The Incredibly Unimportant Keystone Pipeline

Scott Cooley is filling in for John Rekenthaler, who is on sabbatical.

William Shakespeare could not have anticipated

If you listen to public interest groups and politicians, you might think that the decision to build Keystone XL--which would carry oil from the Alberta tar sands to Nebraska--is the most consequential decision that has faced our government in decades. Former Vice President Al Gore has called the pipeline an "atrocity," because of its impact on the environment, while the Sierra Club said that building Keystone would enable production of the "most toxic fuel on the planet." Meanwhile, Keystone supporter Sen. John Hoeven, R-ND, says that construction of the pipeline will create tens of thousands of jobs, increase America's energy independence, and help keep gas prices low.

So, who is right? And what is an investor to do?

Ultimately, neither side is completely honest. And the right course of action for investors might be to do nothing.

To listen to both Keystone proponents and opponents, you would think that construction of the pipeline will have a meaningful effect on the amount of oil produced in Alberta. That is simply not the case. Indeed, tar sands production began in Alberta in the 1960s and really ramped up more than a decade ago. Currently--without the Keystone pipeline--producers extract about 2 million barrels of oil per day from tar sands in the region.

But would construction of the pipeline prompt the production of more oil in Alberta? Morningstar equity analyst Jason Stevens says no: "By itself, the development of the pipeline will not facilitate or constrain oil-sands production." That's because there are so many alternative ways for the oil to reach market, including other pipelines and rail.

Although shipment by rail or alternate pipelines is somewhat more expensive than delivering oil via Keystone, Stevens says the difference in cost is "much less impactful than changes in commodity prices."

So, if Keystone's construction will not materially change the volume of oil extracted from tar sands, it cannot cause the environmental destruction of the planet. Similarly, it also will not lower prices at the pump.

Keystone probably will not create a lot of long-term jobs either. According to an analysis of the project by the U.S. State Department, constructing the pipeline would create about 40,000 direct and indirect jobs for a two-year period, but once built, it would support an additional 50 long-term jobs.

The pipeline's construction also, somewhat surprisingly, has few implications for investors.

One might assume that Keystone's construction would be a boon to TransCanada, given the company's vociferous support for it. But Stevens, who covers TransCanada for Morningstar, says that the estimated cost of the project has risen in recent years, making it unlikely that the company will earn excess returns on the capital invested in Keystone. As a result, he says that completion of the pipeline would have only a minimal impact on his fair value estimate for TransCanada.

Similarly, despite the large amount of media coverage of oil shipments by rail, another Morningstar analyst, Keith Schoonmaker, says that the valuation implications for the likes of

Moreover, Schoonmaker says that his railroad valuation models already assume that a significant portion of Albertan oil production will ultimately be moved by pipeline, whether it is through Keystone or other pipelines such as the one that TransCanada may build through western Canada. When it comes to railroad valuations, therefore, Schoonmaker says that construction of the pipeline "does not move the needle materially."

For the environment, for long-term jobs, for gas prices, and for investors, then, construction of the Keystone pipeline is nearly a nonevent. Indeed, it is really nothing more than entertaining political theater about an issue that we will almost certainly forget about in the coming years. Borrowing again from Macbeth, Shakespeare might have called Keystone "a poor player, that struts and frets his hour upon the stage, and then is heard no more."