How the controversial, critical, market-making Keystone XL pipeline is edging closer to fruition.
This article appears in the April issue of Oilsands Review
By Peter McKenzie-Brown
Oil pipeline
construction in North America began in the 19th century. There are
now a couple of dozen major lines on this continent alone, and they are
supplemented by thousands of gathering and distribution lines. During the 100
years after building began, the major issues surrounding development were the
terms between landowner and pipeline operator. The secondary issue was the
speed with which the operator could clean up and remediate rights-of-way after
a spill. Put another way, pipelines were seen as necessary infrastructure that contributed
to the economy and, therefore, to the public good.
This article argues
that the economic realities behind pipeline construction haven’t changed, and
that North America’s long record of safe pipeline operations will contribute to
momentum for approval of the Keystone XL pipeline. There are economic
imbalances in global oil markets and continental labour markets that need to be
rebalanced. Keystone will be a key part of the rebalancing act.
Proxy Battleground
There would be little
need for this discussion if environmentalism hadn’t become such a powerful
force. The level of hyperbole in the discussion has been extraordinary, with
articles by environmentalists bearing such headlines as “‘Game Over’ For Planet
If XL Oil Pipeline Is Built to Tap Alberta Tar Sands.” So heated has the debate been that the Obama
administration found it politically expedient to postpone a decision on
Keystone until after the recent election.
Canada West Foundation’s
senior economist, Michael Holden, recently released a study that analyzed what
he calls the “vilification” of the oilsands. Holden says, “We wanted to look at
the overarching narrative, the main issues, both positive and negative,” and continues, “What we found is that there is
a battle between the perceived economic benefits and perceived economic risks
associated with oilsands development. They were a number of issues that came
out of that, (one of which is that) pipelines have become a proxy battleground
for the whole discussion about oilsands development.”
Although he believes
Keystone is likely to get approval, he won’t gainsay the effectiveness of the
environmental movement. “The track record of the people opposing the oilsands
speaks for itself. They got the pipeline route changed, the project delayed and
even now there’s no guarantee that the project will pass the State Department.
The delay is all the evidence we need.”
Price differentials can become a powerful force for change.
Burgeoning production from Canada’s oilsands has driven down the price of North
American crude oil, especially relative to international oils like Brent and
other light products. That same sunny outlook for Canadian oil production has
multiplied the number of options aimed at finding international markets to ease
gluts in oil supply.
The underlying reality,
though, is that the US and Canada are responding to growing production by finding
alternative pipeline, rail and barge systems to take Canadian and American oil
to coastal markets and to Eastern Canada. Neither government nor the petroleum
industry itself wants oil differentials to continue, and the billions of
dollars at stake can motivate quite a bit of change. A web of oilsands
pipelines is spreading from Canada’s oil hub at Hardisty, Alberta into American
markets. Three years ago, TransCanada’s new Keystone Pipeline began delivering
435,000 barrels of oil to refining centres in Illinois, while Enbridge’s
Alberta Clipper began delivering 450,000 barrels per day to Superior,
Wisconsin. Those
lines are a metaphor for the industry-driven activity taking place across North
America.
Governments are also
driving innovation. After TransCanada proposed converting one of its
eastward-bound gas lines into a pipeline for bitumen, New Brunswick Premier
David Alward took the idea a step further. He
has suggested that the company should also link that line to refinery systems
in Quebec and to New Brunswick. The Irving Oil Refinery (Canada’s biggest, and
now reliant on expensive imported oil) is located near New Brunswick’s great
deep-water port at St. John, and could be modified to refine bitumen. Such an
extension could even provide diluted bitumen with access to tidewater.
In the proxy
battleground Holden described, Keystone XL illustrates a conflict between old
issues and new ones.
Old Issues and New
The old issues are
technical and economic. The barrel of oil is blackening everywhere as supplies
of light, sweet oil decline, and global demand is rising. Oilsands production
is increasingly available and needs markets. The world’s big refining centres
need feedstock and have the capacity to refine bitumen; pipelines are efficient
and safe. The proposed pipelines are mega-projects that will provide jobs and
economic stimulus. Oil-importing countries around the world want to develop
secure, longer-term supplies, and they are paying much higher prices than
Canadian producers – price-takers rather than price-makers – receive. According
to Holden, “Once the oil is sold to a refinery in the Gulf coast you
automatically are getting international prices. Once you get to the coast the
actual market is virtually secondary.”
The new issues are soft
and environmental. Some environmental groups are aggressive against
hydrocarbons, especially bitumen. They have successfully painted the oilsands
black and want to further punish Canada’s merchants of dirty oil. Citizens
wanting a greener world worry that the pipelines may lead to industrial
accidents that spoil the environment. “It’s important for the oilsands industry
to improve on its environmental records,” says Holden, “and for pipelines to be
built as safely as possible.”
Poster Child
In addition to
displacing offshore imports of crude oil into the U.S. with oil from its
closest trading partner, Keystone XL also would help reduce U.S. imports by
delivering increased domestic crude oil production from the Dakotas and Montana
to U.S. refineries. By moving domestic production from the area in the U.S.
that is seeing the greatest growth, it would be an effective response to the
need for additional pipeline capacity from America’s northern plains.
