2030 Finance | April 8, 2020

Return of Keystone XL: Big banks restart stalled tar sands pipeline construction

Amy Cortese
ImpactAlpha Editor

Amy Cortese

ImpactAlpha, April 8 – Just when the COVID-19 crisis appeared to sound the death knell for the oil industry, the beleaguered Keystone XL pipeline appears to be making a comeback. On March 31, the government of Alberta, Canada committed $1.5 billion and $6 billion in loan guarantees to TC Energy to restart construction of the 1,200-mile pipeline. 

In one swoop, Alberta premier Jason Kenney resurrected the moribund pipeline, for which he conceded there were “no prospective private bidders.” Banks rushed to help fund it. On April 1, Bank of Montreal, Royal Bank of Canada, Scotiabank and TD Bank led a CAD $2 billion bond issuance for a TC Energy subsidiary.

On April 2, JPMorgan Chase and Citi followed with an additional $1.25 billion bond.  Japanese banks Mizuho, MUFG and SMBC were co-managers. Liberty Mutual, a large insurer of fossil fuel companies and projects, insured the Keystone project with a $15.6 million bond.

Extracting, transporting and refining oil from tar sands is one of the dirtiest and most costly ways to produce oil. The logic of building a pipeline to deliver tar sands oil, just as oil demand and prices are crashing and climate action is needed, is dubious.

The carbon bubble has burst. Let’s not re-inflate it

“An oil pipeline that would be reliant on increased production looks very, very difficult,” said Andrew Grant of CarbonTracker. “In a low-carbon world with limited demand, there is simply no place at all for oil sands production.” If completed, the 1,200 mile pipeline is expected to deliver an additional 830,000 barrels of oil a day from Alberta to Nebraska. 

Moody’s Investors Service promptly downgraded the credit rating of TC Energy and its subsidiaries from stable to negative over project cost concerns. The project still faces legal and permitting challenges. And oil prices, already in a long-term slump, have plummeted amid a global glut, prompting companies to scrap projects and sell or write-down assets that are suddenly under water

Kicking the habit

Global banks are reluctant to kick their fossil fuel habit even as they publicly proclaim the need to stem global warming. In February, JPMorgan economists warned of “potential catastrophic outcomes where human life as we know it is threatened,” in a leaked climate change report.

JPMorgan is the world’s largest funder of fossil fuels, with more than $270 billion in financing since the Paris Accord was signed in 2015. The bank bowed to public and investor pressure and announced it would quit funding new oil and gas developments in the Arctic and impose new restrictions on financing coal companies. But it stopped far short of restricting destructive and expansionary activities, such as tar sands drilling and pipelines. 

JPMorgan Chase plays catch-up on climate

Activists have been calling for even bolder action – namely, a ban on new fossil fuel funding as some European banks have done and is necessary to keep global warming below 2 degrees Celsius. “JPMorgan Chase is doubling down on its standing as by far the worst Wall Street banker of tar sands oil, with more financing since Paris than the other big five U.S. banks combined,” said Ruth Breech of Rainforest Action Network, which publishes the Banking on Climate Change report.

She also criticized the Alberta government for pouring billions of dollars into tar sands instead of workers, families, and a regenerative economy, and raised concerns about bringing workers from across the U.S. to work on the pipeline in rural and tribal communities in the midst of a health pandemic. 

Empty words

Banks are not the only enablers. BlackRock, the giant asset manager run by Larry Fink, holds a small stake in one of the bonds. Fink made headlines earlier this year when he used his widely read annual letter to raise the alarm about climate risk, which he said would compel investors “to reassess core assumptions about modern finance.” He added, “Every government, company, and shareholder must confront climate change.” 

Climate Finance 2020: Leaders and laggards in the race to net-zero

The pipeline deal highlights the importance of debt markets in funding fossil fuels. Debt markets are twice the size of equities, and some of the biggest greenhouse gas emitters are not publicly traded, as Bloomberg recently pointed out. It also points to the limits of the conventional shareholder playbook, where investors divest shares of fossil fuel companies or buy them in order to get a seat at the table.

As governments mobilize trillions of dollars to inject into their weakened economies, it is incumbent on them to ensure that their COVID stimulus plans are sustainable not just environmentally but economically, says Grant of CarbonTracker. “Now is the time to look to the future,” he says “The actions people take today will set the course over the next decade.”