Business·Analysis

Why Alberta is throwing billions behind the Keystone XL pipeline

With the energy sector still reeling from weeks of economic turmoil, Alberta's United Conservative government announced it's throwing its financial heft behind the long-delayed Keystone XL pipeline.

Like other governments before it, the UCP is mixing oil, government and politics

This file photo from 2015 shows the Keystone Steele City pumping station, into which the planned Keystone XL pipeline is to connect to, in Steele City, Neb. The Alberta government is investing $1.5 billion equity investment in the Keystone XL pipeline. (Nati Harnik/The Associated Press)

With the energy sector still reeling from weeks of economic turmoil, Alberta's United Conservative government announced Tuesday it is throwing its financial heft behind the long-delayed Keystone XL pipeline.

The investment of $1.5 billion, plus a $6-billion loan guarantee, aims to accelerate construction of the massive project and was warmly greeted by a sector desperate for some good news. 

Still, the enormity of the investment will also raise many questions — including, why now? 

But as with many things in Alberta over the years, the answer can often be found at the intersection of oil, government and politics. Now, the stakes feel higher than ever for an industry with an unsettled future.

"You remember what the [UCP] slogan of the election campaign was, right? It was economy, jobs, pipelines," said Duane Bratt, a political scientist at Mount Royal University in Calgary. "This fits all three of those."

Rough time in oil patch

For industry, there's little question the project is needed.

Alberta's oilpatch has struggled to add pipelines to carry more oil out of the province, in part due to the political and legal hurdles they've faced in Canada and the United States.

The resulting pipeline bottlenecks led to an oil glut that's punished prices for oil out of Western Canada.

With a price tag of $8 billion US, Keystone XL would carry 830,000 barrels of crude a day from Hardisty, Alta., to Nebraska. That oil would then finds its way to Texas refineries on the Gulf Coast.

"I've always been skeptical about government intervention in the market but our failure to get pipelines built has been a failure of government policy and politics, not of markets," Premier Jason Kenney said. (Art Raham/CBC)

Oil prices are dismal today thanks to the economic impact of COVID-19 and an oil price war between Saudi Arabia and Russia — with Alberta oil trading well below $10 US per barrel. But the sector's expectation is that prices will eventually improve after economic activity restarts.

Once the current gloom is gone, analysts see the project as improving market access and the price Alberta producers get for their oil.

"It's giving us more access to those [Gulf Coast] refineries and to a bigger demand sector," said Stephanie Kainz, senior associate, RS Energy Group. 

"That means that you can bring on more projects and definitely, hopefully, infuse more capital into the province and into the Canadian energy sector."

Future of sector is uncertain

There are many questions about what the Canadian energy sector will look like when the current crisis is over. Keystone XL's future looked uncertain, at least in the view of Premier Jason Kenney. This is why, in his opinion, government had to get involved.

With no prospective private sector bidders for the project, Kenney said Alberta's investment was needed or the pipeline would not be built, at least in the foreseeable future.

"I've always been skeptical about government intervention in the market but our failure to get pipelines built has been a failure of government policy and politics, not of markets," Kenney told reporters on Tuesday.

In making the announcement, Kenney could — and did — point to the decisions of governments of the past.

Politics and oil go hand in hand

Though many Albertans may call themselves free-marketers, their governments have often waded into the energy business in significant ways.

As Kenney noted himself, former premiers Ernest Manning and Peter Lougheed made key investments to help develop natural gas and the oilsands industries, respectively.  

A little more recently, Ed Stelmach caused big waves across the industry when he tried to make good on his political promise to get more money from energy royalties.

Students protesting against the proposed Keystone XL pipeline in Washington, DC, in 2014. The project has faced opposition from environmental and Indigenous groups over the years. (Nicholas Kamm/AFP/Getty Images)

That's clearly not part of Kenney's playbook, but politics appears to be at play here as well. 

As noted by Mount Royal University's Bratt, building pipelines was a key part of the premier's election campaign last year and the government would have understood the blowback of letting Keystone fall off the table.

"This would would have been bad for the industry, for the Alberta government — particularly a government that is so aligned to the oil and gas sector," Bratt said.

For a premier that also promised jobs, the pipeline project is important. The government says the work in Alberta will create over 1,400 direct and 5,400 indirect jobs in Alberta during construction.

Investment brings both financial and political risk

But as with all politics, there is also risk.

For one, Bratt wonders about the optics of investing so much money in a pipeline while the same government looks to tighten spending in areas like education.

Alberta NDP Leader Rachel Notley had questions about the business case for the project, calling for the government to be transparent about how it came to the decision to make such a big investment.

The government is also certain to be challenged by those Albertans who believe the economy must become more diversified and that such dollars could have gone a long way in helping elsewhere.

There are legal risks, too.

Efforts to advance the pipeline have been stymied by years of political, environmental and Indigenous opposition.

James Coleman, a law professor at Southern Methodist University in Texas, says the project still faces legal hurdles that could trip up the project in the U.S. That includes a challenge now before a U.S. District Court in Montana launched by environmental and Indigenous groups. 

"Most of the states that [the pipeline] is passing through have approved or tend to be favourable toward this pipeline, but that doesn't mean that there might not be some legal risk," he said.

"You can never predict what a court is going to do."

Kenney, on the other hand, is following the footsteps of some of his predecessors — combining the interests of the oil industry with those of the province.

It may have worked for governments in the past but there are few guarantees in the energy sector these days.  And the question now — for the UCP and citizens — is whether the investment will pay off for Albertans.

About the Author

Tony Seskus

Senior Producer Western Digital Business Unit

Tony Seskus is senior producer with CBC's Western Business unit in Calgary. He's written for newspapers and wire services for more than 25 years on three continents. In Calgary, Tony has reported on the energy sector and federal politics.

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