Monday, November 20, 2017

Hesitation on the Keystone XL Pipeline

The Keystone XL Pipeline obtained its last state approval with a route through Nebraska, but the pipeline owner’s reaction is puzzling, sounding more like a party that has lost a ruling than one that has earned the permit it was seeking. The company says it will have to study its options after the approved pipeline route through the state is partly different from the route it had been planning for. The implication is that the approved route might be too expensive to build, even though it is geologically preferable to the previously proposed route, about the same length, and less expensive in real estate terms.

There have been whispers over the last three years that the Keystone XL Pipeline is a doomed project. Analysts say it can’t operate at a profit unless world oil prices are around $80 or $90. That price level for oil seemed a sure thing when the pipeline was drawn up but now seems exceedingly unlikely. 

Contracts probably don’t allow the project to be canceled, so one possible scenario is that the pipeline is completed and operates for a few months or a year until the money runs out. In that scenario the pipeline loans will never be paid back. If you’re leading a doomed project and you don’t have the authority to cancel, one approach you can take is to slow everything down in the hope that circumstances change. Now that approvals are in, it looks like that may be the guiding dynamic for the Keystone XL Pipeline.