02/27/2012 12:09 EST | Updated 04/28/2012 05:12 EDT

Keystone XL: TransCanada To Build Texas, Oklahoma Leg Of Pipeline Ahead Of Approval


CALGARY - Energy giant TransCanada plans to build the most urgently needed portion of its controversial Keystone XL oil pipeline as a US$2.3-billion stand-alone project.

The Gulf Coast project will be subject to regulatory approvals, but because it will not cross the Canada-U.S. border, it will not need the U.S. presidential approval that tripped up the company's original proposal to pipe crude from Alberta to Texas.

The Calgary-based pipeline company (TSX:TRP) said Monday the Cushing, Okla., to Gulf Coast leg — meant to relieve a supply glut of oil in the middle of the U.S. and boost prices and producers' bottom lines — should be in service by mid to late 2013.

"The Gulf Coast Project will transport growing supplies of U.S. crude oil to meet refinery demand in Texas," said TransCanada CEO Russ Girling in a release

"Gulf Coast refineries can then access lower cost domestic production and avoid paying a premium to foreign oil producers. This would reduce the United States' dependence on foreign crude and allow Americans to use more of the crude oil produced in their own country."

The original US$7.6-billion project would have sent oilsands crude from northern Alberta across the border through six U.S. states to Texas refineries. Oil from some U.S. fields like the Bakken in Montana and North Dakota would have also fed into that line.

However, the State Department denied a key permit in January after the project was assailed by environmentalists and other critics worried about its impact on water systems in Nebraska.

The State Department has final say over whether pipelines that cross international borders are in the national interest. The move Monday will allow crude to start flowing on part of the line sooner than if TransCanada were to seek a new permit for the whole Alberta-to-Gulf Coast system.

"In our view, TRP’s effort to advance the southern leg ahead of the larger (and more contentious) northern portion of (Keystone) XL is likely to speed up the regulatory process, which should ultimately allow the company to complete the proposed pipeline more quickly," said Desjardins Securities analyst Pierre Lacroix in a note to clients.

"At the same time, TRP is also likely to be able to better serve shipper demand by placing the southern portion into service as rapidly as possible."

White House press secretary Jay Carney said Monday that U.S. President Barack Obama was pleased with TransCanada's latest announcement.

"Moving oil from the Midwest to the world-class, state-of-the-art refineries on the Gulf Coast will modernize our infrastructure, create jobs, and encourage American energy production," Carney said in a statement.

"We look forward to working with TransCanada to ensure that it is built in a safe, responsible and timely manner, and we commit to take every step possible to expedite the necessary federal permits."

Travis Davies, a spokesman for the Canadian Association of Petroleum Producers, said the decision to move the Gulf Coast portion first is a "pretty positive" development, and that it's happy to see TransCanada continuing to pursue the northern part of the line at the same time.

"Of course that's what we're most concerned about, getting access to that market," Davies said.

Oilsands crude can get to the U.S. market now through TransCanada's base Keystone system, which currently delivers crude to the U.S. Midwest and Cushing, and an extensive network of oil pipelines operated by rival Enbridge Inc. (TSX:ENB).

Enbridge itself is looking to tap into the Gulf Coast market through two pipeline projects — one that runs from the Chicago area to Cushing, and the reversed Seaway pipeline from Cushing to the Gulf.

TransCanada's move won't change Enbridge's plans, said CEO Pat Daniel, who announced Monday he'll be retiring later this year.

"We have assumed all the way along that Keystone XL — not only this portion, but in its entirety — will be built. That's in our plan and we work around that."

Oilsands producers say there's enough pipeline capacity from Canada to the U.S. for now, but their planned expansion in the years ahead depends on new pipelines — the full Keystone XL or Enbridge's Northern Gateway pipeline across northern B.C. to the West Coast. Some have touted rail transport as a stop-gap solution.

On Keystone XL, the State Department dealt TransCanada two blows in recent months. In the fall, it delayed a decision until early 2013 so TransCanada could work out a new route through Nebraska to avoid ecologically sensitive areas.

Then, last month, it denied TransCanada a permit for the project, but left the door open for the company to apply for a new one.

Obama said a deadline imposed on his administration by the Republicans to make a decision by Feb. 21 didn't allow enough time to adequately study a new route through Nebraska, so he had no choice but to reject the project.

But he said the decision had less to do with the pipeline's merits than with the arbitrary deadline the Republicans had set.

TransCanada said Monday it will file a new presidential permit application for the northern part of Keystone XL from the Canada-U.S. border at Montana to Steele City, Neb., in the "near future."

"Our application will include the already reviewed route in Montana and South Dakota," Girling said.

"The over three-year environmental review for Keystone XL completed last summer was the most comprehensive process ever for a cross-border pipeline. Based on that work, we would expect our cross- border permit should be processed expeditiously and a decision made once a new route in Nebraska is determined."

Speaking to reporters by phone from Chicago, Alberta Premier Alison Redford said while the Gulf Coast project is "good news," her team is not taking its eyes off the bigger picture.

"In terms of being constructive and demonstrating success, this will assist in the other application for the presidential permit," she said.

"(But) I'm not going to take the position that somehow because the second piece has been built we don't need to concentrate on the first. I think it all matters."

Bill McKibben, an environmental activist who led high-profile protests against Keystone XL, said the Gulf Coast project won't bring more oilsands crude into the United States, a major concern amongst pipeline critics who say that type of oil is dirtier than other sources.

However, "we stand with our allies across the region who are fighting to keep giant multinational corporations from condemning their lands. This fight is uniting people, from environmentalists to Tea Partiers, in all kinds of ways," McKibben said in an emailed statement.

TransCanada shares rose 39 cents to $42.39 on the Toronto Stock Exchange.

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