Keystone XL RIP

By Lori Musser

The fortunes of the project cargo industry are largely intertwined with the state of American energy in general and oil and gas in particular. As the shift to renewables accelerates, and energy investments realign, it muddies the markets sought by energy supply chain participants. Realignment spells opportunity for those willing to make the shift, but those who stand firm to serve their traditional fossil fuel customers have prospects too.

The plug was pulled by U.S. President Joe Biden on the last leg of the controversial 1,200-mile Keystone XL pipeline that was being built to take Alberta oil sands product to Nebraska. While delivering a staggering blow to Alberta, the U.S. market impact may prove largely inconsequential, according to Garrett Golding, business economist in the Research Department at the Federal Reserve Bank of Dallas.

Since the pipeline was first announced in 2005, the U.S. need for additional pipeline capacity from Canada has fallen because of the emergence of alternative supply chains (rail and other pipeline capacity) and the emergence of cheaper fuel from fracking.

The Canadian oil sands, with about 165 billion barrels, comprise the third-largest oil reserves in the world, after those in Venezuela and Saudi Arabia, according to the Alberta provincial government. Upstream-sector capital investments were massive, peaking at more than US$28 billion in a single year.

Then, on June 9, 2021, Canada’s TC Energy Corp. confirmed it had terminated the Keystone XL Pipeline Project. New construction was suspended following the revocation of the project’s U.S. Presidential Permit on Jan. 20, 2021.

Andy Black, Association of Oil Pipelines president and CEO, said the decision to cease has ripple effects across multiple industries. He said it killed 10,000 jobs and took US$2.2 billion in payroll out of workers’ pockets. He said that the pipeline’s builder was about to award US$3 billion in contracts to U.S. contractors and suppliers. Project cargo players took a hit.

Pulling the permit didn’t, however, shut down the sands, or stop TC Energy’s other capital expenditure, or close alternative routes and modes for transporting the Alberta oil to the U.S. TC Energy confirmed that it continues to make progress on US$20 billion of secured growth projects and US$7 billion of projects under development. In a June 2021 media release the company stated: “Looking forward, there is tremendous opportunity for TC Energy in the energy transition.”


Big Question for Alberta Oil

Alberta oil sand product will still move to the U.S. Keystone XL was designed to handle 830,000 barrels per day, so there will need to be modal shifts. Industry analysts suggest some of that oil will instead ride on rail. Some oil will shift to existing pipelines including Enbridge’s Line 3 Canada-to-Wisconsin pipeline, or their Line 5 pipeline, which runs under Lake Michigan, or the soon-to-be-twinned Trans Mountain pipeline that connects Alberta to the Canadian West Coast and then potentially south to Washington State.

Some Alberta oil product has moved by vessel and will continue to do so, but first the oil has to get to a waterway. Tucker Gilliam is vice president of marine assets at Crowley Shipping, which operates the largest U.S.-flag independent fleet of petroleum tank vessels, including tankers and articulated tug barges that serve the West, East and Gulf coasts. “While general domestic consumption demand may impact fleet volumes, our tank vessel fleet anticipates no change due to the pipeline decision,” Gilliam told Breakbulk.

However, Port of Corpus Christi CEO Sean Strawbridge said scrapping Keystone XL was shortsighted. “Even with new sources in the U.S., the Keystone pipeline could have delivered crude to U.S. refineries that they might otherwise have to get from more nefarious sources of production.” Other oil producing countries may, for example, be politically unstable or have supply issues, or may not have the same level of commitment to protecting the environment as Canada.

Strawbridge added: “This hurts our Canadian trading partners at a time when we are all excited about the United States-Mexico-Canada [free trade] Agreement. I’m disappointed for the simple fact that pipelines are the safest modality to move hydrocarbons.”


A Question of Capacity

The construction of pipelines serving Alberta, and indeed, all of North America, has created a decades-long wealth of project cargo volumes for transportation and logistics businesses. The loss of the massive Keystone XL project will be mourned by many, but the energy industry has plenty of other projects in the works, including other pipelines, wellheads, access roads, refineries, pump stations, and power plants.

Rob Scott is a past Keystone XL project manager for Bechtel Oil, Gas and Chemicals, currently serving Bechtel National. When asked about the impact of Keystone XL being pulled, he said to Breakbulk: “I believe in the near term with ongoing expansion projects, there is enough capacity to support energy needs.” That doesn’t mean there won’t be investment and expansion. “The critical steps in the next zero to two years will be No. 1, maintenance of existing critical infrastructure through the proposed infrastructure bill and No. 2, execution of sustainable energy transition projects.”

