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TransCanada brings XL back to life despite speed bumps

Despite what its chief executive described as “speed bumps”, the Keystone oil-sands pipeline to Texas is already an important part of TransCanada’s plans to ship 40% of Canada’s exports to the US

On 3 May TransCanada resubmitted a formal application for the portion of the pipeline running from the Canadian border to Steele City, Nebraska. Speaking at the company’s annual shareholder’s meeting in Calgary, president Russ Girling said first two phases of the pipeline have already delivered more than 175 million barrels, or 500,000 barrels a day (b/d), of Canadian crude to US markets. He added that total delivered volumes to date are equivalent to a third of US strategic petroleum reserves.

If it is fully expanded to 1.4m b/d, Keystone will move 40% of Canada’s exports and supply about 10% of US oil demand. Construction of the Wood River-Patoka segment was completed in 2010, and first oil reached Cushing, Oklahoma in February 2011.

During its first year of operation, Girling said Keystone has generated C$600m ($605.7m) in gross earnings, and will add another C$700m to the company’s bottom line in 2012. Keystone is “often understated, or overlooked”, Girling said. “It’s become already, a substantial component of our portfolio.”

And also the most controversial. Much has already been made of the US State Department’s refusal to grant a permit for Keystone XL, although President Barack Obama has since lent support for the Oklahoma-to-Texas portion of the line. Construction of that leg has begun, Girling said, and will be in service by 2013. The rest of the pipeline is expected to be completed in 2015.

The stumbling block remains the northern sector which links Canada with the Bakken oilfields in North Dakota. In early, April TransCanada resubmitted plans for a new route through Nebraska, which the state subsequently approved.

US President Barack Obama has said his rejection of the pipeline proposal last year was not based on the “merits” of the project but on procedure. To that end, TransCanada will be allowed to break XL into smaller, bite-sized chunks. The Oklahoma-Texas leg will be considered separately because it does not cross international borders.

Girling said the revised presidential permit will now apply only to the Canada-Nebraska segment and he expects to have approval by 2013, regardless of the outcome of US elections.

The company has already spent about $1.5 billion on long-lead pipe and equipment. Construction on the Canadian side of the border is due to begin shortly. Girling said he remains convinced that Keystone XL can safely supply US refineries with growing supplies of domestic and Canadian crude. The clincher is the Bakken, whose surging oil output is outstripping the capacity of local pipelines to transport it.

According to the US Energy Information Administration, Bakken oil output is growing by a staggering 12,000 b/d per month, and is fast approaching 600,000 b/d. In the absence of additional take-away capacity, more than 150,000 b/d is loaded onto rail cars and trucks.

“In my mind that’s clear evidence that the market wants and needs this pipeline,” Girling said. Girling’s confidence that XL will eventually be approved appears well-placed. If he is re-elected, Obama seems inclined to give XL approval, while Republican challenger Mitt Romney is also believed to support the proposal.

Most observers in both Canada and the US agree that XL will eventually be built; the question is when.

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