Even as crude prices slumped to their lowest since 2002, the Canadian energy industry was in for some positive surprise.



In a rare instance of providing funds for an oil pipeline, Alberta's United Conservative government is set to take an equity interest of $1.1 billion and authorize a $4.2-billion loan guarantee to help smooth the path forward for TC Energy’s TRP much-delayed Keystone XL project.



Here’s what you need to know:



What is the Keystone XL Pipeline & Why is it Needed?



By now, it is well documented that the oil market is struggling. The price of U.S. crude fell to $19.27 a barrel at one point Monday, its lowest since 2002, while Brent crude dropped below $23 – levels not seen in 17 years.



The fast-spreading novel coronavirus outbreak has triggered an unprecedented selloff in the commodity. In particular, with major cities under lockdown and travel restrictions in place, the consumption for crude is set to drop substantially. Pressure in the oil markets has been exacerbated by the no-holds-barred price war between Saudi Arabia and Russia.



Meanwhile, the problem has been far worse in Canada. In fact, Alberta’s Western Canada Select (‘WCS’) - the benchmark for Canadian heavy crude – has consistently lagged the New York-traded West Texas Intermediate ("WTI").



While oil production is surging in a country with the world’s third largest reserves, Canada's exploration and production sector has remained out of favor, primarily due to the scarcity of pipelines in part due to the political and legal hurdles. In short, pipeline construction in Canada has failed to keep pace with rising domestic crude volumes – the heavier sour variety churned out of the oil sands – resulting in infrastructural bottleneck. This has forced producers to give away their products in the United States – Canada’s major market – at a discounted rate. As it is, Canadian heavy crude is inferior to the higher-quality oil extracted from shale formations in the United States and is also more expensive to transport and refine. Even a government-mandated production cut failed to prop up the depressed prices. The situation is so bad that recently WCS plunged to a record low of under $5 a barrel.



This makes life harder for Canada-based crude producers. At the prevailing prices, these companies are unlikely to hit cash flow breakeven. As a response to the bearish environment, the Canadian oil fraternity has scaled back drilling activity, suspended buybacks and promised cuts to their capital budgets. The likes of Imperial Oil IMO, Suncor Energy SU, Cenovus Energy CVE, Canadian Natural Resources CNQ, among others, lowered their 2020 capital expenditure target to contend with depleted oil prices.



In a nutshell, the requirement for pipelines to ship Canada's surplus production is pretty obvious and this is where the Keystone XL comes in. Designed to carry 830,000 barrels of crude a day from Alberta’s oil sands to U.S. Gulf Coast refineries, the $8-billion, 1,900-kilometer conduit is TC Energy’s flagship infrastructure project.



When completed, Keystone XL will considerably ease the pipeline shortage plaguing Canada’s oil industry. Importantly, TC Energy has been able to secure long-term volume contracts for more than 90% of the pipeline’s capacity, indicating widespread commercial support for the development.



How Far Along is the Project & Why is it Disputed?



The long-delayed pipeline has encountered significant regulatory, legal and environmental setbacks over the year. It is strongly opposed by environmentalists and politicians, owing to the risk of emitting greenhouse gases in transporting bitumen and crude to the United States. In November 2015, president Obama rejected TC Energy's application to construct the Keystone XL pipeline on fears that it would weaken United States’ position in international climate change negotiations. However, in 2017, the project was cleared by President Trump as he was of the opinion that the development of such pipelines can revive the economy.



After facing delays for near about a decade, the pipeline – set to transport Canadian oil to refineries and distribution centers in the United States – finally received regulatory approval from Nebraska commissioners last year, albeit on an alternative route to the one proposed by the company. However, the project was again hit by fresh controversy, as rerouting of the pipeline subjected it to a new legal investigation.



Why is Alberta Government Investing in the Pipeline?



There was just too much uncertainty associated with Keystone XL for sponsor TC Energy to commit to the project’s development. The future looked bleak and the government says it had to intervene. The investment would take care of most of the construction costs till the end of this year, with the remainder being financed by the company. Once the project come online - expected in summer 2023 - TC Energy will buy out the Alberta government’s portion.



Following the Alberta government’s newly announced financial support, TC Energy - carrying a Zacks Rank #3 (Hold) - promptly declared that it would start work on the Keystone XL pipeline immediately, pushing the long-stymied development closer to fruition.



You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.



While questions have been raised about the use of public funds in the energy business, federal help was cited as necessary to lower the risk for this multibillion-dollar infrastructure project and push it toward completion. Supporters of the deal further point to how Canada’s federal government stepped in to purchase the Trans Mountain expansion project from Kinder Morgan KMI in 2018. At the same time, the deal was touted as important in the context of economic development and job creation at a time when the commodity price plunge and the impact of coronavirus have wreaked havoc on the industry through layoffs and oil production cuts



Is the Project Finally Out of the Woods?



Expectedly, the capital infusion was cheered by the industry, which believes that the pipeline would significantly improve critical market access and the price realizations for producers once we move past the current economic gloom. No doubt, Alberta’s Keystone investment has come as a shot in the arm for the province’s struggling energy sector.



While the government’s stimulus would stop the project from falling off the table, it’s not enough to guarantee a go-ahead. Legal hurdles in the U.S., both at the state and federal levels, still remain, which can further delay construction of the massive project.



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