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By Andrew Holland on Jan 16, 2013 with 2 responses

One Year On From the Keystone Pipeline Rejection

Background

A year ago, President Obama, under pressure from a deadline set by House Republicans, rejected the application of TransCanada for the Keystone XL pipeline that would pump Canadian crude from Alberta to the American gulf coast.

With a new decision on the Keystone XL pipeline due in the first quarter of 2013, according to the State Department — a  date that may slip according to some observers — it is useful to assess the actual effects of not building the Keystone pipeline on Canadian oil production and North American energy markets.

(Read More:  Obama Under Increasing Pressure to Make Keystone XL Decision)

Stopping the Keystone XL pipeline was touted as a big win for environmentalists, who had set their sights on Keystone XL as a big target. As Bill McKibben often quotes NASA scientist James Hansen, using the entire resources of Canada’s oil sands would mean “game over for the climate.” Once complete, Keystone XL would have a capacity of up to 1.1 million barrels of diluted bitumen per day – 54% of Canada’s total bitumen production (note: bitumen is the crude product from production in the oil sands).  So, for groups like McKibben’s 350.org, the goal of stopping the pipeline was to slow and eventually stop the exploitation of Canada’s tar sands. The thought was that if environmentalists could stop the building of the Keystone pipeline, they could prevent Canada from having a market for their oil, and thereby production would slow and eventually stop.

Oil Sands Production Continues to Increase

In 2011, I wrote that “the balance of evidence shows that permitting the Keystone XL pipeline will not be good for American energy security, economic stability, or environmental sustainability.” For me, the risks of climate change are a clear threat to national security, and deserve action sooner rather than later. It should be clear that we can either pay now to reduce emissions, or we pay later in the form of dangerous weather, rising seas, and threats to our security.  One year later, however, the evidence so far shows that production in the oil sands continue to increase, while the blocking of Keystone has led to some very unpredictable outcomes.

A look at Canada’s oil production numbers shows that, by stopping the expansion of Keystone, environmentalists have not been successful in reducing production of Canadian oil in general, or the heavy bitumen that is produced from the oil sands specifically. From December of 2011 until December of 2012, total Canadian production rose from 3.3 million barrels per day (mbd) to 3.6 mbd, a 9% increase, while production of bitumen rose from 1.76 mbd to 2.05 mbd, a 16% increase (all production numbers from the Canadian National Energy Board).

The lack of pipeline infrastructure has left this increased production with few outlets to global markets. That has left Canadian companies and politicians to begin to court Asian markets by touting the building of the Northern Gateway pipeline from Alberta to the Pacific in British Columbia, where the bitumen could then be shipped on to China, Japan, or any other oil consumer. That pipeline will see many of the same opponents that the Keystone XL has, plus Canada’s indigenous ‘First Nations’ across whose land the pipeline will cross, but this is an opportunity that would not likely have been considered so rapidly had Keystone been approved.

Oil by Rail

As a shorter term outlet for oil, the Port of Churchill, Canada’s only Arctic seaport, is actively exploring options for exporting oil via the Hudson Bay and the Arctic Ocean. The first shipment could go as early as July 2013, ironically into an Arctic made ice-free by climate change. Those who thought that a spill in Nebraska would be disastrous surely would not be happy that blocking the pipeline action has resulted in an increase in the possibility of a spill in Hudson Bay or the Arctic Ocean.

(Read More:  Canada’s Ambassador Bets 6-Pack on Keystone Pipeline Approval)

Perhaps the most visible effect of the blocking of Keystone is that, over the last year, the volume of crude shipped by the two major Canadian rail lines, the Canadian Northern (CN) and the Canada Pacific (CP), has increased from 11.4 million barrels in 2011 to an expected volume of 64 million barrels by the end of this year, a shocking 560% annual increase. These ‘virtual pipelines’ may actually be more appealing to oil producers and refiners because of the flexibility that it affords them: while a pipeline can only send a certain amount to a predetermined place, oil companies can change rail orders to meet market fluctuations.

Unintended Consequences?

So far, then, the goals of environmentalists have not been met: production from the Alberta oil sands is up over the past year, and appears to be accelerating, while other outlets for the accelerating production mean that, if Americans won’t buy it, then Canad will sell to others.

Even worse, blocking Keystone may actually have some counterproductive effects.

The shipping of oil by rail may be much more environmentally dangerous than via pipeline. A study by the Manhattan Institute, a conservative-leaning think tank, found that transporting oil by rail or road is far more dangerous and environmentally unfriendly than transporting it by pipeline. A spokesman for the Sierra Club has called oil by rail “an accident waiting to happen.”

One thing that the blocking of Keystone has succeeded in is ‘stranding’ much of the oil in the center of North America – there is simply not enough infrastructure to get this glut of oil to the coasts and onward to world markets. This lock-in of most Canadian oil means that the Canadian benchmark oil sells at a much lower price than it would otherwise receive. As of early January, Western Canada Select was worth about $41 per barrel less than the US benchmark West Texas Intermediate (WTI). Partly that price difference can be explained by inferior quality, but mostly it is because of the glut of oil in the region. It is discounted versus WTI, which itself sells at a discount of about $18-20 below the international benchmark Brent crude price.  If this market imbalance were persistent, then it could signal that the environmentalists’ plan was working; low prices would eventually lead to less production.

However, ultimately, oil is like water. You can put a dam in its way, but it still wants to flow downhill – to markets. So long as there is a demand for the crude oil that comes from Canada’s tar sands, companies will find a way to sell it.

This proves that the only effective way to address climate change will be to reduce demand. Market-based mechanisms like a carbon tax or a cap and trade scheme would reduce demand for oil, while also encouraging companies to use the most efficient and safest ways to transport it. In light of their failure to bring such a mechanism to pass in Congress, the environmental community embraced opposition to Keystone as a second-best solution. One year on, the consequences show that this has not had the desired effect and has led to unforeseen consequences.

  1. By Robert Rapier on January 21, 2013 at 1:58 am

    “One year later, however, the evidence so far shows that production in the oil sands continue to increase, while the blocking of Keystone has led to some very unpredictable outcomes.”

    I would argue that those outcomes were pretty predictable. In face, I predicted some of them.

    RR

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  2. By Tap Management, Inc. on February 22, 2013 at 4:12 pm

    According to a new report by Harris Interactive, roughly 69 percent of Americans support the Keystone XL project and 83 percent believe the pipeline would enhance U.S. energy security.

    Furthermore, 92 percent of respondents agreed that the job creation expectations of the Keystone XL were very important factors in their consideration of the project.

    Nevertheless, the pipeline remains unapproved, and is in its fifth year of review by U.S. officials.

    [link]      
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