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Despite setbacks, a case remains to build TransCanada’s Energy East pipeline

Deer congregate around pipe stored in North Dakota for the Keystone XL project.

Terray Sylvester/REUTERS

A resurrection of TransCanada Corp.'s Keystone XL pipeline is seen by some in the energy industry as the end of the company's Energy East proposal. It may not be.

If Keystone XL and two other oil export pipelines recently approved by Ottawa get built, the case for the $15.7-billion Energy East project takes a hit based on transport capacity needs alone, but other factors remain at play that help make the case for the contentious West-East project. They include economic benefits to oil producers from having access to multiple markets as well as increased energy security in Eastern Canada, which is largely dependent on imported crude.

TransCanada's aim to proceed with the project suffered another setback on Friday when the National Energy Board said it would have to restart its regulatory process from the beginning. The project was already shaping up to be politically thorny for federal Liberals, as it faces opposition among First Nations and municipalities in Quebec.

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Read more: New NEB panel to reboot troubled Energy East pipeline review

Read more: TransCanada submits new application for Keystone pipeline

Read more: Trudeau welcomes Trump's Keystone pipeline revival

Former New Brunswick premier Frank McKenna was an early booster of Energy East and argues that U.S. President Donald Trump's aggressive protectionism makes the West-to-East project even more important to Canada's interests.

"I think the activities of the last few days have made Energy East even more imperative because President Trump has talked about approving Keystone XL but he has made it clear there would be some onerous conditions attached to it," Mr. McKenna said, adding some analysts give the KXL project only a 50-50 chance of proceeding.

Canadian oil producers and successive Alberta governments have for years lamented the lack of access to export markets apart from the United States, saying it has saddled output from the oil sands with deep discounts.

Late last year, Prime Minister Justin Trudeau approved Kinder Morgan Canada's $6.8-billion Trans Mountain expansion, which will triple capacity for shipments to the West Coast, and the replacement of an existing Enbridge Inc. line to the U.S. Midwest, which will allow more oil to flow. This week, Mr. Trump set the U.S. regulatory wheels back in motion for the approval of Keystone XL, the pipeline to southern U.S. refineries whose application languished for seven years under the Obama administration, before it was rejected.

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Based on current Canadian Association of Petroleum Producers (CAPP) projections, the combined capacity of Keystone XL, Trans Mountain and Enbridge Line 3, at around 1.7 million barrels a day, would be sufficient to at least 2030. That shows a reduced need for Energy East volumes, said Afolabi Ogunnaike, analyst at Wood Mackenzie. He does not expect TransCanada will build both pipelines.

"The reality is no one wants to spend billions of dollars building a pipeline to have it run empty," said Mr. Ogunnaike.

Some analysts have long viewed Energy East as a Plan B should Keystone XL get rejected. The line would move up to 1.1 million barrels a day to Saint John from Alberta. It faces push-back from some municipal politicians and First Nations in Quebec, and its regulatory process was sent into disarray when three members of the National Energy Board panel had to be replaced due to concerns about potential conflicts of interest. That triggered Friday's move to restart the approval application process, putting the current targeted startup of late 2020 in serious doubt.

TransCanada and its shippers are still committed to Energy East, spokesman Tim Duboyce said. In addition, the Alberta government has been an enthusiastic backer, even securing capacity for its petroleum marketing agency.

Despite the renewed push, Keystone XL is still not a sure thing, Mr. Ogunnaike said. There could still be holdups at the state level, including in Nebraska, where opposition among landowners proved intense before Mr. Obama rejected the proposal in late 2015.

In addition, CAPP's production forecast could increase as oil prices improve and access to new markets would reduce the discount on Canadian crude, boosting returns on investment. Indeed, the group has reduced its outlook in recent years as oil prices collapsed.

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Even if all the approved pipelines get built, oil producers would reap rewards from another export point from the East Coast, where Energy East would also feed Irving Oil's refinery, said Jackie Forrest, director of research at ARC Energy Research Institute

"The benefit of Energy East and Trans Mountain is they open up new markets for Canadian crude beyond the United States, and the optionality that provides is seen to have great value versus the downside of having too much capacity," Ms. Forrest said.

"[Insufficient pipeline] capacity is an issue that I think has reduced the amount of investment in Western Canada. If we were in a scenario where we had excess capacity, you could make the argument that, all things being equal, you would see more capital invested here than what otherwise would have been the case."

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About the Authors
Mergers and Acquisitions Reporter

Jeffrey Jones is a veteran journalist specializing in mergers, acquisitions and private equity for The Globe and Mail’s Report on Business. Before joining The Globe and Mail in 2013, he was a senior reporter for Reuters, writing news, features and analysis on energy deals, pipelines, politics and general topics. More

Global Energy Reporter

Shawn McCarthy is an Ottawa-based, national business correspondent for The Globe and Mail, covering a global energy beat. He writes on various aspects of the international energy industry, from oil and gas production and refining, to the development of new technologies, to the business implications of climate-change regulations. More

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