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By Robert Rapier on Dec 16, 2013 with 21 responses

How Bitumen Gets to Market

Introduction

Today’s article concludes the series covering my recent trip to the Athabasca oil sands around Fort McMurray, Alberta. This is an annual trip hosted by the Canadian government for energy journalists to raise overall awareness on issues involving the oil sands. Expenses for the trip were paid for by the Canadian government.

Previous articles in this series include:

In today’s final article I want to discuss the logistics involved in getting the oil sands to market. There is a narrative widely promoted by some environmental groups that they can successfully stall oil sands development by shutting off new routes to market.

On my trip to the oil sands, the logistical issues of getting the bitumen to market were a major topic of discussion. The issue has received especially widespread attention in recent years as a result of the high-profile battle over the Keystone XL pipeline extension, which many view — incorrectly as I will show — as essential in enabling future oil sands growth.

Keystone XL Review

To review, the Keystone Pipeline is owned by TransCanada (TSE: TRP, NYSE: TRP). The pipeline already has the capacity to move 590,000 barrels per day (bpd) of crude oil from the Athabasca oil sands to hubs and refineries in the US. The first phase of the pipeline began operating in 2010 and connects Alberta to refineries in Illinois. In 2011, the second phase of Keystone connected Steele City, Nebraska to the major oil hub in Cushing, Oklahoma.

There are two proposed expansions of the Keystone Pipeline that are collectively called Keystone XL (“XL” stands for export limited). The southern leg of the pipeline has been built and is due to begin regular operations next month. This Keystone-Cushing extension will have an initial capacity to transport 700,000 barrels of oil per day from the Cushing hub to Gulf Coast refineries. Because it didn’t cross an international border, the southern leg of the pipeline did not require federal approval.

The northern leg, however, would cross the US-Canadian border. Therefore the State Department is required to determine that the project is in the national interest in order to grant a permit. This proposed 1,180-mile addition would extend from Hardisty, Alberta to Steele City, Nebraska, and would transport up to 830,000 bpd of crude from the oil sands in Alberta and the Bakken oil fields in North Dakota to refineries on the US Gulf Coast.

The Keystone XL pipeline project has probably been the most discussed pipeline project in US history since the Trans-Alaska pipeline of the mid-1970s. Opponents of the Keystone pipeline generally hold the view that the Keystone XL is the key to the expansion of Alberta’s oil sands, and that stopping the pipeline will substantially slow the rate of oil sands development. Such views demonstrate a general lack of understanding about how logistics projects are executed.

The Current Pipeline Situation

Most people are entirely unaware of the extent to which pipelines already crisscross North America, but it’s akin to an invisible interstate highway system. (There are actually 2.5 million miles of oil and gas pipeline in the US versus 47,000 miles in the US Interstate Highway System).

Below is a partial map of just the largest pipelines that crisscross North America. There are pipelines crossing through national parks and above the nation’s aquifers, and there are pipelines crossing the US border to the north and south.

north_america_pipelines_mapMajor North American Oil, Gas, and Product Pipelines. Source: Theodora

Yet I constantly encounter arguments that preventing the Keystone XL pipeline will prevent heavy oil from Canada from making its way to market. The widely-held perception is that Keystone XL is the lifeline upon which the future of the oil sands depends. Many are surprised to learn that the Keystone XL would not be the first, or the 10th, or even the 50th oil or gas pipeline crossing the US-Canadian border. According to the Canadian Embassy in Washington, D.C., there are 74 operating oil and gas pipelines that cross the border between the US and Canada. Keystone XL would be the 75th.

Keystone XL Alternatives

Even if Keystone XL opponents are aware that many pipelines already cross the border, they often insist that this one is special, and that this one holds the key to the expansion of oil sands production. Stop Keystone XL, they insist, and oil sands development will stall.

They might even offer up that there is another pipeline proposal called the Enbridge Gateway (also called the Northern Gateway) that would provide an outlet for oil sands bitumen to the Pacific Ocean, but they will insist that there is so much opposition in British Columbia and from First Nations groups that this pipeline is unlikely to be built. They are probably right about that. And that sums up the knowledge of probably 95 percent of the people opposing the Keystone XL pipeline.

But there is so much they don’t know.

For example, there were many pipeline proposals being floated before Keystone XL was conceived that would have exported Alberta bitumen. But the Keystone XL got a lot of commitments from industry because it made the most sense to ship the heavy oil to US Gulf Coast refineries that were configured to refine heavy oil. This would have backed out heavy Venezuelan crude, essentially trading it for a more reliable and friendlier Canadian supply. So shippers lined up behind the project that made the most sense to them — Keystone XL — and competing pipeline proposals were shelved. Now that Keystone XL is facing formidable opposition, TransCanada’s competitors are dusting off old proposals, and coming up with new ones.

