Oil prices have crashed, but Keystone XL keeps moving forward

Despite this year’s crash in crude prices, TC Energy Corp on Tuesday said it would start construction on the controversial $8bn Keystone XL pipeline after it secured financial backing for the project from the government of Alberta, Canada, pushing the long-delayed pipeline closer to fruition.

Alberta, home of the world’s third-largest oil reserves, has struggled for years as congested pipelines weakened prices and forced the provincial government to curtail production. Many companies in the province have cut capital spending as well due to the twin shocks of falling demand from the fast-spreading coronavirus outbreak, and an oil price war initiated by Saudi Arabia after its market alliance with Russia collapsed in acrimony earlier this month.

Imperial Oil Ltd on Tuesday became the latest producer to retrench, saying it would halt share repurchases and cut 2020 spending by 30 percent, or $351m.

The Keystone XL pipeline, which would carry 830,000 barrels of crude per day from Alberta to the Midwest region of the United States, has been delayed for more than a decade by opposition from landowners, environmental groups and Native American tribes.

Alberta would make a $1.1bn equity investment into the project and provide a $4.2bn loan guarantee. Construction could start as soon as this week, it said.

“We cannot wait for the end of the pandemic and the global recession to act,” Alberta Premier Jason Kenney said in a statement.

The support would substantially cover construction costs through the end of 2020, TC Energy said, with the balance funded through a $2.7bn investment by the company.

The government backing removes a key hurdle for the project, said Jackie Forrest, a senior director at the ARC Energy Research Institute in Calgary. But it still faces legal challenges.

“One of the key risks has always been that you put money into this and the politics in the US change, and you aren’t able to complete the project,” she said.

TC Energy expects to buy the Alberta government’s stake once the project enters service in 2023. It also plans to raise about $1bn by selling some of its shares.

The company, which had planned to start mobilising heavy construction equipment in February, said last month that there was too much uncertainty to commit immediately to the project.

Alberta’s support is the second direct investment by a Canadian government in a major pipeline project. Canada in 2018 paid 4.5 billion Canadian dollars ($3.17bn) to acquire the Trans Mountain pipeline and expansion project, despite formidable political and environmental opposition.