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North American Energy and US Jobs

By David Dittman on August 23, 2011

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Having bargained away any opportunity his administration had to get a serious jobs bill passed and signed before his reelection campaign kicks into high gear, President Obama will continue his political suicide by a thousand cuts if he doesn’t approve TransCanada Corp’s (TSX: TRP, NYSE: TRP) application to extend its cross-border Keystone Pipeline this fall.

Forget, for the moment, that Keystone XL will help solve a supply glut at a key crude oil terminal. And a long way’s off, of course, is the time when Alberta will be producing near the top end of its oil sands potential, but it’s a reasonable estimate that up to 4 billion barrels a day will be stranded by 2015 if the effort to expand North America’s pipeline infrastructure doesn’t start now.

Set aside, too, that the project will result in significant federal tax revenue over the long term. And, provided irresponsible local legislators don’t repeat mistakes made during negotiations for the original Keystone’s construction and offer concessions TransCanada never requested, the extension will also generate taxes at a time of shrinking budgets for governments at all levels.

While we’re looking at the long-term picture, the longer Keystone XL doesn’t get built, the more and more likely becomes the construction of at least one and likely several pipeline proposals to the British Columbia coast. The US Dept of Energy (DoE) concluded that these pipelines to BC would open the Canadian oil sands to Asian markets and result in a substantial increase in US reliance on oil sourced from unstable and/or hostile Middle Eastern and African regimes.

The DoE report found that “the same slate of crude oils would have to be refined even if reallocated geographically.” In other words, Canadian oil sands crude is going to find its way to market.

Returning to the main point, plain and simple, approving Keystone XL is a jobs-creator that the Obama administration won’t have to take to Congress. It has positive short-term-messaging benefits on the issue that is clearly No. 1 among voters, so it’s good politics.

According to a 2011 study by the Canadian Energy Research Institute (CERI), new oil sands investments are expected to create 444,000 new US jobs by 2035. As for right now, TransCanada’s Robert Jones, the executive in charge of the project, recently noted that Keystone XL is indeed “shovel ready” and that construction would involve hiring as many as 10,000 Americans immediately and up 34,000 by 2014.

The Republican-controlled House of Representatives passed a bill this simmer that would require the US State Dept, which has jurisdiction because it’s a cross-border pipeline, to issue a final decision on Keystone XL by Nov. 1. The September rollout of the President’s jobs plan is perfect time to announce the administration’s approval of the project.

Much opposition is being raised to Keystone XL because it will facilitate production of Canada’s oil sands, which, environmentalists like to point out, are dirty. But dirty or not, it’s coming. And contrary to what you may have been led to believe, the actual environmental impact may not be as substantial compared to conventional production.

Getting more crude oil to processing facilities could not only help reduce dependence on hostile sources of oil and create much-needed public revenue. It will also put people to work, likely not at the rates company-sponsored reports suggest but certainly more than would be if the project isn’t allowed to proceed.

Keystone XL also happens to be an infrastructure project with medium- and long-term economic benefits–new sources of government revenue and a start toward North American energy independence. And that makes it good policy.

North American Energy: Exxon, the Gulf, the Government and More Jobs

Here’s another item President Obama can include in his September jobs speech: Announce that his administration will relent and grant Exxon Mobil (NYSE: XOM) an extension on leases it holds in the Gulf of Mexico that were recently revealed to hold an estimated 1 billion barrels of recoverable oil.

It was only through documents filed as part of a lawsuit Exxon filed in mid-August against the government that the extent of the find at the Julia Field was revealed. Exxon is seeking to overturn a February 2009 Interior Dept decision to refuse its October 2008 application for an extension of three of its Julia leases. According to the company and independent experts denial of the extension was extraordinary.

The Interior Dept is holding fast to the line that its “priority remains the safe development of the nation’s offshore energy resources” and that it will “continue to approve extensions that meet regulatory standards,” which is all short for “BP.” Officials are trying to look tough on oil companies that want to drill in the Gulf in the aftermath of one of the worst environmental disasters in history.

The trouble here is that Exxon Mobil is generally accepted to be the most cautious mover in the Gulf of Mexico went it comes to exploiting deepwater reserves, which is just about the 180-degree opposite of BP Plc (NYSE: BP). The BP Macondo spill is the primary factor behind chilling government policy that’s led to declining rig utilization rates in a region still rich, apparently, with billion-barrel fields.

The test well that revealed the potential of the Julia well was drilled in 6,500 feet of water to a depth 31,160 feet, a remarkable feat of engineering. Exxon and its Norway-based partner Statoil announced the discovery in January 2008 but didn’t disclose what it believed to be its size. The following October Exxon filed for an extension of its lease rights in order to make a comprehensive plan on how to best develop the area. The government has granted thousands of lease extensions in the past; not one request for an extension for development has ever been denied.

ut in February 2009 the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE)–a part of the Interior Dept that describes itself as “the federal agency responsible for overseeing the safe and environmentally responsible development of energy and mineral resources on the Outer Continental Shelf”–turned down Exxon’s extension request, saying the plan the company outlined for its exploitation of the leases wasn’t specific enough.

It’s important that the government show a serious regulatory face–as the BP disaster, which occurred at rig that was subject to a late-stage design change, makes clear–and that it ensure that leases it grants are responsibly produced. But holding up Exxon’s Julia ambitions at this point is neither serious nor responsible.

If the decision stands it might take a new company another 10 years to conducts its own tests and get the Julia field producing. Allowing Exxon to proceed on its results to date will hasten the day when an estimated USD11 billion of royalties can start to flow to the US Treasury.

Stopping the flow of activity out of the Gulf is also a jobs program. An active rig takes about 1,000 workers, give or take; it’s a complex mini-economy that includes vessels to move men and supplies back and forth, and there are helicopter companies, supply houses, fabricators, inspectors, engineers and regulators onshore providing support services.

North American Energy: A High-Quality, High-Yield Play

Pembina Pipeline Corp (TSX: PPL, OTC: PBNPF) recently announced the completion of its Nipisi and Mitsue pipelines ahead of schedule and on budget. Nipisi is a heavy oil pipeline, while Mitsue will transport diluent. Both service the Pelican Lake and Peace River heavy oil regions of Alberta. Mitsue commenced operations in mid-June, ahead of schedule, and will contribute fully to third-quarter profits. Nipisi, meanwhile, initiated deliveries in early July, with a full ramp-up expected early in the fourth quarter.

Completing this combined CAD400 million worth of pipeline projects is a major milestone for Pembina and its strategy of growing by building and buying needed Canadian energy infrastructure assets. The company also recently announced a move to boost it raw gas processing ability by 16 percent at its Cutbank Complex in west central Alberta by mid-2012, and it has numerous other irons in the fire to boost future cash flows.

During a recent analyst presentation CEO Robert Michaleski responded to a question about future dividend policy by forecasting annual growth of 3 to 5 percent after 2012. He also threw out a target payout ratio of 75 to 85 percent, with an eye to being a fully taxable corporation starting in 2015. Those expectations are certainly backed up by strong second-quarter numbers.

Pembina has been consistently priced above a value-based entry point since late June. Recent volatility, however, has taken it below USD25, where it yields 6.2 percent, on down days.

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