The following graphic summarizes a number of the pipeline projects that are currently being planned or built in the US and Canada.

Pipeline Proposals

Major US and Canadian Oil Pipeline Proposals. Source: Alberta Department of Energy

As should be obvious, there are a lot more routes planned besides the Northern Gateway from Edmonton to Kitimat, British Columbia. I want to talk about two of these proposals, which became much more important to the Canadian government once Keystone XL project delays began, and it became uncertain as to whether the project would get US approval. One of the pipeline projects would carry bitumen east from Alberta, and the other would carry it west.

TransCanada’s Energy East pipeline would be a 4,500-kilometer pipeline that would carry 1.1-million barrels of crude oil per day from Alberta and Saskatchewan to refineries in Eastern Canada. The Energy East pipeline project involves converting an existing natural gas pipeline to an oil transportation pipeline, constructing new pipelines in Alberta, Saskatchewan, Manitoba, Eastern Ontario, Quebec and New Brunswick to link up with the converted pipeline, and then constructing the associated facilities, pump stations and tank terminals required to move crude oil from Alberta to Quebec and New Brunswick, including marine facilities that enable access to other markets by ship.

This project alone would be nearly 50 percent larger than Keystone XL, and would still give Alberta’s bitumen access to Gulf Coast refineries by allowing the oil to be loaded on ships on Canada’s East Coast and transported by water (at a price competitive with the Keystone XL route). The pipeline is expected to be in service to Quebec by 2017 and to New Brunswick by 2018. A recent open season for the project received over 900,000 bpd in shipping commitments for 20 years.

Kinder Morgan’s Trans Mountain pipeline is the only pipeline currently running from Alberta’s oil sands to Canada’s Pacific coast. Kinder Morgan Energy Partners LP (NYSE: KMP) has filed an application with Canadian regulators that would greatly increase the current capacity of the 300,000 bpd Trans Mountain pipeline. The expansion of the current pipeline would be along the existing right-of-way, greatly simplifying the environmental permitting for the project. The project would nearly triple the existing pipeline capacity to 890,000 bpd, and would terminate in Burnaby, British Columbia. To date 710,000 bpd in shipping commitments have already been obtained. The pipeline is scheduled to begin construction in 2016 with incremental product online in 2017. This project would greatly increase the access of Alberta’s oil sands producers to the lucrative and growing markets of Asia.

Obviously neither pipeline requires US approval, both pipelines face far fewer obstacles than the Northern Gateway pipeline, and they give Alberta’s oil access to both coasts. Mark my words, while there will be opposition, new oil transport capacity from the oils sands will continue to be built. After all, if you put yourself in the shoes of the Canadian government, they certainly don’t want fickle US politics to threaten one of Canada’s highest priorities: development of the country’s 183 billion barrels of bitumen reserves.

And Then There’s Rail

Then of course there is the rail option. As I have pointed out many times, railroads essentially built a Keystone XL on rails in about 3 years to transport oil from the Bakken oil fields in North Dakota. Why? Because there was insufficient pipeline capacity to get growing oil supplies from the Bakken to world markets where the crude commanded premium prices. It wasn’t that there was anything special about Bakken crude that allowed it be transported by rail. It’s just that the price differentials were high, the railroads saw an opportunity (Warren Buffett’s BNSF railroad is the dominant player), and oil producers were more than willing to pay the price to get their crude to distant markets.

Rail in North Dakota vs Western Canada

Rail in Western Canada Mirrors Rail in the Bakken. Source: Alberta Government

The same thing is beginning to happen with Alberta bitumen. This crude is significantly discounted from global markets, and as a result there is a lot of incentive for shippers to get the oil to market. Whether oil-by-rail continues to ramp up at the same pace as in the Bakken — which has been the case thus far — will be a simple function of whether the price differentials remain high and the pipeline options insufficient.

Recently, 175,000 bpd of Western Canada’s crude was being exported by rail, out of the current maximum operational capacity of 224,000 bpd. And many new rail loading terminals are on the drawing board:

Crude Oil Rail Terminals

Pending Crude Oil Rail Loading Terminals. Source: Alberta Government

These rail projects on the drawing board would push the rail capacity up to over 900,000 bpd. Along with the announced pipeline projects, the total capacity would cover expected oil sands production increases until the next decade — even without Keystone XL. In fact, it is safe to say that not all of the projects will be built because that would create too much capacity to the ultimate cost of pipeline companies and rail operators.

Conclusions

One thing is certain, though. The future of the oil sands doesn’t hinge on whether Keystone XL is approved. Environmental organizations that argue otherwise are fooling themselves and their supporters. I suspect some of them are even aware of this, but Keystone XL opposition has become a good fundraising issue.

As I have argued many times in the past, the real way to slow down oil sands development is to implement programs that reduce demand, not attempt to restrict the supply. As long as the demand is there, the oil will find a way to market. Don’t say I didn’t tell you so.

