Keystone XL construction to start now, finally, as Alberta injects billions in cash, loan guarantees

Twelve years after it was first proposed, construction is now a go

Calgary – After 12 years of battles, an intransigent President Barrack Obama who killed the project, a supportive President Donald Trump who revived it in his first week in office, countless regulatory and legal fights and delays, and now a major cash infusion and loan guarantee from the Government of Alberta, the US$8 billion Keystone XL pipeline project is finally a go.

TC Energy, which used to be known as TransCanada when this whole thing started, made the announcement before markets opened on Tuesday, March 31. The province of Alberta made a similar announcement, with Alberta Premier Jason Kenney releasing a video explaining why his province would be making bold step of investing C$1.5 billion into construction this year, and a further C$6 billion in loan guarantees.

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TC Energy’s Russ Girling

“We appreciate the ongoing backing of landowners, customers, Indigenous groups and numerous partners in the U.S. and Canada who helped us secure project support and key regulatory approvals as this important energy infrastructure project is poised to put thousands of people to work, generate substantial economic benefits and strengthen the continent’s energy security,” said Russ Girling, TC Energy’s president and chief executive officer, in a release. Girling has spent his entire 10-year tenure as CEO fighting for this project.

Girling said, “In addition, we thank U.S. President Donald Trump and Alberta Premier Jason Kenney as well as many government officials across North America for their advocacy without which, individually and collectively, this project could not have advanced.”

In his first week as president in January, 2017, Trump invited TransCanada to renew its application and build this pipeline.

The 1,947-kilometre (1,210-mile) 36-inch pipeline will have a capacity of 830,000 barrels per day (bpd) of crude oil, running from Hardisty, Alberta to Steele City, Nebraska. There it will connect with TC Energy’s existing facilities to reach U.S. Gulf Coast refiners. With pre-construction activities underway, the pipeline is expected to enter service in 2023.

Working with COVID-19 awareness

“During construction, we will continue to take guidance from all levels of government and health authorities to determine the most proactive and responsible actions in order to ensure the safety of our crews and community members during the current COVID-19 situation. Construction will advance only after every consideration for the health and safety of our people, their families and of those in the surrounding communities has been taken into account,” said Girling.

TC Energy said project is underpinned by new 20-year transportation service agreements for 575,000 bpd with a group of “strong, credit-worthy counterparties which are expected to generate approximately US$1.3 billion of earnings before interest, taxes, depreciation and amortization (EBITDA) on an annual basis.”

In addition, once Keystone XL is in service, current contracts for 115,000 bpd from Hardisty to the U.S. Gulf Coast on the existing Keystone line will shift to the new facilities under renewed 20-year contracts. Subject to terms and conditions outlined in the agreements, 50 per cent of any difference between the estimated capital cost and final cost of the project are subject to a sharing mechanism and will be reflected in the pipeline tolls.

TC Energy said the Government of Alberta has agreed to invest approximately US$1.1 billion as equity in the project, which substantially covers planned construction costs through the end of 2020. The remaining capital investment of approximately US$6.9 billion is expected to be largely made in 2021 and 2022 and funded through the combination of a US$4.2 billion project level credit facility to be fully guaranteed by the Government of Alberta and a US$2.7 billion investment by TC Energy.

(Note the discrepancies in dollar amounts can be attributed to the conversion between U.S. and Canadian dollars).

TC Energy said their capital investment will be funded through a combination of internally generated cash flow, hybrid securities and common equity through the activation of its dividend reinvestment program in 2021 and 2022. To provide additional financial flexibility in support of its credit metrics and capital program, including the project, the company intends to also file a $1 billion equity shelf to enable an at-the-market equity issuance program which will be utilized if and as deemed appropriate.

Once the project is completed and placed into service, TC Energy expects to acquire the Government of Alberta’s equity investment under agreed terms and conditions and to refinance the US$4.2 billion credit facility in the debt capital markets.

