BUSINESS
03/31/2020 09:27 EDT

Keystone XL Pipeline Will Go Ahead, TC Energy Says, As Oil Prices Hit Multi-Year Lows

The announcement comes as Canadian bitumen sells for below $5 a barrel.

THE CANADIAN PRESS
Russ Girling, president and CEO of TransCanada Corporation, today known as TC Energy, addresses the company's annual meeting in Calgary, May 1, 2015. The company says it is going ahead with the Keystone XL pipeline.

CALGARY ― TC Energy Corp. gave the go ahead for construction of its US$8-billion Keystone XL Pipeline project on Tuesday, with a helping hand from the Alberta government.

The company said 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 US$6.9 billion is expected to be funded through a combination of a US$4.2-billion project level credit facility to be fully guaranteed by the Alberta government and a US$2.7-billion investment by TC Energy.

Watch: The oil price collapse could signal a huge deflationary shock to the economy. Story continues below.

 

The announcement came as Canadian oilsands product sold for record low prices below US$5 per barrel at the start of this week.

In a research note this week, investment bank Goldman Sachs said the oil businesses at highest risk from the oil price collapse are those that have the hardest time getting oil to market, particularly Canadian oilsands and some shale oil operations in Texas.

The 1,947-kilometre Keystone XL pipeline project will be able to carry 830,000 barrels per day of crude oil from Hardisty, Alta., to Steele City, Neb. where it will connect with TC Energy’s existing facilities.

The company formerly known as TransCanada says with pre-construction activities underway, the pipeline is expected to enter service in 2023.

Once the project is complete and in service, TC Energy expects to acquire the Alberta government’s equity investment under agreed terms and conditions and 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,″ TC Energy chief executive Russ Girling said in a statement.

The project was first proposed more than a decade ago but has faced numerous hurdles and had been rejected by the Obama administration.

If pipelines get clogged up as refineries shut down, inventories cannot build, reducing the cushion and creating a very quick risk reversal towards oil shortages.Investment bank Goldman Sachs, in a client note this week

However, U.S. President Donald Trump has worked to revive the project and been a strong backer of the pipeline.

“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,″ 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.”

Oil prices going negative

Because of a lack of storage space, producers will be willing to sell at negative prices to have buyers take oil off their hands, Goldman Sachs said. Some oil producers in the U.S. have already reportedly paid buyers to take oil.

“Paradoxically, this will ultimately create an inflationary oil supply shock of historic proportions because so much oil production will be forced to be shut in,” Goldman Sachs wrote.

Refiners across the world, meanwhile, have been forced to halt operations because of steep falls in demand that have sent traders and analysts scrambling to cut their forecasts.

“If pipelines get clogged up as refineries shut down, inventories cannot build, reducing the cushion and creating a very quick risk reversal towards oil shortages,” Goldman said in a note.

This would in turn push prices above the Wall Street bank’s $55 a barrel target for 2021, it said.

― The Canadian Press, with a file from HuffPost Canada and Reuters