TransCanada Wins as Obama Keystone Permit Seen

11 08, 2012 by Bloomberg

Canadian energy companies led by TransCanada Corp. (TRP) and Suncor Energy Inc. will likely benefit from the re-election of U.S. President Barack Obama, who analysts say will approve TransCanada’s Keystone XL pipeline.

More pipelines, including the 1,661-mile (2,673-kilometer) link from Alberta’s oil sands to refineries on the U.S. Gulf coast, will be needed as North American oil and natural gas output is estimated to surge 73 percent in the next 20 years.

“I was in Calgary a week or so ago and people are understandably nervous about Obama and whether he would tack back on this issue after the election and maybe reward his environmental supporters by not moving the project forward,” Robert Johnston, director of global energy and natural resources at the Eurasia Group, said by phone from Washington. “We still expect it will be approved on the basis of it being in the national interest.”

Obama rejected Keystone XL in January amid protests about the oil conduit’s impact on Nebraska’s environmentally sensitive Sand Hills region. Since then, the pipeline has been rerouted around the region, while oil output from Alberta to the Bakken formation in North Dakota has continued to climb.

Production of oil and natural gas liquids from Canada, the U.S. and Mexico could increase by more than 11 million barrels per day to 27 million barrels by 2022, Edward L. Morse, Citigroup Inc.’s global head of commodities research in New York, said in a report published earlier this year. That would meet about a quarter of current global consumption.

‘Huge Expansion’

More energy infrastructure will be required to accommodate changes in demand and supply flows and further integrate the two countries’ energy network, said Enbridge Inc. (ENB) Chief Executive Officer Al Monaco.

“If you look at fundamentals for crude oil, we’re seeing a huge expansion in volume,” Monaco said during a conference call with analysts yesterday. “It’s in everybody’s interest to get new infrastructure built. I think that’s been the Obama administration’s view.”

Crude oil valued at C$68 billion ($68.3 billion) last year was Canada’s largest export at 15 percent of the total, according to government data. Most of it went to the U.S.

Keystone XL will be approved by the U.S. because it is in U.S. national interests in terms of national security, jobs and economic growth, Canadian Natural Resources Minister Joe Oliver said yesterday.

“I don’t know exactly why he postponed it but the point is right now we’re not in the middle of an election campaign and it will be decided by the administration on its merits,” Oliver told reporters in Ottawa.

Carbon Emissions

TransCanada’s shares have lost 3.1 percent since Aug. 1 as the campaign entered its final phase. TransCanada re-applied in May for a U.S. permit for a part of the Keystone XL pipeline, after Obama rejected it on Jan. 18. The Standard & Poor’s/TSX Energy Index (STENRS) fell 2.1 percent yesterday, more than the 1.1 percent decline in the broad stock index.

Obama was elected in 2008 promising to legislate on climate and energy to help the world’s second-largest emitter of greenhouse gases reduce emissions. Obama also has repeatedly sought to repeal oil and gas subsidies. Removing the drilling- costs benefit in his most recent annual budget would add $3.5 billion to federal coffers in 2013, the White House estimated.

While Canada’s oil-sands producers are cooperating with each other to reduce per-barrel emissions, bitumen production still generates more CO2 output than conventional oil, according to estimates by the Canadian Association of Petroleum Producers.

‘Real Issue’

“The real issue is the overhang of concern in Canada on things like the low-carbon fuel standard, carbon pricing, discriminatory access for the oil sands in the U.S.,” Eurasia Group’s Johnston said in the Nov. 5 interview.

Alberta, Canada’s wealthiest province and home to its oil and gas industry, has been fighting the European Union’s efforts to have crude derived from oil-sands bitumen designated as more carbon intensive than conventional sources. California is also among jurisdictions that have proposed standards on low-carbon fuel.

“Having a tough customer does a producer in any sector a lot of good,” Ed Whittingham, executive director of the Pembina Institute, said in an interview. “It forces you to pull up your socks. You’ve got to drive down carbon content of your product and at the same time think more expansively around responsible development.”

Keystone Delays

The delays over Keystone XL have also forced Canada to consider access to new markets for Canadian crude, and reducing dependency on the U.S. has become of the most significant issues for Canadian producers, said Rick George, the former Suncor (SU) CEO who recently wrote a book called “Sun Rise: Suncor, the Oil Sands and the Future of Energy.”

“We don’t want to be in a situation where U.S. is the only market,” George said in an interview yesterday. “You only have to see how political the Keystone pipeline became.”

TransCanada continues to believe the line will be approved late in the first quarter, Shawn Howard, a company spokesman, said yesterday.

“As a growing number of Americans realize, acquiring Canadian and American oil through Keystone XL improves U.S. energy security,” Howard said in an e-mailed statement.

The U.S. State Department is preparing an additional environmental study of the line and will release a statement for public comment when it’s complete, a spokeswoman for the department said, declining to be identified. The department doesn’t anticipate completing the review before the first quarter of 2013, she said.

Second Term

A second term for Obama may also provide support for renewable energy. Obama’s campaign highlighted the need to diversify power production, including the use of renewable energy, which will benefit companies like Enbridge Inc., one of the biggest investors in U.S. wind and solar plants.

Canadian companies including Enbridge, Brookfield Renewables Partners LP and Algonquin Power & Utilities Corp. (AQN) have invested in U.S. assets, including wind power, solar and hydropower. Renewable power production is supported by a tax credit, which provides a 2.2 cent per kilowatt-hour benefit for the first 10 years of a renewable-energy plant’s operation. Romney had promised to scrap the subsidy.

“The indications are that Obama will be more friendly on clean technology,” said Geoff Hill, national oil and gas leader at Deloitte & Touche LLP in Calgary. “But there’s still a lot of angst in Calgary around Keystone.”