Lauerman: Premier Kenney’s Risky Gamble On Keystone XL

Premier Jason Kenney backstopped TC Energy’s Keystone XL (KXL) pipeline with $7.5 billion of Alberta’s money at the end of March to ensure a positive final investment decision (FID) and construction on the project to start in April.

On May 18, the Biden election campaign vowed in a statement to kill the pipeline project if Joe Biden, the presumptive nominee for the Democratic Party, is elected U.S. president in November. This was no great surprise since Vice President Biden stood next to President Barack Obama when he killed KXL in November 2015, with President Donald Trump subsequently resurrecting it from the dead in January 2017.

There is little doubt that TC Energy would have postponed its FID until after the U.S. presidential election if the Alberta government hadn’t de-risked KXL. It would have been the prudent thing to do, especially given current circumstances.

Enbridge Inc. is attempting to switch its roughly three million bbls/d Mainline crude pipeline system from an 100 per cent common carrier relying on monthly nominations to a 90 per cent long-term fixed-volume contract one primarily out of concern for a lack of supply from Western Canada in coming years.

Capital spending by the western Canadian oil industry has been depressed since the middle of last decade, the 590,000 bbls/d Trans Mountain Expansion (TMX), a contract carrier, will steal market share from the Mainline once it comes online, while Enbridge continues to expand capacity with projects such as the 370,000 bbls/d Line 3 replacement.

In addition, by the end of March, capital spending by Canadian oil companies was collapsing further, as a result of the short-lived oil price war and historic collapse in global oil consumption due to actions to combat the COVID-19 pandemic — some of which may take years to come back, if ever.

Premier Kenney has gambled big on the KXL pipeline project at the present time. The question to ask now is whether he will get lucky, and the pipeline will be completed, or not.

Biden’s no-brainer

The statement released by the Biden campaign said he would “proudly stand in the Roosevelt Room again as President and stop it for good by rescinding the Keystone XL pipeline permit.” The only surprise was how long it took Biden to announce his stand on KXL, as killing the pipeline project is almost all upside for him from a political perspective. If Biden is to defeat U.S. President Donald Trump in November, he needs to energize the progressive base of the Democratic Party and get them out to vote — something Hillary Clinton failed to do in the 2016 presidential election, after her long drawn out battle with Senator Bernie Sanders for the party’s nomination — and KXL is the ideal issue to do so.

Since TransCanada — as TC Energy was previously known — first proposed the KXL pipeline in July 2008, it has become a lightning rod for climate change campaigners in the U.S. The oilsands is viewed as the “thin edge of the wedge” for producing oil from high-carbon sources by environmentalists — coal-to-oil being their greatest fear — and as the pipeline was to move 830,000 bbls/d of diluted bitumen from northern Alberta to refineries in the U.S. Gulf Coast region, it simply had to be stopped.

At the same time, there is no reason to believe Biden will go back on his KXL campaign promise if he wins the presidency in November. He had a solid track record of supporting climate change initiatives in the U.S. Senate, while proposing some of the toughest measures targeting U.S. oil and gas companies among candidates for the Democratic nomination. For example, Biden has proposed a drilling ban on federal lands, including the cancelling of existing drilling permits, to help the U.S. reduce its carbon footprint.

Kenney’s rebuttal

The KXL statement by the Biden campaign immediately put Premier Kenney on both the offensive and defensive. At a press conference on May 19, he said by beginning construction on the pipeline in April “we are creating facts on the ground.” The cross-border section between Saskatchewan and Montana has now been completed, and barring significant additional delays the pipeline is expected to be operational in June 2023.

In addition, Premier Kenney threatened to take legal action against the U.S. government, in conjunction with TC Energy, if Biden was to pull the presidential permit for KXL, saying Alberta “would use every legal means at our disposal to protect our fiscal and economic interests.” TransCanada filed a claim against the U.S. under NAFTA and launched a US$15 billion lawsuit after President Obama vetoed the pipeline, subsequently dropped when President Trump endorsed it.

Finally, on the defensive side, Premier Kenney said the $6 billion loan guarantee to backstop TC Energy’s construction of KXL does not kick in until next year, meaning it’s not at risk if Biden was to cancel the project. The premier did not answer a question concerning the fate of Alberta’s $1.5 billion equity investment in the KXL project, which is financing most, if not all, of this year’s construction costs.

The Alberta government and TC Energy may or may not have a legal case against the U.S. government, depending which legal scholar one talks to, and hence may or may not be able to recoup investment losses if President Biden was to kill KXL. But there is little doubt that the U.S. president has the legal authority to stop construction of a pipeline by revoking its presidential permit, and even prevent operation of one that has been completed.

“There’s not really any legal limit on a president’s ability to get rid of a pipeline, even if it’s been built,” said James Coleman, an energy law professor at Southern Methodist University in Dallas. “You need approval for every last piece and the pipeline doesn’t have any benefit to you unless you get the whole thing into service.”

Hence, the reason TC Energy’s KXL project has long been said to face “last-mile risk,” and why Premier Kenney’s “facts on the ground” argument is a non-starter.

Biden versus Trump

As of now, Premier Kenney’s best hope for saving the KXL project, and the province’s $1.5 billion equity investment, is another Trump victory come November. He may currently be trailing Biden by between one and eight percentage points in national opinion polls, but this is far from insurmountable for Trump, especially as he was trailing by a similar amount on the eve of the 2016 presidential election, and won.

Trump may appear a jerk and boor to many people north of the 49th parallel — and elsewhere in the world, for that matter — but he has a highly committed political base in the U.S. In addition, incumbents almost always win presidential re-election — since 1932, only Jimmy Carter and George H. W. Bush have lost — and Trump has accumulated a massive war chest. According to the Republican National Committee, he has brought in an unprecedented US$742 million as of the end of April, 63 per cent more than former President Obama at the same point in the election cycle eight years ago.

To conclude, Premier Kenney may get lucky with another Trump victory in November, and the KXL pipeline will be completed. Either way, the next time Premier Kenney has a hankering to gamble it would be best he went to the River Cree Casino in Edmonton or the Grey Eagle Casino in Calgary and gambled with his own money, rather than gambling with Alberta’s money, especially on something as risky as KXL shortly before a U.S. presidential election.