“Strong commercial and financial support positions us to prudently build and fund the project, along with our existing $30 billion secured capital program, in a manner that is consistent with maintaining our strong financial position and credit metrics,” added Girling. “Once completed, approximately 98 per cent of the company’s consolidated EBITDA is expected to come from regulated or long-term contracted assets.”

Jason Kenney explains Alberta’s investment

Alberta is taking a page from the federal government’s involvement in the Trans Mountain Expansion project, getting involved to make sure an export oil pipeline is built. The Government of Alberta is now assuming much of the financial risk for the project, similar in a fashion to how the federal government did the same with the Trans Mountain Expansion project, but doing so without nationalizing Keystone XL and taking over ownership.  

In his online video, Kenney noted this is being done during the COVID-19 crisis and while Alberta’s economy “is undergoing the greatest contraction since the Great Depression, with hundreds of thousands of layoffs.”

“On top of it all, our biggest industry has been hammered by the lowest energy prices in decades, thanks in part to the OPEC-Russia price war. We are coping with these enormous challenges after five years of economic stagnation."

Can’t wait for pandemic or recession to end

Kenney said, “When we get through the crisis, and the global economy moves to growth, it will be more obvious than ever that the world needs a reliable, democratic major source of energy. But that will only happen if our energy has access to global markets. In other words, it will only happen if we get pipelines built. We can’t wait for the end of the pandemic and global recession in order to act. There are steps that we must take now to built our future, steps that are focused on jobs, the economy and pipelines.

“I am pleased to announce that the Government of Alberta has finalized an agreement with Calgary-based TC Energy to invest in the completion of the Keystone XL Pipeline. Alberta is making a $1.5 billion equity investment in Keystone XL this year, followed by a $6 billion loan guarantee next year.

“Construction will begin in Alberta immediately, at the Canada-U.S. border, as well as in the United States.”

That international border crossing in in southwest Saskatchewan.

Kenney said this deal was the culmination of six months of negations and background work by the government and TC Energy.

“It will kickstart immediate construction on the pipeline, with the goal of increasing the delivery of oil sands crude to U.S. markets by at least 830,000 barrels per day by the summer of 2023. This investment will immediately create nearly 7,000 jobs in Alberta, this year, and 13,500 total jobs across Canada,” Kenney said.

“It will also help our economy more quickly recover from the brutal impact of the COVID-19 pandemic and recession.”

He said, “It will strengthen North American energy independence and security against hostile foreign powers, by ensuring long-term investment and development, as well as production, from the Canadian oil sands.”

Kenney said the tough times Alberta has faced over the last five years has been in part due to allowing others to restrict the province’s ability to compete, grow and prosper.  

“This investment in Keystone XL is a bold move to re-take control of our province’s economic destiny and put it firmly back in the hands of the owners of our natural resources, the people of Alberta.

Failure of governments, not markets

He said he’s always been skeptical of government involvement in the market. “But our failure to get pipelines built has been a failure of government policy and politics, not markets. TC Energy has already invested $6 billion and spent a decade trying to get Keystone XL built. But the project was delayed for years because of a very political U.S. presidential veto and legal tactics by foreign-funded special interests trying to landlock Alberta energy.

“And now the chaos in global energy markets created in part by Saudi Arabia’s predatory dumping of oil, means the market is not functioning, and there are no prospective private market bidders of the Keystone XL project at this time. In other words, without this investment by Alberta, the pipeline would not be built.

“We also believe this is our last chance to get a major pipeline project done, and without it, the future of our largest industry will be compromised.

“The Government of Alberta is confident that this is a wise investment. After construction is complete, we will be able to sell our shares at profit. In addition, the project will have a net return of over $30 billion to the Alberta taxpayer through royalties and higher prices for Alberta oil in the next 20 years.”

Kenney concluded by saying this would kickstart the oil sands again, protecting hundreds of thousands of jobs, and generating billions in tax revenues.

