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Keystone XL: How Energy, Government, and the Economy Interact – A Guest Post from Llenrock Group Apr 7, 2015

This post from Eric Hawthorn is part of our Llenrock Group guest post series and originally appeared on the Llenrock Group blog.

The energy sector, of course, is a huge driver of local economies, the national employment rate, and commercial real estate values and demand throughout the country. I’ve discussed this subject before, of course, in the context of such things as the Marcellus and Bakken shale plays and the industry that’s sprung up around the hydraulic fracturing (a/k/a fracking) sub-sector of the energy industry. I’ve also recently discussed the impact of oil price fluctuations and the shock of cheap oil as they impact local real estate values. So those are two of the big issues in the energy sector–both of which have broad indirect connections to CRE growth and demand–but there is one more major issue influencing energy sector activity in the U.S., and this is one we’ve all heard about: the Keystone XL pipeline. I’m sure you’ve seen the headlines. Politicians, business groups, and environmental interests made the KXL project a key talking point, whether for or against, and President Obama last month deflected another attempt by the Republican-controlled Congress to pass a bill approving the project, the president exercising his third veto since he took office. Even though KXL seems to have majority support among the U.S. populace (or those who were polled, anyway), it is nonetheless quite controversial. While public opposition to fracking was pretty swiftly steamrolled in states like Pennsylvania, opposition to KXL seems broader in scope.

A few words about KXL, largely drawn from an above-par article on the Keystone Pipeline System over on Wikipedia. Essentially, the pipeline is intended to expedite the flow of oil from its point of extraction, Alberta, Canada, to oil refineries on the Gulf Coast. So this is a Point A to Point B logistical scenario, but an endlessly complicated one. The KXL portion of TransCanada’s Keystone pipeline network is a significantly wider pipeline (intended to increase the barrels/hour flow of crude) that is a direct line from Alberta to the southern edge of Nebraska, which picks up oil extracted from the Bakken Shale play over which it passes, then deploys the oil to other pipelines to make the remaining journey south. The pipeline, if it ever comes into existence, will span hundreds of miles, cross state and national borders, and require scores of eminent domain proceedings to cut across private land. Lawsuits are flying, political maneuvers are being executed, and tons of money is flowing into research and campaigns for and against the project. Here are some of the controversies surrounding the pipeline:

  • Environmental impact: there are concerns that KXL will encourage greater extraction of Canadian tar sands, which emits more greenhouse gases than traditional oil drilling (so there’s the Climate to think of, if you believe in that sort of thing…). Further, the pipeline as it’s proposed would pass over essential aquifers and other land forms and risks damaging them (particularly if there’s an oil leak, which would not be unprecedented).
  • Financial waste: some analysts believe the pipeline is unwarranted based on Canada’s tar-oil output and international demand. It amounts to a project costing billions of dollars but benefiting very few people, opponents contend.
  • Economic impact: this is largely unknown, but there are a lot of theories swirling around regarding who will benefit from this project. Some feel that Canada’s economy will benefit most, while others believe the resultant strengthening of Canada’s dollar against U.S. currency will give the United States a competitive advantage.
  • Beneficiaries: the project is expected to create thousands of temporary (1-2 year) jobs but virtually no (in the low hundreds) permanent positions in the country, at least directly. Indirectly, once again, it’s tough to calculate how much of a benefit this project offers to the U.S. workforce. Further, many point out that the oil being refined after flowing though this network will be exported internationally, for the most part, so it doesn’t have much to do with energy independence.

There’s our little run-through on KXL and some of the issues that have made this proposed infrastructure project such a political lightning rod. The question remains: what would the KXL’s construction (or lack of construction) mean for the commercial real estate sector?

The answer, alas, remains somewhat elusive. Since the larger economic footprint of this project is subject to debate, and economic drivers are responsible for real estate values and a healthy development pipeline, it’s hard to say what this means for local or national real estate markets. Still, I can hazard a few guesses:

  1. Select small and large markets in the Midwest and South will see increased investment and development, as more workers appear in places like Nebraska, Oklahoma, and Texas, where the KXL’s product is refined.
  2. Energy companies would obviously benefit, so energy hubs like Houston stand to see increased leasing demand across asset types.
  3. Like fracking boom town Williston, North Dakota, some key communities along the pipeline’s route may see a brief burst of development activity, but since the employment surge is temporary, this will likely die down.

In conclusion, it seems the KXL project’s influence on CRE would be limited at best, and would not be felt by most of the country or its real estate community.

Posted by: Raymond T. Cirz

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