Industry Trend Analysis - Quick View: Canadian Crude Exports Do Not Hinge On KXL - JAN 2018

The Latest: On November 20, Nebraska's Public Service Commission approved an amended route for TransCanada's Keystone XL (KXL) pipeline. The permit was the final regulatory hurdle for the 830,000b/d project that has been plagued by federal and state-level setbacks since 2010. The company stated it would review the commission's decision before making a decision on KXL's future development.

Implications: The approval highlights the commission's belief in KXL's economic and strategic viability, underscored by the strength of the US-Canada trade relationship. Through the month of August, Canada comprised over 42.0% of total US crude imports, making it the largest single exporter. The construction of KXL would boost Canada's export capacity by nearly 25.0%, cementing its prominence within the US market.

Clear Demand For Canadian Crude
US - Heavy Crude Imports by Country, 000b/d
Source: EIA

What's Next?: KXL's completion is not assured. The approved route differs from the original proposal, which is likely to trigger another round of local right-of-way agreements with impacted landowners. This will add to development costs and extend the project's timeline further.

In addition, the project has suffered from weakened subscriber interest, calling into question the project's commercial viability. US interest in KXL has waned since its inception due to rising domestic supplies and the build out of rail transport. TransCanada stated it does have adequate support, but has yet to reveal the results of its latest open season which closed at the end of October.

Finally, we do not rule out the possibility of an appeal of the commission's ruling. Strong grassroots and environmental opposition could result in further legal delays, potentially delaying its development beyond 2018.

We maintain that regardless of KXL's path moving forward, both the US and Canada will remain heavily reliant on each other for the foreseeable future. The US takes in over 98% of all Canadian oil exports, due to a lack of pipeline access from Alberta to the coast of Canada. Meanwhile, production declines in alternate heavy crude exporters - including Venezuela and Mexico - will boost demand for Canadian supplies, providing a crucial outlet for oil sands output growth.

Related Research:

  • ' Midstream Bottleneck Dampening Trade Prospects ' , October 6

  • ' Canadian Crude To Benefit From Venezuelan Woes ' , July 31

  • ' KXL Progress Will Cement Bilateral Ties ' , March 27