The need for North American energy infrastructure investment is highly sectoral and localized. Dallas Fed’s Golding said: “We are still going to see production growth out of the U.S. It isn’t clear that we will always need more rigs to maintain and grow production. Because of the lower production growth path we are in, the need for crude pipeline [construction] isn’t as great as in the past. We are overbuilt in the Permian Basin for now. On the gas side, we still need more pipeline and processing capacity in the shale basins.”

Going forward, Golding sees a dichotomy in capacity expansion in oil and gas: “U.S. operators that are publicly owned are still under heavy investor pressure to not increase spending or drilling activity even if prices go higher. Instead, they are to use the higher prices to return capital to shareholders. Privately owned companies are ramping up capacity. They aren’t under the same pressures. A lot of them have chosen to drill more. Those two factors are balancing each other out in overall spending levels and impact to U.S. production growth.” We can expect, by historical standards, somewhat modest production growth in the U.S., Golding concluded.

Corpus Christi’s Strawbridge, meanwhile, is concerned that there is an emerging “investability” issue in oil and gas. “Institutional pension funds are investing more in sustainable projects. We are engaging this administration to lower the vilification rhetoric on fossil fuels. They are needed for quality of life,” he said.

The U.S. Senate have been negotiating a historic, trillion-dollar infrastructure package meant to “transform America.” If the bill is passed by Congress and signed into law, a great deal of federal funding would be directed toward U.S. roads, bridges and waterways, broadband and clean energy.

The infrastructure bill isn’t expected to provide direct benefits for the oil and gas industry, but there may be indirect benefits, perhaps for plugging abandoned wells or decommissioning, and there may be benefits for renewables, specifically related to electric-vehicle charging infrastructure – but that remains to be seen.


Enduring Case for Fossil Fuels

Clean energy cargoes are becoming increasingly important to many supply chain participants. Carriers, forwarders, insurers and others that historically specialized in traditional oil and gas industry components may be able to take on or switch to renewable energy construction components such as wind blades and massive batteries. Some may not, but that may not be an issue just yet.

Strawbridge said the emergence of greener energy is inevitable, but in his opinion, there will be hydrocarbon projects for the foreseeable future: “Companies cannot function without fossil fuels. Crude oil is ultimately consumed in the manufacture of things like medicines and cosmetics, apparel and footwear. I don’t think Main Street America fully realizes the necessity of hydrocarbons in their daily lives.”

In Corpus Christi, the necessity is perhaps more obvious. Energy-related businesses make up roughly 80 percent of port business and comprise the vast majority of the US$55 billion in investment made around the port in the last seven years. The port is America’s largest energy export port and also the top port as measured in revenue tons.

Strawbridge’s forecast for fossil fuel production remains buoyant: “Today we move a variety of petrochemicals – resins, plastics, natural gas, refined products and crude. That gives us a bit of resiliency. We have not seen the peak, in my opinion. For up to five more decades we will continue to see fossil fuels as part of any sovereign economy, including the U.S.”

Despite a drop this past year, Corpus Christi anticipates a solid future in project cargo. “Yes, we’ve seen it diminish as companies introduce more discipline to their capital programs. Historically, when energy prices rose, the additional cash flow would be invested in more production and balance sheets would balloon with debt. Now, when they have additional cash flow they pay down debt,” Strawbridge said.” But he has no doubt of a recovery, noting a recent uptick in rig counts, and great potential in emerging fuels.  

Corpus Christi expects growth in blue hydrogen, which is already produced locally but could be scaled up with a successful carbon capture program and offshore storage in geological formations. Solar is also growing. The port has signed a memorandum of understanding with an institutional investment company to build a solar array with 800 megawatts of storage. The port sees a market for ammonia, and another for green hydrogen, which will be accelerated when a ready water source becomes available. The permitting of an 80-million-gallon per day water desalination facility, the largest in the U.S., is under way. Strawbridge noted that will continue to attract more investment: “Water was an Achilles heel.”

The future of U.S. energy will be shaped by supply, consumer will, demand, competition, government diktats, private industry wherewithal and even energy cyber security, among other factors. The volumes and composition of energy project cargoes is evolving, embracing more renewable energy infrastructure components, but traditional fossil fuel cargo will not, it seems, evaporate overnight. 


Based in the U.S., Lori Musser is a veteran shipping industry writer.

Image credit: Government of Alberta