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The Keystone XL has been a topic of much contention and frustration for several years. With the US State Department’s release of its Final Supplemental Environmental Impact Statement report on January 31st, 2014, the pipeline has become no less controversial though recent developments suggest that the project will be approved. The primary contention has been the safety and environmental impact of the pipeline, though it is important to recognize the situation from a Canadian context as well as an American. 

All figures below are derived from BP’s Statistical Review of World Energy 2013, unless otherwise noted.

Canadian Oil Reserves

About 98% of Canada’s oil is concentrated in Alberta, and 99% of that oil is in the form of unconventional oil sands. These Albertan reserves amount to 170.2 billion barrels, though this oil is heavy, with a low API gravity, and sulfurous. US refineries have been increasingly equipped to handle such oil, making it suitable for the US market.

In 2012, Canada exported 3.056 million bpd and imported about 700,000 bpd. Of these exports, 2.955 million bpd went to the US, comprising 96.6% of all Canadian exports. As such, the US holds a near monopoly on Canadian oil, which has given the refining and transportation system its present structure.

Canadian oil sands are particularly sensitive to oil prices, requiring “$40-70/bbl for new in-situ projects and $80-100/bbl for new surface mining projects” according to the Energy Information Administration. Understandably, the surge in oil prices in the 2000s has led to a boom in Canadian oil sands extraction.

Avoiding a needlessly in-depth discussion of the characteristics of Canadian bitumen here, the EIA notes that “many objections to oil sands development center upon the relatively energy-intensive and carbon-intensive extraction and processing methods required. Calculations of the climate impacts of oil sands development are complicated and often yield different results but, caveats and exceptions aside, well-to-tank greenhouse gas emissions are typically higher for oil produced from the oil sands than oil produced through conventional means. The potential to exacerbate climate change is merely one of the environmental costs that accompany the development of Canada’s oil sands.”

Effectively, producing oil from Canadian oil sands requires a much larger expenditure of capital and energy, in addition to greater carbon emissions. One might expect this of an unconventional energy source, and it remains a large point of contention for environmentalists.

Canadian Exports to the US and Integration

At present, Canada suffers from bottlenecks in pipeline and rail capacity to bring its oil to the US market, resulting in losses of “$47 million a day on average, implying $17 billion a year,” according to the Fraser Institute. Essentially, Canadian oil trades at a discount to the world price because it cannot reach world markets and remains bound to the US pipelines in the Midwest, creating a glut and forcing a $37 price discount to Brent crude prices as a result. Obviously, the Canadian government is pushing to resolve the situation and decrease the discount for Canadian oil. As such, it is pushing for the approval of the Keystone XL pipeline, which will help bring more of this oil to market at a cheaper transportation rate than rail.

The result of the large price differential, coupled with pipeline bottlenecks, has been the rise of crude by rail. Even though rail is more expensive as a method of transportation, the price differential is large enough that transporting crude by rail is still profitable. If that price differential were to narrow, it would be no longer worthwhile to transport crude by rail. However, for now, the expansion of rail networks continues. The State Department’s most recent reports notes the rise of rail infrastructure in recent years and the accompanying rise in transportation, which has increased from nearly none in 2011 to 180,000 bpd in 2013. According to the report, rail loading facilities are expected to increase by 57% to a capacity of 1.1 million bpd from the present 700,000 bpd. As more crude by rail is brought to US refiners, bypassing the pipelines, the price differential will narrow, perversely, making rail less competitive. In any case, more oil will come southward to the US.

As such, Canadian oil from Alberta will continue to come into the US, albeit at a higher price, with or without the Keystone XL pipeline.

The pipeline itself will add 830.000 bpd of capacity, of which, 100,000 bpd will be reserved for the Bakken shale. This will help alleviate some of the bottlenecks and provide Canadian producers with a narrower differential for their oil, placating some concerns.

US Domestic Politics and Pipeline Approval  

The primary point of contention has been the safety and environmental impact of the pipeline on both greenhouse emissions and aquifers in Nebraska, as well as continued dependence on oil. As the project crosses the US-Canadian border, it requires approval from the State Department and, ultimately, the president to begin construction. The State Department report takes into account revised routing and additional precautions taken on the pipeline. The report appears favorable to the project, noting that “approval or denial of any one crude oil transport project, including the proposed Project, remains unlikely to significantly impact the rate of extraction in the oil sands, or the continued demand for heavy crude oil at refineries in the United States.” It also notes the bypassing of important aquifers in Nebraska and the lowered incidence of high volume spillage through the use of pipelines. The greenhouse emissions from the project are insubstantial, though the greater fear remains the US dependence on the particularly energy and carbon intensive oil sands of Canada. The much-lauded job creation aspect of the pipeline will be minimal and only temporary construction work, for the most part. 

The report itself appears to be a necessary piece of information for the administration to make a defensible decision on the pipeline. US domestic politics come into play as the administration, which has long-courted environmentalist constituents has to decide on the pipeline, especially when vulnerable Democrats have to win reelection and are under local pressure for and against the pipeline. 

Canada – Looking East

The more interesting effects of the Keystone pipeline are actually taking place in Canada. Canadian PM Stephen Harper has been repeatedly on the record as frustrated with American delays of the project. Even in early 2012, Harper was quoted saying “Canada will continue to work to diversify its energy exports.” With no land outlets other than through the US, Canadian energy can only by shipped by sea. As most Canadian oil is located in Alberta, shipping the crude westward to British Columbia makes the most sense. There are already pipelines to Vancouver and the Trans Canada pipeline is being reviewed for expansion. British Columbia and Alberta are already cooperating on allowing Enbridge to construct additional pipelines with a specific aim of exporting to Asian markets, pending environmental and safety concerns. Even just recently, Harper’s statements have echoed a feeling of frustration “this administration may continue to be difficult for reasons of internal politics, but I do believe that one way or another these decisions will go ahead at some point.”

The US clearly does not want Canadian oil to be exported elsewhere when it receives nearly all Canadian exports; the US National Oceanic and Atmospheric Administration released a report warning of the dangers of transporting crude to British Columbia. The timing of the report coincides with increased calls for outlets other than the US, especially when the Enbridge pipeline is expected to carry about 500,000 bpd, constituting a substantial portion of Canadian production. 

In short, the Canadian government is frustrated with the pace of developments in the US over the Keystone XL. It will begin looking for other outlets for its oil, ones that will pay the world price and minimize the discount on Canadian crude. This move would be advantageous to Canada and detrimental to the US as competition is introduced into the system. Moreover, the system of refineries and conduits depends on a constant stream of Canadian oil and would be disturbed as a result, unless US sources can make up the difference. The Keystone pipeline is about more than just environmental concerns; it underscores a systemic arrangement that is not static and unchanging; the Canadians have the option to reorient the arrangement to their benefit and to American disadvantage.

The US enjoys a monopolist’s position; political diffidence may squander this advantage for US refiners and consumers. Keystone may not lower gasoline prices in the US, but it may just prevent them from rising as it enables the current energy arrangement between the US and Canada to continue.