The Competitors Who Stand To Win From Denial Of Keystone XL
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The Competitors Who Stand To Win From Denial Of Keystone XL

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By Mark Druskoff

Several years ago, Greg Armstrong, CEO of Plains All American, told attendees at an oil and gas conference that he supported TransCanada ’s Keystone XL (KXL) pipeline as an American, but his company would actually benefit if it didn’t get built.

Plains All American did not respond to a request for comment on Friday after the White House denied the KXL permit, but Armstrong’s point is well taken. KXL was just one of many competing ways Canadian crude could have gotten to market.

With apologies to big oil conspiracy theorists, competition among oil and gas companies is fierce, and particularly so in this down market that has seen oil and gas companies pummeled in the equity markets.

TransCanada is but just one tree in a forest of competitors, and its loss will likely be someone else’s gain. So although this denial throws a wrench into TransCanada’s austral ambitions, multiple other companies could eventually be winners, including companies run by one of President Barack Obama’s strongest supporters. More on this later.

Wrong place, wrong time

Crude oil never seems to be where it’s wanted most. That inconvenient fact has influenced both war and peace around the world for more than a century as global powers have striven for mastery of the prize of oil.

In North America, it’s also given rise to a robust segment of the oil and gas industry known as the midstream sector. From publicly traded behemoths down to newly minted private equity-backed start-ups, the focus of midstream enterprises is the movement of oil and gas. In the U.S. alone, there are around 500,000 miles of oil and gas pipelines, according to data from the American Petroleum Institute and the Energy Information Administration.

Although the KXL decision is seen as a loss to Canada, it may not be as harsh a blow as it seems. With a denial being a clear and present danger, TransCanada had developed a Plan B for KXL, primarily its Energy East project, said Skip York, Vice President of Integrated Energy for WoodMac.

Energy East, as it name suggests, would move crude from Alberta across Canada to the maritime provinces where it could be placed on a ship, he said. Those cargoes could move across the Atlantic to Europe, transit the Panama Canal to Asia, or just as likely sail on a barge down to the U.S. Gulf Coast, ending up in the same place KXL would have taken it, said York.

TransCanada also could pursue bridging the gap created by the permit denial by taking crude in rail cars from Hardisty, Alberta, down to the portion of Keystone that already exists in the US, York said.

Fellow Canadian pipeliner Enbridge also stands to benefit greatly from TransCanada’s denial, said Greg Haas, analyst with Stratas Advisors. Although Enbridge is itself seeking approval from the State Department to expand its Alberta Clipper pipeline to take 300,000 barrels per day of Canadian crude across the border, it has a raft of existing projects that could increase volumes without having to run that political gauntlet, noted Haas.

Enbridge announced earlier this year that with a modest expenditure of capital, around $1.5 billion, the company could increase the amount of Canadian crude flowing to the U.S. by 540,000 barrels per day by making improvements to existing pipelines, Haas said. That volume equals more than 70 percent of the Canadian volume that KXL was expected to carry. In the event Enbridge were to secure a permit where TransCanada failed, it would actually slightly surpass the KXL’s capacity.

It could take Enbridge as little as two years to add that capacity as it requires no new construction, said York.

The U.S. has its own beneficiaries. Enbridge’s pipelines interconnect with assets owned by midstream giant Energy Transfer, Haas pointed out. ETP has rail and pipeline ties to Enbridge’s pipelines in Illinois, which can take those Canadian barrels down to Louisiana, where refineries are hungry for crude. In particular, ETP’s Energy Transfer Crude Oil Pipeline, one-quarter of which is owned by Phillips 66, and its Eastern Gulf Coast Access project.

As Greg Armstrong presciently pointed out, Plains All American could also be a winner. The company is operator and owner of the CapLine and ChiCap pipelines, along with a consortium of other equity holders, including Shell, Marathon, and BP. Currently, those two pipelines move crude northward, from the Gulf Coast to Chicago, but the flow of both pipelines could be reversed for a few hundreds of millions of dollars and in months not years, said York.

In addition to reversing a pipeline, Plains All American operates a substantial crude-by-rail fleet that could benefit, said York. With commodity price declines affecting basis differentials, the once hot crude-by-rail sector has seen some cooling off lately, said an industry executive.

The denial of KXL is a “shot in the arm” for crude by rail, and helps prolong the life of the industry, said Haas. The KXL denial is not going to return crude by rail to its former glory, only global changes in the crude price will do that, but it would be helpful to the industry, agreed the industry executive.

And whatever is good for crude by rail, is good for railroads. Particularly those with a northern footprint, such as Burlington Northern Santa Fe.

In 2010, Warren Buffett’s Berkshire Hathaway acquired BNSF for $26.5 billion. Fueled by crude by rail volumes, BNSF became a cash cow for Berkshire, producing billions. Through a holding company called Marmon, Berkshire also owns Union Tank Car, which owns rail tank cars.

In his 2012 Letter to Shareholders, Buffett noted that both BNSF and Marmon are “benefitting from the resurgence of U.S. oil production” and “all indications are that BNSF’s oil shipments will grow substantially in coming years.”

Buffett has been a high-profile supporter of President Obama who donated and hosted a fundraiser to support Obama’s re-election bid.

In recent earnings reports, however, BNSF has reported being harmed by lower crude by rail volumes. In March, Buffett came out publicly in support of KXL but he doth protest too much methinks, as KXL’s denial serves as a booster to crude by rail.

Mark Druskoff is deputy editor of Mergermarket’s North America energy team. He covers oil and gas from Houston and can be reached at

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