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Thursday, January 21, 2021

Whoo-Hoo! Enbridge To Benefit From Keystone XL Decision -- January 21, 2021

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Link here.

Summary: 

  • Biden is set to cancel the Keystone XL Presidential Permit, killing the entire project.
  • TC Energy and the Canadian government tried to appeal, promising billions in renewable development and American jobs. Odds still appear low.
  • Meanwhile, Enbridge is waiting from a corner, anxiously awaiting results. Its Mainline system is perhaps the largest beneficiary of Keystone XL cancellation.
  • Because of this, it might not be a surprise to see management back off its request to shift to longer-term contracts on Mainline, instead sticking with spot shipments.

Narrative:

Enbridge, the owner of the Enbridge Mainline, is likely observing all of this with great interest. Its pipelines that cross the border, for all intents and purposes, have as close to a monopoly as one can manage to get. The majority of crude oil barrels that are sent south for use in US refineries - many of which require these heavier, sour grades to function - flow on Enbridge lines. Further, the Line 3 Replacement project effectively would increase that capacity and at this point, with all permits in hand, Enbridge should have smooth sailing ahead to completing all work, albeit all accomplished just mere months before the Trump - Biden transition. The firm is setting pretty.

The Line 3 Replacement, alongside Keystone XL and the Trans Mountain Expansion, have been key projects pitched to solve wide differentials. Competing pipelines have been an Enbridge worry for some time, and with the spectre of competition looming, Enbridge had begun to engage in some shenanigans.

To explain, for the entirety of its 70 years of operation, the Enbridge Mainline has operated in the spot market. Fully 100% of the network's capacity is available under monthly shipment contracts. If over allotted (as it has been quite often), prospective shippers receive a pro-rated allocation. These spot contracts give producers flexibility to secure volumes without locking themselves into expensive long-term commitments.

Those expensive long-term commitments are exactly what Enbridge wanted to shift to in recent years. Enbridge appealed to the Canada Energy Regulator ("CER") to do just that, conveniently when Keystone XL and the Trans Mountain Expansion prospects were looking great. In its defense, Enbridge has stated that it simply wants to mirror the contracts backing other projects and key long haul pipelines across North America, but investors should not kid themselves. Management is pursuing this change because it was in its best economic interest. Rather than see future Mainline volumes fluctuate (and thus cash flows as well), it wanted to get ahead of the upcoming competition, locking shippers into contracts now while there is a dearth of capacity. Canadian oil producers, including Canadian Natural Resources and countless others, rightly challenged the proposal.

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