Keystone Pipeline won’t Use U.S Steel

The oil market has changed markedly in the last several years, with U.S. demand de- creasing, and U.S. production increasing for the first time in nearly 30 years. TransCanada (NYSE:TRP), a Canadian pipeline company, has proposed an export pipeline called Keystone XL, which would carry up to 900,000 bpd of tar sands oil from operations in Alberta, Canada, more than 2,000 miles to refineries on the Gulf Coast. The pipeline would cross six American states including Montana, South Dakota, Nebraska, Kansas, Oklahoma and Texas. Refineries in Gulf Coast plan to refine the Canadian heavy crude oil supplied by the pipeline into diesel and other products for export to Europe and Latin America. Proceeds from these exports are earned tax-free.

TransCanada Corporation proposed the Keystone pipeline project on February 9, 2005. The pipeline, from Hardisty, Alberta, Canada, to Patoka, Illinois, United States, became operational in June 2010. The Keystone XL (XL stands for “export limited”) extension was proposed in 2008. The Keystone XL proposal faced criticism from environmentalists and a minority of the members of the United States Congress. In 2011, Cornell ILR Global Labor Institute released the results of the GLI Keystone XL Report, which evaluated the pipeline’s impact on employment, the environment, energy independence, the economy, and other critical areas.

Transcanada-keystone-xl-map

A bill approving the construction of the Keystone XL Pipeline was passed by the Senate (62–36) on January 29, 2015, and by the House (270–152) on February 11, 2015. President Obama vetoed the bill on February 24, 2015, arguing that the decision of approval should rest with the Executive Branch. In the veto message, Obama said that the bill “attempts to circumvent longstanding and proven processes for determining whether or not building and operating a cross-border pipeline serves the national interest. The Senate was unable to override the veto by a two-thirds majority, with a 62-37 vote.

On January 24, 2017, President Donald Trump took action intended to permit the pipeline’s completion, requiring American-made steel be used in the construction. Steel manufacturers and analysts said that TransCanada’s stringent requirements for the pipeline, including thickness and pressure requirements, already keeps most U.S.-based steelmakers out, given current forging and manufacturing processes. U.S. steelmakers, such as U.S. Steel, AK Steel or Steel Dynamics, will receive negligible benefit from the multi-billion dollar Keystone XL project, because they have limited ability to meet the stringent materials requirements for the TransCanada line.

Foreign-owned steelmakers with U.S. operations, such as Welspun India and its U.S. arm Welspun as well as Russia’s Evraz, are best able to produce the pipe. “There are people who make (this type of) steel pipe in the U.S., but they’re mostly Indian and Russian” companies, said Charles Bradford, an analyst at New York-based Bradford Research. In 2012, TransCanada said 50 percent of the pipes used to build the project would come from a plant in Little Rock, Arkansas, operated by Indian conglomerate Welspun. The remaining pipe would be made in Canada, Italy and India.

The real question is whether the U.S. steel industry has the capacity to supply every pipeline project in the United States, said Libby Toudouze, portfolio manager at Cushing Asset Management. “Let’s say in 2017, 2018 we need 300 miles of pipeline and the U.S. steel companies’ maximum capacity could crank out 100 miles of pipe. It’s not reasonable for us to hold up the 200 miles of pipeline because the U.S. guys can’t scale to get there,” she said.

On the other hand, a requirement to use domestic steel would almost certainly violate 70 years of settled international trade law. Countries around the world traded more than $20 trillion in goods and services in 2015, and almost all that moves under the rules of the World Trade Organization (“World Trade Statistical Review”, WTO, 2016). The WTO, and its forerunner the General Agreement on Tariffs and Trade, is one of the pillars of post-war prosperity and a major reason the global economy has never suffered another collapse like the 1930s. GATT/WTO members are required to give the same treatment to imports from all other members, so any privilege given to an importer from one country must be given to importers from all other WTO members.

According to Reuter’s John Kemp, the plan to require the use of U.S. steel in U.S. pipelines is a textbook case of a local content requirement the GATT/WTO has long held is inconsistent with Article III:4.
Trump’s plan to require U.S. pipelines to be built with U.S. steel is clearly inconsistent with the national treatment obligation set out in Article III:4

“The products of the territory of any contracting party imported into the territory of any other contracting party shall be accorded treatment no less favorable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use.”

The United States has challenged content requirements applied by India (solar cells), Argentina (import licenses), China (tax refunds, auto parts), Turkey (rice), Canada (wheat, auto parts) and the Philippines (auto parts) among others. In fact, the United States has brought more challenges to local content requirements than any other member of the WTO. The blunt reality for the Trump administration is that there is no way to make pipeline approvals conditional on the use of U.S. steel without undermining the U.S. goal of fair market access for U.S. exporters.