April 25, 2014 7:57 pm

A nice investor-friendly pipeline crisis

Keystone XL may be the walking dead, but the energy industry depends on gas, says John Dizard
A woman holds up a sign protesting the Keystone XL pipeline outside of a State Department public hearing in Washington, D.C., U.S., on Friday, Oct. 7, 2011. BP Plc's oil spill in the Gulf of Mexico helped fuel environmentalists' opposition to TransCanada Corp.'s Keystone XL pipeline, the company's chief executive officer said. TransCanada plans to build a 1,661-mile (2,673-kilometer) line to transport Canadian oil from Alberta to Texas refineries. Photographer: Andrew Harrer/Bloomberg©Bloomberg

Anyone who has seen the stack of regulatory filings and public statements for projects such as pipelines could be forgiven for wondering why TransCanada’s shares dropped by over 3 per cent last Monday. Yes, that was the first trading day after the State Department announced it was “suspending” the collection of other agencies’ comments on the Keystone XL pipeline from the Alberta tar sands to the US Midwest.

Why was the equity market surprised? After a February ruling by a Nebraska district judge that the Keystone XL permit process violated the state constitution, the project was one of the walking dead for at least this year. President Obama and secretary of state Kerry had given more “tells” than a first-time gambler on the Las Vegas Strip. They did not want it to happen, and had the authority to keep it from happening.

For whatever reason, though, elite opinion consistently overestimated Keystone XL’s chances for presidential approval. Battles are won by concentrating on the decisive point in space and time. The environmental movement kept its objective in mind while retaining tactical flexibility. TransCanada and its supporters had a lot of numbers on their side, but did not, and probably could not, move as opportunistically.

There was much shocked criticism of the KXL postponement, but the White House arguably had little choice, given the way the cross-border approval process had been changed in 2011. Pipeline supporters who say the president could have overlooked the landowners’ challenge to the Nebraska route are technically correct; the pipeline procedure is an executive order, not a law passed by Congress.

At the time of the BP Macondo and Enbridge pipeline oil spills in mid-2010, KXL seemed to be almost through the approval process. Then the political balance changed. Shawn Howard, a TransCanada spokesperson, says: “Normally with a presidential permit, what they look at is the section that crosses the international border to the first shutdown valve or [pump] station. That would be about 50 feet for Keystone XL. In this case they decided to look at the full pipeline.” An environmental advocate would argue with the word “normally”, but Mr Howard is right about the history.

So when, a few months after BP Macondo, the president said he would be “measuring these recommendations” on KXL based on the environmental effects on “folks in Nebraska”, that gave a great deal of authority to the Environmental Protection Agency’s carbon cappers. If the EPA were to assert to the State Department that it could not make a definitive environmental assessment, given any uncertainty about the route, and the president went forward with an approval, a good case could be made that he had abandoned his post-Macondo position.

There is now a line being tried out in the political and capital markets that once the Nebraska case is resolved (the proponents assume favourably for TransCanada), KXL approval could be a useful presidential bargaining chip in putting together a climate and energy superdeal. President Obama agrees to KXL, in return for some package of clean-energy tax credits, federal transmission-grid support, and agreement to let the EPA control new and existing source power-plant emissions.

No. Will not happen. The Republican leadership would dearly love a 2015 superdeal (energy for them, climate for the Democrats) should they get a majority. However, the various energy subsectors have shown they are not willing to give up their particular interests to create the sort of cross-party coalition that would be necessary to muscle a deal through.

The environmental groups’ legal strategists have mischievously suggested that TransCanada and its Nebraska supporters could try dropping the procedure declared unconstitutional by the lower court judge, and instead start one going through the state Public Service Commission.

For some reason, TransCanada seems to believe that anti-tank mines have been sown on that road. Also, since Nebraska does not have an intrastate oil pipeline network, or an existing section of an interstate pipeline, the PSC would have a lot of work to do to set up its approval procedures. So no, the pipeliners will wait for the appeals process to conclude, probably next year.

TransCanada is turning more attention to its Energy East pipeline from the western provinces to ports and refineries in Quebec and New Brunswick. This 4,600km project, while not a substitute for KXL, can keep it busy. TransCanada and the pipeline opponents agree the Canadian oil pipeline approval process is shorter and more determinate at each stage.

The KXL back-and-forth has distracted Washington’s attention from the relatively slow pace at which gas pipelines are being financed and built, given the increasing dependence of the power industry on the stuff. A nice, focused, investor-friendly crisis is coming up. That is much more likely than some history-making climate (or energy, if you prefer) deal.

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