America’s Department of
State will make the final decision on the Keystone Expansion. Although most of
the smart money still seems to be betting that the US government will buy the
energy security argument, in his inaugural speech, president Obama said “we
will respond to the threat of climate change, knowing that the failure to do so
would betray our children and future generations” – a sentiment he repeated
during his state of the union address. These comments created a lot of concern
within the gas, oil sands and coal industries. He then appointed a climate hawk,
Senator John Kerry, as his new secretary of state, and reaffirmed in his state
of the union address that “for the sake of our children and our future, we must
do more to combat climate change.”
What does all this mean
for the oilsands sector? “Our high level view is that the
Congressional/international dynamics remain unfavorable for a big cap and trade
or carbon tax push by Obama,” according to Robert Johnston, the director of energy and natural resources for Eurasia
Group, a New York-based enterprise that bills itself as “the world’s leading
global political risk research and consulting firm.”
Johnston thinks there
is a “65% likelihood of (Keystone XL) approval by summer.” If environmental
groups persuade the State Department to commission an update of a key study –
released in 2010 – on the project’s GHG impacts, a common view is that the result
will be lower oil sands investment because of the weaker outlook for Gateway and
congestion in the midcontinent and Gulf Coast pipelines. Johnston’s view is the
exact opposite. “The fact that Alberta’s realized prices are low and that there
is a risk of an investment slowdown…means that the US market is less likely to
get the security benefits of the oil sands without [Keystone XL], due to the
lack of easy alternatives.”
“For climate change to
truly be his legacy, Obama would probably need to secure a victory on climate
legislation in Congress,” he added. “At present, this is not realistic, given
that Republicans control the House and that even moderate Democrats in the
Senate are opposed to climate legislation. Congress is still leery of climate
legislation after a grueling effort to pass a cap-and-trade bill in 2009-2010
and there is little appetite to resurrect this fight. There could potentially
be more support for a less contentious clean energy standard, but it is still
too early to say how much backing such a bill could muster. Obama is…likely to
push for renewable energy subsidies as part of budget negotiations.”
“If America cannot
produce all its own hydrocarbons, many would settle for North American
self-sufficiency,” The Economist, a British
magazine, argues in an article on energy independence for the continent. “This
would require more imports of Canadian oil. That in turn would depend on
building Keystone XL, a pipeline that would bring oil from the northern
neighbour and reassure Canada that its hydrocarbons are wanted down south.
Keystone XL is likely to go ahead in some form after the election but the
political controversy over the plan may encourage Canada instead to build
pipelines to its west coast to take its oil and gas to the fast-growing markets
of Asia.”
Michael Holden also
believes the decision on Keystone will favour Canada. “I would be surprised if
Keystone didn’t go ahead,” he says, although he’s not a believer in the west
coast pipeline option. “In the case of Northern Gateway, I’d be surprised if it
did.”
“It’s important for the
oilsands industry to improve on its environmental records, and for pipelines to
be built as safely as possible,” he adds, so “scrutiny from environmental
groups isn’t a bad thing. But these groups are underestimating the economic
impact of the oilsands.” He sounds puzzled when he asks, rhetorically, “What is
it about the oilsands that makes them a poster child for the environmental
movement?”
Other Proposals
As these projects go
through the approval mill, inventive companies and people will continue to
propose innovative ways to get Canada’s oil to “tidewater” – code for
“international markets and prices.” For example, pipeline giant Kinder Morgan
is seeking approval for a $4.1 billion expansion of the TransMountain pipeline
to BC’s lower mainland. This would involve twinning the existing pipeline, adding
new pumping stations, increasing the number of storage facilities and expanding
a marine terminal in Vancouver Harbour. This would increase Canada’s ability to
ship blended bitumen overseas.
More recently, Enbridge
proposed transporting Canadian and North Dakota crude to Gulf Coast refiners with
a $3.4-billion conversion of another natural-gas pipeline system. A joint
venture with a Texas-based limited partnership, this scheme would involve
reversing 1,100 kilometres of an existing natural-gas trunk line to transport 660,000
barrels of oil a day from Illinois to Louisiana. If this system gets regulatory
approval, it could be in operation by 2015.
With so many ideas
snapping at Keystone’s heels, there are risks in the longer-term timeframe. How
soon will Keystone XL be approved, and then how long to bring it to completion?
Price differentials are holding back oilsands investment in Canada, and
providing “crack-spread” advantages mostly to American refineries in the
western states.
The same concerns apply
to New Brunswick Premier David Alward’s ambitious ideas about transforming part
of the TransCanada gas pipeline into a bitumen conduit to Ontario, and then
linking it to Quebec and Atlantic Canada. Is that feasible from the point of
view of economics and regulatory approval? Could it be done in the medium term?
Although the timelines
are vague, economic forces are clearly promoting change. Increasingly, the
outlines of those changes are becoming clear.
