

The commission was looking for a middle ground between advocates that wanted to see the pipeline built and sceptics that argued the line should, if built at all, travel a route that takes advantage of the existing infrastructure.

TransCanada lobbied hard for its preferred route throughout the approval process, making the ruling a disappointment even though it offers the clearest path yet to seeing the project through to completion. "The preferred route was the product of literally years of study, analysis, and refinement by Keystone, federal agencies and Nebraska agencies. No alternative route, including the Keystone mainline alternative, the Sandhills alternative, or anything argued for by the intervenors, comes close to the quality of the preferred route," the company argued in a briefing to the Commission's regulators earlier this year. 

Although TransCanada proposed the mainline alternative to show state regulators an option that would take advantage of existing Keystone infrastructure, it later concluded that simply laying Keystone XL along Keystone's original path was not possible. Because of easement conditions, natural barriers and other regulatory rules, TransCanada experts said, just 38.3 miles of the route were actually suitable for so-called "co-location". "The mainline alternative route would require placing Keystone XL in a sub-optimal location because the mainline is already on the best site," TransCanada said in the briefing.

Extra costs

For TransCanada, the ruling throws up a host of new issues. The line will undoubtedly be more expensive, requiring more pipe to cover the longer route and an additional pumping station to keep the crude flowing through the line. It will also require TransCanada to win over a host of new landowners along the alternative route. Those landowners, one of the Commissioners that voted against approval pointed out, probably didn't even know their property was being seriously considered as a route for Keystone XL. While many landowners along the preferred Keystone XL route opposed the project, more than 90% had signed on with TransCanada.

Opponents of the pipeline, which have led years of highly-charged protests against Keystone XL and successfully pushed it into the national political conversation, seized on the fact that the alternative mainline route was approved. They said it opened new avenues for regulatory and legal challenges, pointing out that the approved route had been through much less regulatory scrutiny than the preferred route, which had been the focus of most of the attention.

The State Department is looking at the decision to see if it will have to issue a new environmental impact study. The alternative mainline route was not included in the 2014 survey that underpins the Presidential Permit that Donald Trump signed off on earlier this year. The key question will be whether or not the new route is substantially different enough to trigger a new environmental study. A new federal study would set the project back for months if not years.

TransCanada's brief statement following the decision wasn't exactly a victory lap. "As a result of today's decision, we will conduct a careful review of the Public Service Commission's ruling while assessing how the decision would impact the cost and schedule of the project," the company's boss Russ Girling said.

Filling the pipeline

On top of sorting through the new political questions, TransCanada is still in the process of getting producers to commit to filling the pipeline. On that front, Girling sounded confident earlier this month in an investor call following the end of Keystone XL's "open season" in late October. "We anticipate the support for the project to be substantially similar to that which existed when we first applied for the Keystone pipeline permit," Girling said in a 9 November analyst call. The comments indicate that major Canadian producers haven't backed away from the project given the years of uncertainty surrounding its viability. The company wants firm commitments of 0.5m b/d before moving ahead with the project.

The market will be watching developments closely as the need for new heavy oil supplies in the Gulf Coast grow. The two major heavy oil suppliers into the US' main refining base, Venezuela and Mexico, have both seen supplies plummet. Since 2011, when the Obama administration first rejected the project, exports from those countries have fallen by roughly 0.9m b/d, and there is little likelihood of a recovery anytime soon. Canada's Keystone XL backers argue they are the answer to the Gulf Coast's heavy oil supply worries.

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