Keystone’s Rocky Restart: South Bow Navigates Safety and Profitability Amid Regulatory Scrutiny

South Bow Corporation (SOBO) faces a pivotal test as it prepares to restart the controversial Keystone Pipeline by April 15, 2025, following a recent oil spill near Fort Ransom, North Dakota. The pipeline’s return to service—albeit at reduced rates—will be contingent on regulatory approvals and operational adjustments that reflect its troubled history of spills, safety violations, and escalating scrutiny. For investors, the decision highlights a stark balancing act: the asset’s strategic importance to North American energy logistics versus its persistent risks to South Bow’s financial stability and reputation.

A Restart, But Not a Return to Normal

South Bow announced plans to restart the pipeline at reduced operational rates in both U.S. and Canadian segments after a rupture on April 7 spilled 3,500 barrels of crude onto agricultural land. The move comes under strict mandates from the U.S. Pipeline and Hazardous Materials Safety Administration (PHMSA), which cited the pipeline’s 13 significant spills since 2010—including a 2022 Kansas spill of 14,000 barrels—as evidence of systemic flaws. PHMSA’s corrective action order demands metallurgical testing, root-cause analyses, and pressure reductions to address manufacturing defects and corrosion risks.

The pipeline’s reduced capacity—operating at lower flow rates and reduced pressure—will likely persist until South Bow satisfies regulators. PHMSA’s April 12 order also requires the company to reevaluate past inspections, a process that could delay full operational recovery. “This isn’t just about fixing a pipe—it’s about rebuilding trust,” said analyst Sarah Lin, director of energy research at Morningstar, noting that investors must weigh short-term disruptions against long-term strategic value.

A History of Spills, A Pattern of Costs

The April spill mirrors a 2019 rupture in North Dakota, both involving pipeline segments manufactured by Berg Steel Pipe. Internal documents revealed 14% of welds in North Dakota sections lacked adequate corrosion protection, a flaw PHMSA linked to prior incidents. Since its spinoff from TC Energy in October 2024, South Bow has already faced a $480 million cleanup bill from the 2022 Kansas spill and a $6.2 million fine for the 2019 leak.

The cumulative toll is clear: 22 spills between 2010 and 2020 (per a 2021 GAO report) and a spill rate of 1.9 spills per 1,000 miles annually, exceeding the national average. “These incidents aren’t random—they’re symptoms of aging infrastructure and lax oversight,” said environmental lawyer Mark Thompson, who has represented communities affected by Keystone spills.

The Economic Tightrope

The pipeline’s shutdown has already disrupted 622,000 barrels/day of Canadian crude flowing to U.S. refineries, forcing operators to rely on costlier rail transport. Analysts estimate rail costs have risen 18% since the April 7 spill, though refineries have temporarily offset shortages by drawing from storage reserves. However, a prolonged outage could push diesel and jet fuel prices higher, squeezing consumers and manufacturers.

South Bow’s financial health provides some cushion: its $7.9 billion debt issuance in summer 2024 signals investor confidence, and its minimum volume commitments (MVCs) on the Keystone Pipeline exceed 85%, ensuring stable revenue even at reduced capacity. Yet, the company’s shares have underperformed since the spinoff, falling 14% compared to TC Energy’s 8% decline.

Regulatory and Operational Crossroads

PHMSA’s demands underscore a broader shift in regulatory tolerance. The agency’s 2023 safety revisions now require more frequent inline inspections, which South Bow has yet to fully implement in problem-prone segments. Meanwhile, environmental groups have petitioned to revoke the pipeline’s cross-border permit under the Clean Water Act, citing recurring failures.

South Bow’s response includes metallurgical testing on affected sections and plans to expand fiber-optic sensor coverage (currently under 15%). However, these measures may not be enough to assuage critics. “They’re treating symptoms, not the disease,” said Thompson. “Without replacing aging pipe, spills will keep happening.”

Conclusion: Risk and Reward in a High-Stakes Sector

South Bow’s Keystone restart is a microcosm of the broader energy sector’s tension between profit and responsibility. While the pipeline remains strategically vital—transporting 7% of U.S. crude needs and reducing reliance on overseas imports—its safety record and aging infrastructure pose existential risks.

Investors should consider:
- Short-Term Volatility: Regulatory delays and spill-related costs could pressure SOBO’s earnings in 2025.
- Long-Term Viability: The pipeline’s MVCs and crude demand provide a revenue floor, but replacement costs for defective segments could exceed $1 billion.
- Geopolitical Context: A prolonged outage risks increasing U.S. reliance on Middle Eastern oil, a political liability that may incentivize regulatory compromises.

South Bow’s leadership has emphasized “strategic flexibility” and financial resilience, but its ability to balance safety, costs, and regulatory demands will determine whether the company becomes a midstream leader—or a cautionary tale. For now, the market’s verdict is cautious: the pipeline’s restart is a start, but the road ahead is fraught with spills and scrutiny.