One of the big Cdn oil market stories this morning will be that the restart of the Keystone oil pipeline isn’t likely to be a matter of days, but more a matter of weeks. We identified the wildcard to the timing for a restart to be the regulator, and the quoted comments from all three commissioners in the South Dakota Public Utilities Commission (PUC) overseeing the restart clearly suggest the PUC will be looking at this incident with a tough eye. This was our fear and the reason why we wrote our Nov 20 blog “Cdn Heavy Oil Differentials Likely To Be Hit Harder Than The $1.55/b So Far From The Keystone Oil Spill” [LINK]. We worried that the regulator is likely to take more time on this restart, especially given the Keystone name and last year’s Standing Rock protests that delayed the Dakota Access Pipeline. As of Tues 7am MDT, Cdn heavy oil differentials widened by another $1.00, from $14.20/b to $16.75/b. The three commission comments reinforce that fear and that a restart isn’t days or a couple weeks, but will be much longer and it lead to Cdn heavy oil diffs being hit harder than the $2.55/b to date.
All three South Dakota PUC commissioners came out with tough comments: Our worry is that the market is still overlooking the wildcard to the restart – how the regulator will approach the restart decision. There is no fixed timeline for a decision. Rather it will be what the regulator needs to look at before making a restart decision. This wildcard is why we thought a quick restart was unlikely. That was reinforced even moreso last night when Reuters posted an excellent story because it had quotes from all three commissioners on the PUC, who will be the regulatory body deciding on the Keystone restart. No one reading this Reuters story (South Dakota regulators say they could revoke Keystone permit after spill”[LINK]) will be thinking there is a quick restart to the Keystone oil pipeline following last Thursday’s oil spill. We think the revoking of the permit is an extreme and unlikely event, and certainly gets attention. But the commissioner quotes point to a very tough scrutiny from the regulators. Reuters wrote:
“We are waiting to see what the forensic analysis comes back with to see if any of our conditions were violated,” Kristie Fiegen, chair of the three-person South Dakota Public Utilities Commission, told Reuters, adding a violation could lead to a suspension or cancellation of the permit.”
Chris Nelson, another commissioner, agreed. “The PUC needs to determine whether any of the permit conditions for this pipeline were violated. Those conditions were placed on the permit to ensure safe construction and operation of the pipeline,” he said.
“If it was knowingly operating in a fashion not allowed under the permit or if construction was done in a fashion that was not acceptable, that should cause the closure of the pipe for at least a period of time until those challenges are rectified,” said Gary Hanson, the third commissioner.
The “forensic analysis” is what makes us worry that the shutdown is not days, or a couple weeks, but something much longer. The big comment of concern is the PUC waiting on a forensic analysis. Reuters also wrote “The PUC expects a preliminary report about the spill from federal and state technical experts within the next 10 days. A more comprehensive analysis could take several months.” This wasn’t a quote from one of the commissioners, but we expect Reuters wrote these two timelines based on their discussions with the commissioners. If they were looking at it as a simple leak, clean up and repair, then a quick restart would be normal. But the tone and content of the commissioner quotes make it hard to see the PUC making a restart decision based on a preliminary report. It just seems like the PUC is looking for something.
TRP has not yet determined the cause of the pipeline leak. TRP set up an Amherst Incident site for the oil spill and TRP’s response [LINK]. The key determinant to how long the pipeline will be shut down will be for TRP to figure out what caused the leak. There is no update on finding out the cause of the leak. TRP’s latest update is that “Over 160 crew members are on site removing oil. Repair plans will be confirmed once we are able to safely expose the impacted section of pipe. As of November 21, over 16,000 gallons of oil have been removed using hydro-vac and excavation equipment. TransCanada engineers are currently evaluating appropriate repair methods in conjunction with Pipeline and Hazardous Materials Administration (PHMSA).”
Cdn heavy oil differentials widened another $1.00/b. Cdn heavy oil prices reacted immediately from TransCanada’s announcement that Keystone pipeline was being shut down for the spill following the oil spill. This immediately led to a shut in of Cdn heavy oil, and it also led to an immediate increase in the discount for Cdn heavy oil. The WCS less WTI differential increased from $14,20/b on Thus to $15.75/b on Monday and a further $1.00 to $16.75 at Tues 7am MDT. Keystone has a capacity of 590,000 b/d.
WCS Less WTI Differential US$/b
Source: Bloomberg
Cdn heavy oil differentials are likely to hit for a longer period. The quotes from the commissioners are confirming our fears that they will be taking a tough look at the Keystone oil spill and that it the shut down isn’t a matter days or a couple weeks, but much longer. Cdn heavy oil differentials have already widened by $2.55 to $16.75/b. We expect this could widen further and will stay wide for the duration of the pipeline shut down. Unfortunately, our worries on the regulator wildcard are being confirmed.