Energy

The Real Reason Keystone XL Might Fail


Pipes sit at the TransCanada Houston Lateral Project pipe yard in Mont Belvieu, Tex., on March 5

Photograph by Scott Dalton/Bloomberg

Pipes sit at the TransCanada Houston Lateral Project pipe yard in Mont Belvieu, Tex., on March 5

(Corrects paragraphs two and three to reflect that TransCanada first identified welds needing repair, and includes the company's response in an update. )

Radically revised jobs numbers (from tens of thousands to, say, 50). Misleading ad campaigns (“energy security” that translates to Canadian exports to China). Ass-covering bureaucrats at the U.S. State Department. A president who can’t seem to decide, yes or no, despite evidence that the project fails his own criteria for approval. The battle over the proposed fourth and final leg of the Keystone oil pipeline complex—the Keystone XL—long ago became something of a farce. But whereas much of the debate has been based on projections of one form or another (including this magazine’s analysis of the oil price point ($65 per barrel) at which the Keystone becomes a big old boondoggle, or the amount of carbon humans can add to the earth’s atmosphere before it’s “game over,” according to a NASA scientist)—that all seems a bit hypothetical compared with the news this week, news that had been hidden in plain sight, and only gained a wider audience on Tuesday, when Joan Lowy of the Associated Press published on it.

Last fall, the U.S. Department of Transportation’s Pipeline and Hazardous Materials Safety Administration (PHMSA) checked up on the progress of the third, southern leg of the Keystone, the Gulf Coast Pipeline. This is the line that TransCanada (TRP) Chief Executive Officer Russ Girling called the “world’s safest pipeline” when it began moving crude in January, and the same one that President Obama flew to Cushing, Okla., to champion back in March 2012.

Well, the inspectors learned that TransCanada had been busy repairing defective construction—in particular, crap welding—and had even stopped construction for a day just to get on top of it. The regulator later sent two severe warning letters to the Calgary oil company and slapped two “special conditions” on top of the 57 already required of TransCanada for the proposed Keystone XL—right there in the State Department’s Jan. 31 Final Environmental Impact Statement that we and scores of others combed through and missed.

The first stipulates that if State approves the Keystone XL, TransCanada has to implement a quality management system for the entire construction process to “ensure that this pipeline is—from the beginning—built to the highest standards.” Second, and more notably, TransCanada must hire an independent, third-party inspection company to go behind it and double-check all its work: the welding, the trench-digging, the laying of pipe, etc. For a company as large as TransCanada, that is rare, pipeline analysts say. Something usually required of a company only after a catastrophe like the one in 2010 in Kalamazoo, Mich. It’s also a major practical challenge. Imagine Ford being required to hire a third party to inspect each and every one of its cars as it builds them. Oh, and the PHMSA gets the final OK on this chaperone.

Now, before anyone howls “here we go again” about regulators sticking it to business, consider the source (the PHMSA is hardly an activist agency), and consider a sample of what the PHMSA called TransCanada out on.

“From the start of welding,” the PHMSA wrote in a Sept. 26, 2013, letter (PDF), “TransCanada experienced a high weld rejection rate.” (That is, ultrasonic testing on the welds holding the pipes together determined they were not up to snuff.) “During the first week 26.8 percent of the welds required repairs, 32.0 percent the second week, 72.2 percent the third week, and 45.0 percent the fourth week. On September 25, 2012, TransCanada stopped the Spread 3 welding after 205 of the 425 welds, or 48.2 percent required repairs.”

Let that register.

During one week in September, 72 percent, or almost three-quarters, of the welds on the “safest pipeline in the world” required redoing. (TransCanada, for its part, says it has addressed the PHMSA’s concerns, and you can read its response in writing here [PDF].) Throughout the Keystone XL fight, TransCanada has maintained that the chance of a spill is remote, and that its pipelines are state-of-the-art. But the implications of TransCanada’s inferior welding on its Southern leg are precisely why the Keystone XL has met with such fierce resistance on the ground in Nebraska. It’s there the planned pipe will pass over the Ogallala aquifer, which irrigates much of the Great Plains, and directly and indirectly supports millions of American jobs—and that’s not counting all the drinking water.

David McColl, an analyst with Morningstar who covers TransCanada, notes that defects aren’t uncommon in large projects like these, but says it would’ve been preferable that TransCanada had found them rather than federal safety inspectors. “The pipeline industry, and especially TransCanada, is waging a multiyear battle right now, so given the current environment, they really have no choice but to go along,” McColl says of the PHMSA’s provisions in the Jan. 31 report. Does he consider these “special conditions” excessive? Requiring a company like TransCanada to hire a third-party inspection company “does seem a bit unusual,” he says.

Eric Lee, an oil and gas analyst at Citigroup, says these revelations only add to the sizable amount of skepticism that already exists around the Keystone XL. “Given everything else, this is just another straw of hay on the camel’s back,” he says. “I’m not sure if it’s the one that breaks it.”

Maybe not. And maybe the PHMSA’s special conditions will work as intended, and, if Keystone XL is ever built, it will be safer for them. But if there is one community that’s not surprised by Lowy’s scoop, it’s homeowners in Oklahoma and northern Texas who witnessed the shoddy work on the Gulf Coast Pipeline as it happened on their property. (The Army Corps of Engineers used imminent domain to clear the way for TransCanada.) In a largely overlooked November 2013 Public Citizen report (PDF), several property owners recorded many of the same problems as did the PHMSA.

“We’ve known about these issues for two years,” says Jane Kleeb, the director of Bold Nebraska, a nonprofit formed by ranchers and others to prevent the Keystone XL. “Landowners called and told us about all these sections of pipe that kept having to be pulled out of the ground and replaced.” She says the problems did not require an engineer’s eye to detect: pipes in trenches that were too shallow; pipes laid over visible rocks pressing against the metal tubes; faulty welds that didn’t seal. Having seen what they saw of the construction process, “several landowners I’ve spoken to live in fear that a major spill could happen any day.”

UPDATE ON JUNE 4: In addition to correcting this post to establish that TransCanada, not government regulators, first identified faulty welds in its Gulf Coast Pipeline (now reflected in the text above), TransCanada contends that new conditions placed on its company prior to the construction of the proposed Keystone XL are not the “direct result” of repair work on the Gulf Coast line. “As PHMSA made clear in the Associated Press story, the two conditions reflect learnings from pipeline projects across our industry, not just the Keystone XL project,” writes TransCanada spokesman Davis Sheremata. “These conditions are being placed on similar projects across the United States.”

Philips_190
Philips is an associate editor for Bloomberg Businessweek in Washington. Follow him on Twitter @matthewaphilips.
Wieners_190
Wieners (@bradwieners) is an executive editor for Bloomberg Businessweek.

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