TransCanada says Keystone XL more than symbolic

WASHINGTON - In the six years since TransCanada Corp. proposed the Keystone XL pipeline, the economics of the pro-ject and the oil sands crude it is meant to carry through North America have shifted dramatically.

The most recent hit has come in the form of oil prices that have sunk nearly 30 percent since June, amid continued uncertainty about when - and whether - the project will win U.S. approval. A State Department review of Keystone XL is on hold pending a ruling by Nebraska's Supreme Court, and legislation to authorize the pipeline failed a Senate vote Tuesday.

But analysts and company executives insist that there is still a big need for the pipeline that would ferry crude more than 1,000 miles from Alberta to Cushing, Okla., and then on to Gulf Coast refineries.

"Keystone XL is a nice, direct route to a huge refining complex,'' said Mark Oberstoetter, an upstream principal analyst with Wood Mackenzie. While there may be other pipelines that get Canadian crude there, "Keystone XL is still the low-cost, get-you-to-a-market option that makes a lot of sense.''

Keystone has become a hot political issue in the nation's capital.

TransCanada Corp. CEO Russ Girling insisted Wednesday that for the Calgary, Alberta-based company, Keystone XL is more than a political touchstone.

"This has got nothing to do with symbolism for us,'' he said, insisting that the market demand for Keystone XL has grown along with soaring North American oil production.

"The desire of the marketplace to move crude from Alberta and the Bakken to the Gulf Coast has only increased,'' Girling said, noting that companies that have contracted for space on Keystone XL over 20 years haven't relinquished any capacity. "Not one of those shippers has given up any of their capacity, and what we know is if they do, we have a list of others who want to take that capacity from them.''

When TransCanada asked the State Department for permission to build the pipeline in September 2008, the dynamic was a lot different:

1 At the time, a flurry of new oil sands projects were driving up costs, with budget overruns prompting producers to delay, resize or cancel projects, Oberstoetter said.

1 A separate pipeline from Alberta to Chicago was viewed as a more lucrative option than building one to the West Coast or the Gulf Coast.

1 And some oil sands producers were complaining that there was too much pipeline capacity, going so far as to sue regulators for approving individual projects.

Flash forward six years, and now, Alberta oil sands producers are eager for more routes to ferry the hydrocarbon bitumen out of the province. While they are increasingly relying on rail to transport diluted bitumen to market, it is more expensive than pipelines.

"The thing that's gotten lost in the whole Keystone XL drama is how much the fundamental flow of oil in North America has changed over that time period, from 2008 to today,'' said Andrew Leach, an energy policy expert and associate professor in the Alberta School of Business.

Although Keystone XL would move about 100,000 barrels of Bakken crude from North Dakota, most of its capacity is reserved for Canadian producers that use a variety of methods to harvest bitumen from Alberta's oil sands.

The price tags, including the costs to pull oil out of the ground, for projects can vary as much as the harvesting techniques.

Existing developments can generally survive even lower crude prices. But yet-to-be-built pro-jects could be jeopardized if crude prices continue to fall or remain relatively low. In recent reports the International Energy Agency and the Canadian Energy Research Institute suggested new mining projects need $100 per barrel prices to break even, while new - and cheaper - steam-assisted pro-jects require slightly less, around $85 per barrel.

By contrast, existing steam-assisted gravity drainage projects have lower break-even points, generally ranging from $60 to more than $70, Oberstoetter said.

Roughly a quarter of oil sands projects - those where bitumen is upgraded on site - could be at risk if crude prices remain below $80 for an extended period of time, the IEA said.

But Leach notes that the depreciation of Canada's dollar against the U.S. dollar has provided a buffer against the oil price slide for Alberta producers. Some projects are still attractive if U.S. benchmark oil is trading between $55 and $65 dollars a barrel.