Routing details

The announcement comes as oil plumbs depths unheard of in decades. West Texas Intermediate crude spent the previous week floating in the low US$20s per barrel, while the price for the oil going into the pipe, Western Canadian Select crude, hit US$4.26 per barrel the day before the announcement.

This project is actually the construction of the northern portion of the pipeline system. Several years ago, Keystone XL, as it was originally envisioned, was split roughly in half. The southern portion, from Cushing, Oklahoma, to the Texas Gulf Coast was built and put into operation while President Obama was still in office. He famously appeared in a 2012 photo op in front of stacks of pipe during its construction.

It was the northern portion, the part that will connect Alberta’s oil hub, Hardisty, Alberta, to America’s hub at Cushing, that will now be built. The pipeline actually doesn’t run all the way to Cushing, but to Steele City, Nebraska, from which it will tie into Cushing.

The pipeline will run south from Hardisty, roughly parallel to the Saskatchewan border until it crosses the South Saskatchewan River. At that point it makes a turn to the southeast an cuts across the very southwest corner of Saskatchewan, crossing the U.S. border east of the Monchy, Saskatchewan border crossing.

It is at this border crossing where Saskatchewan is expected to see first construction. If the pipeline follows the pattern of other major Canada Energy Regulator-regulated pipelines, mainline construction in Saskatchewan likely will not begin until late summer.

Pipe reconditioned

Pipe for the project had been deployed to various points in Saskatchewan and Alberta in the summer of 2011. That pipe sat, in the open, for the better part of a decade. While given a coat of paint to protect the coating from ultraviolet light, by 2018. that pipe had been exposed to the elements for a long time. AS a result, TC Energy brought that pipe, which had bee sitting at Piapot, Shaunavon and Camrose was sent back to be inspected and recoated as needed, with a substantial part of the work being done in Regina at Shawcor. That work was completed in the fall of 2019.

As the Keystone XL pipeline’s northern portion has remained in hiatus all this time, oil had continued to find its way, some of which has been by rail. The pipeline’s origin and terminus closely mirror that of the two crude-by-rail trains that derailed in Saskatchewan near Guernsey on Dec. 9, 2019 and Feb. 6, 2020.

No Saskatchewan money announced

In early February Saskatchewan Premier Scott Moe announced the establishment of the Pipeline Projects Assessment Committee (PPAC), a cabinet committee focused on evaluating potential pipeline projects in Saskatchewan. This included looking at the possibility of investing in export pipelines. However, there was no announcement from the Government of Saskatchewan on March 31 with regards to putting any money into the project.

Former Saskatchewan Premier Brad Wall had been a strong proponent of the project, making multiple trips to Washington to advocate for it. Current Premier Scott Moe has shown similar support.  

Federal response

Asked by reporters the same morning about construction during the COVID-19 crisis on Keystone XL and Trans Mountain Expansion (a Crown corporation) Prime Minister Justin Trudeau deflected, stating, “I can assure you Crown corporations, all Crown corporations, are following the best medical advice.”

Federal Minister of Natural Resources Seamus O'Regan, said, “This is good news for our oil and gas industry. It comes at a time when the industry needs it. It means thousands of good, well-paying jobs for the highly-skilled workers the industry needs now and into the future.

“The Government of Canada has always been a strong supporter of Keystone XL. The project increases our market access – safely, responsibly, and sustainably -- and fits within Canada's climate plan.

“I commend the Government of Alberta on providing equity support and loan guarantees. These will help to ensure the success of the project. 

“We know these extraordinary global conditions have given rise to extraordinary challenges for Canadian energy sector workers and their families. Still, Canada remains the best place to invest when it comes to responsible, sustainable resource development. Today's announcement will bring about real benefits to our country's economy, and continue to set the bar for strong safety and environmental practices.”

NOTE: updated at 12:48 to include federal response from Federal Minister of Natural Resources Seamus O'Regan. 

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