The Keystone XL pipeline remains a hot button issue in Washington. Indeed, President Obama’s rejection of the northern portion of that pipeline last year sparked praise from environmentalists and outrage from many Conservatives. This move may be temporary, as TransCanada (TRP) has submitted a new plan that would further limit environmental concerns. If approved, the project would transport approximately 1.3 million barrels per day from Canada to the Gulf of Mexico. The pipeline will ease bottlenecks and create additional opportunities for oil producers, refineries, and Engineering and Construction (E&C) companies.
TransCanada’s $7 billion Keystone XL pipeline can be broken down by its northern and southern sections. The northern stretch of the project requires federal approval, as it crosses the border between the U.S. and Canada. The pipeline would run from Hardisty Terminal Station in Alberta, Canada to an existing station in in Steele City, Kansas. Along the way, petroleum from Montana and North Dakota would join the Canadian crude.
This segment has presented the most problems on the regulatory front. TransCanada has had to revise its initial plans, due to environmental concerns related to the Sand Hills region of Nebraska and the Ogallala Aquifer (supplies water to eight states). The new proposal avoids the Sand Hills completely and reduces its exposure to the aquifer. However, opponents still believe the new route is not adequate and that haul of heavy oil via pipeline is not worth the risks.
The second part of the construction, The Gulf Coast Project, is 435 miles of pipeline that links associated facilities in Cushing, Oklahoma to refineries in Texas. This segment does not need a Presidential Permit, but has received support from the executive branch anyhow. There is currently a large glut of oil backed up at Cushing from the north that has allowed North American crude to trade at discounts to international crude for some time. This section is set to come online by mid-to-late 2013 and will likely narrow the spread between the Brent crude international benchmark and the West Texas Intermediate benchmark (U.S).
All indications suggest that the northern part of the extension should be approved by the beginning-to-the middle of this year. We believe cheaper Canadian crude prices, anticipated manufacturing and construction jobs, and ability to lower the United States' dependence on foreign oil outweigh the possible risks. Engineering and Construction companies stand to benefit the most, as direct and indirect work will be created from the energy infrastructure buildout.
The construction of the 1,600 mile pipeline (1,300 in the U.S.) can be broken down into 17 sections. The extension includes 30 pump stations, six construction camps, and tank construction at the crude oil terminal in Cushing, Oklahoma. Additionally, construction management and engineering & inspection services should remain strong in the coming years. There are a number of joint ventures between privately held midstream companies that should lay a bulk of the pipeline for TransCanada.
However, bidding opportunities related to pipelines and ancillary work should remain strong for most E&C operators. Quanta Services (PWR) has secured work on the northern section, and with the largest long-haul pipeline business in the U.S., it should be a strong competitor for new awards going forward. Stantec (STN.TO), a Canadian E&C provider, stands to see a pickup in its services with its recent acquisition of Cimarron Engineering. Cimarron specializes in pipeline design and is currently working with TransCanada in Alberta. We believe this connection and Stantec’s strong history of execution on ancillary projects puts them in an ideal position as the regulatory concerns subside.
The extension should also provide opportunities for new refineries, oil sands mines, and facility upgrades. Additional work stemming from these bigger projects includes water treatment jobs, temporary housing for personnel and equipment, and infrastructure projects to name a few.
There are a number of companies in the E&C industry that should benefit from direct or indirect projects stemming from the expansion. One such firm, MasTec (MTZ), was recently awarded a terminal station on the southern portion of the pipeline. Fluor (FLR), the largest U.S. E&C firm, is one of the few American companies that has a strong footprint in Alberta. Fluor has projects that include an oil sands bitumen upgrader facility with Shell, a refinery, and various oil sands mines. We expect the company to remain a major player in this market, due to its industry leading execution and its ability to take on larger-scale projects.
We believe that the pipeline will be approved, as America’s demand for oil will likely trump environmental concerns. Too, the elevated unemployment rate and the lackluster construction market should bolster TransCanada’s chances for the project. Investors should consider taking a look at various companies within the E&C industry, as the possible approval of the Keystone XL pipeline would most likely help boost the bottom lines of the participating energy-related companies over the coming years.
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At the time of this article’s writing, the author did not have positions in any of the companies mentioned.