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Economic cost of Canadian oil price discounts counted in billions of dollars

CALGARY, A.B. – TransCanada Corp. says it doesn’t know when it will be able to build its Keystone XL pipeline after a Montana judge stopped it last week but it is confident the project will make money once it is built and in service.

It’s too soon to say what the decision by U.S. District Judge Brian Morris last Thursday will mean to the timeline and cost of the pipeline, Paul Miller, liquids pipeline president, said at TransCanada’s investor day in Toronto on Tuesday.

The project was proposed in 2008, denied by former president Barack Obama in 2015 (leading to a $2.9-billion non-cash write-down for TransCanada) and resurrected by President Donald Trump in 2017.

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“It’s important to remember our commercial model on XL has not changed materially,” Miller said.

“All historical costs, plus (cost of construction), since 2009 are captured for toll determination. The writedown we took in 2015 does not remove these costs from rate-making purposes. We share capital cost variances equally with our shippers.”

He said the pipeline capacity, minus an amount that must be reserved for spot shipments, is now fully committed.

Indigenous and environmental groups sued TransCanada and the U.S. State Department after Nebraska authorities approved an alternative route to the one TransCanada had proposed through the state, arguing it hadn’t properly studied it.

In his decision, Morris agreed the analysis didn’t fully cover the cumulative effects of greenhouse gas emissions, the effects of current oil prices on the pipeline’s viability or include updated modelling of potential oil spills.

The proposed 1,897-kilometre pipeline would carry as much as 830,000 barrels a day of crude from Hardisty, Alta., to Steel City, Neb., where it would meet up with other pipelines to the U.S. Gulf Coast.

TransCanada is examining the deficiencies identified by the judge to determine what affect meeting them will have on the schedule and its last cost estimate of about $10 billion, Miller said.

The lack of export pipeline access from Western Canada has been blamed for steep discounts for crude oil compared with New York-traded West Texas Intermediate, prompting some producers to reduce oil production and leading to record levels of crude-by-rail shipping.

Oilsands producer Cenovus Energy Inc. has called on the Alberta government to impose production cuts to bring supply in line with takeaway capacity and protect royalties but companies with refineries that benefit from lower prices or contracted export pipeline space oppose the move.

“As far as timing around the pipeline, the need for Keystone XL has never been greater,” Miller said at investor day.

“When you’re looking at US$40 to $50 differentials on WCS (Western Canadian Select bitumen-blend oil) versus WTI, whether it’s in this administration or the next administration, XL is a project that the industry needs and is a valuable piece of infrastructure for the North American economy.”

TransCanada told investors it expects to raise its dividend at an average annual rate of eight to 10 percent through 2021, an outlook supported by expected growth in earnings and cash flow.

The pipeline operator has increased its dividend on common shares in each of the last 18 years.

Comparable earnings before interest, taxes, depreciation and amortization are expected to grow to about $10 billion in 2021, a 35 percent increase from the $7.4 billion in 2017, TransCanada said.

(THE CANADIAN PRESS)

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