Investment Opportunities as the Keystone Pipeline Approval is Stalled

In 2006, the North Dakota Bakken production was 5240 barrels per day. Today, it produces 1.1 Million barrels per day. With the Keystone pipeline approval being delayed, 75% of the North Dakota oil is transported to the refineries in Nova Scotia and Texas over the rails and the oil transported by the tank cars has risen by over 2000% in the last 3 years.

These are impressive numbers. Not to mention that there is much additional fracking and shale oil production occurring in other parts of the United States, including Montana, Colorado, Texas, Kansas and Oklahoma. If you include Canada, Alberta’s tar sands are said to contain more oil than Saudi Arabia and the production is still rising.

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All this oil needs to be moved to the refineries so they can be processed for the domestic and international markets. The US and Canadian oil production has risen very quickly by significant numbers and the infrastructure does not exist to efficiently distribute it to the storage facilities and refineries. Transporting oil over the rail is at best a temporary solution, often fraught with danger as these tracks do pass through populated areas and accidents and derailments do happen (there have been a few in the recent months involving oil transporting tank cars).

Keystone Pipeline System

Keystone pipeline mapProposed and built by TransCanada, the Keystone Pipeline System is intended to transport oil from Alberta and North US to primarily refineries in Texas Gulf Coast. Upon completion, the Keystone Pipeline System would consist of the completed 2,151-mile (3,462 km) Keystone Pipeline (Phases I and II) and the proposed 1,661-mile (2,673 km) Keystone Gulf Coast Expansion Project (Phases III and IV) . The controversial fourth phase, the Keystone XL Pipeline Project, would begin at the oil distribution hub in Hardisty, Alberta, and extend 1,179 miles (1,897 km), to Steele City, Nebraska (Source: Wikipedia)

As of today, Phases I and II are operational with a capacity of 590,000 barrels/day. Phase III from the oil distribution hub Cushing, OK to the Gulf Coast is close to completion and will likely be operational by the end of this year. This can potentially move as much as 700,000 barrels of oil per day from Cushing to the Texas refineries. Most of this oil would be sweet, light crude from North Dakota and other US sites, at least initially, as Cushing has built up a significant glut of bakken oil over the last 2 years.

Phase IV, also known as Keystone XL, is waiting for approval from the US Government.

Once the Keystone pipeline approval is granted, the Phases III and IV will together transport up to 830,000 barrels of oil/day, primarily from the Canadian tar sands. American crude, which is much lighter variety will enter the pipeline at Baker, Montana (see the picture).

The problem of course is that the approval of this leg of the project has been held up on environmental concerns. Economically, the pipeline makes senses as a more efficient way of transporting oil, increases distribution capacity that will allow tar sands production to expand. Environmental groups are opposed to building the pipeline over the Ogalla aquifer in Nebraska and also over the fact that this will mean an increase in tar sands oil production, which inherently carries a large carbon footprint.

Ongoing Energy Market Dynamics and the Investment Opportunities

Warren Buffett recently invested in solar plants in California as well as Canadian oil sands. Clearly he believes that the output and profits from the oil sands will continue to increase. He also owns Burlington Northern railroad that is benefitting greatly from the increased crude transport over the rail. He is thought to oppose the Keystone XL pipeline.

The Obama administration, while initially pushing hard for the project to be approved, has stalled on the final decision under pressure from the lobbyists. One of the reasons maybe that a cheaper oil (as the supply increases, prices fall) is a threat to the push for alternative energy development, and with the solar and wind energy costs coming down drastically, if the administration can hold off the pipeline for a few years, it may be able to let these alternative energies compete on their own with the fossil fuels in the open market with subsidies removed.

This gives us a window of few years in which we can profit from well chosen investments in Solar energy as well as alternative modes of transporting crude, such as rail. There are a number of new refinery projects associated with this and other pipelines on the table and there may be investment opportunities in companies that help in building refineries, although good values may be hard to find in this sector.

As we go into these investments, it would be helpful to keep in mind that ultimately when the pipeline becomes operational, it will take some demand away from the rails rendering some of their capacity at that time excess. They will still be required, and may be able to redeploy their tank car assets quickly depending on how fast and sustained is the growth in US and Canadian oil production. Given the current growth rates, I believe any slack will be short lived.


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