If you remember, a few weeks back, we talked about the Keystone XL pipeline.
On January 9th, the House of Representatives voted 266 to 153 to pass the bill that approves the Keystone XL, the pipeline that will carry around 800,000 barrels a day of heavy Canadian tar sands crude to the U.S. Gulf Coast.
It was the ninth time the House had voted to approve the pipeline, but this time it had larger implications because the new majority Republican Senate would be able to pass it as well.
And after a couple weeks of amendments and debate, the Senate passed the bill 62 to 36 yesterday.
Although the body as a whole rejected some major amendments, the bill has still undergone enough minor changes that it will have to go back to the House for another vote…
Isn’t politics exciting?
Think about it: This is a month’s worth of work to approve a bill that the White House already said it would veto. I’m sure if you or I were tasked with a job and this is how we went about doing it, we would’ve been fired a long time ago.
But I digress…
It Doesn’t Even Matter
The point I’m really trying to make here is that all of the political posturing and months of maneuvering by both sides to attempt to pass or derail the bill doesn’t even rely on basic logic.
According to a study by the State Department, the Keystone XL pipeline will have little to no effect on the environment. Some say the extra customer base (when tar sands producers export oil abroad) will incentivize more production that could increase pollution.
This makes sense until you look at the price of oil and realize we are in a supply glut that won’t be helped by an extra 800,000 barrels per day on the world market. The cost advantage for increased production is gone.
Still, by the time Keystone gets built, oil could go back up.
But even if this does happen, the State Department and other think tanks and organizations have found that the job creation numbers for the pipeline are less than savory.
Republican Senate Majority Leader Mitch McConnell has claimed that the pipeline would add billions to the economy, but the facts and evidence reject this thesis. Although the bill would add thousands of temporary construction jobs, the number of permanent employees will likely be less than 40 people… hardly a boon for the economy.
And beyond that, the oil being pumped through Keystone XL will be almost entirely bituminous tar sands crude, with a negligible amount coming from light oil formations in the U.S.
The only way for this bill to be of value to you is if some useful or potentially profitable amendments are added. Unfortunately, the latest vote didn’t add anything groundbreaking — nothing that even remotely looked like infrastructure reform or oil and natural gas exports rule changes.
Still, I wanted to discuss it with you today because investors will be talking about it. Some naïve ones may even try to trade on it.
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Tar Sands Sinking
So here’s how it goes…
The companies that will make money off of the approval of the Keystone XL pipeline are oil sands producers.
If you had asked me a couple of years ago whether or not the pipeline would be good for investors, I would’ve said yes. But now that oil is in a supply glut and prices are in a bear market, the game has changed.
Even though prices can go back up, producers are already cutting back on spending, especially in the cost-intensive Canadian oil sands.
Just take a look at Cenovus Energy (NYSE: CVE):
The company has oil sands assets in Alberta, but because of falling oil prices, it said it will cut back on spending this year by $700 million.
CEO Brian Ferguson says, “I believe oil prices will rebound, but the timing is uncertain. We’re taking the actions we deem prudent to help protect the financial resilience of Cenovus without compromising our future.”
It’s no wonder the CEO is worried. As you can see in the chart above, his company has underperformed the larger oil and gas market by a 20% margin — most likely because his company operates in the expensive oil sands, where Cenovus and other companies have to cut spending or risk bankruptcy.
So I’m not sure these companies are ready to boost production to the levels needed for exports through Keystone XL. Rather, they are in defensive mode and will wait for prices to rebound.
Not that it matters. Remember, Obama plans to veto the bill as early as next week, so there’s nothing to see here — just more great work from our elected representatives in Congress.
Until next time,
Keith Kohl
Check us out on YouTube!A true insider in the technology and energy markets, Keith’s research has helped everyday investors capitalize from the rapid adoption of new technology trends and energy transitions. Keith connects with hundreds of thousands of readers as the Managing Editor of Energy & Capital, as well as the investment director of Angel Publishing’s Energy Investor and Technology and Opportunity.
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