Link to Original Article: How Bitumen Gets to Market

By Robert Rapier. You can find me on TwitterLinkedIn, or Facebook.

  1. By James on December 17, 2013 at 7:24 am

    Hi Robert,

    Thanks for this excellent series of articles on the oil sands. I definitely learned a lot by reading them. I agree that there is probably nothing we can do to stop the bitumen/oil from the tar sands from getting to market, but if there is one good thing about the whole Keystone XL debate, it is that it has raised awareness of energy issues to a level that likely was not there before.

    I was wondering if you have plans to do a similar trip to perhaps a large-scale wind farm or solar project. (Good luck in getting any government, specifically the Canadian government, to cover your costs for that!) I think it would be very interesting to juxtapose what you have here with a look at some major renewable energy projects. I’m sure you can get a renewable project developer to cover costs.

    Thanks again and I enjoy reading your work.

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    • By Robert Rapier on December 17, 2013 at 8:53 am

      “I was wondering if you have plans to do a similar trip to perhaps a large-scale wind farm or solar project.”

      I have been invited twice to tour a geothermal project, but both times I was in Hawaii and it wasn’t really feasible. This wasn’t too bad because the connections from Phoenix were easy. There was actually a direct flight from here to Edmonton. If I get a similar chance with a renewable project I will take it.

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      • By James on December 17, 2013 at 9:50 am

        Some potential options in Arizona (no idea if they would offer such a tour or not, though):
        PV – Mesquite Solar owned by Sempra 66 MW
        CSP – Solana owned by Abengoa 280 MW (with molten salt storage)

        Keep up the good work.

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      • By Tom G. on December 17, 2013 at 4:29 pm

        A trip to an enhanced geothermal facility with CO2 secondary would be really interesting to me. Of course a sponsor is needed, LOL.

        Living in Arizona, we are surrounded by solar and they aren’t very interesting. You sit some solar panels in the sun, they start automatically in the morning and shut themselves down automatically at night. They are noiseless, don’t emit anything and don’t need anyone to run or monitor them. There MIGHT be one operator at the facility but most likely it will be controlled off site by the utility or grid operator.

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      • By David Sands on December 19, 2013 at 2:39 pm

        I am certain that we would accommodate you – in the same terms we do for journos investigating the oil sands – if you want to come at look at the renewable energy investments we’ve made from the Alberta Government’s charge on carbon emissions. Biofuels, wind, solar, storage, and energy efficiency projects. There’s a lot to see. Hundreds of millions of dollars worth. Check the website of the Climate Change Emissions Management Corporation (CCEMC), and let me know if you’d like to come and see it, I’ll help as I can.
        - David Sands, a PR guy with Government of Alberta

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        • By Robert Rapier on December 20, 2013 at 7:53 pm

          Hi David,

          I may be interested in this. Let’s discuss after the holidays. Cheers, Robert

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  2. By Forrest on December 17, 2013 at 8:45 am

    We’re both increasing supply and reducing demand. Our transportation fleet hit a new mpg average. Auto technology advancing quickly beyond CAFE requirements. Ethanol continues importance upon boosting octane for high efficiency engines as well as cost advantage. Around here the fuel sells $1 less than unleaded. In Grand Rapids a station selling E85 for $1.79/gallon and because the low cost of corn, profits are up. Natural gas is projected to power our truck fleet. Mexico has announced ending It’s state run petrol business, opening up for exploration of western hemisphere largest oil reserves. This could up the oil output to the equivalent of one Nigeria to world supply. Within two years Exxon maintains North America will be vaulted ahead of every OPEC member output except for Saudi Arabia. I read a report that these factors will diminish ethanol growth and would appear the growth of oil sand projects.

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  3. By shecky vegas on December 17, 2013 at 1:15 pm

    My disagreement over Keystone was the manner it was handled. It was an overly obvious case of corporations and governments making back-room deals and running roughshod over the common man. No consideration over family farms, public parks, and the general environment. It was just, “Build, build, build!”
    And, of course, the consistant total lieing about everything involved with the project, from jobs created (remember “manhours of labor”?) to lower gas prices (yeah, right, sure), has opened the general public’s eyes to how much bullshit gets fed to them by the greedheads in charge.
    I’m glad a lot of people finally woke up.

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    • By Mr. Crenshaw on December 24, 2013 at 12:57 pm

      Where are you getting your information from? I find it hard to believe that you have had access to these so called “back-room deals”, yet you proclaim to know exactly what went on there. This has been a very high-profile project for TCPL; hardly something to be considered secretive or back-room.

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  4. By Forrest on December 19, 2013 at 9:38 am

    “As long as the supply is there, the oil will find a way to market”. Doesn’t it still depend on economics? This is why grand standing upon Keystone XL..just to slow down and expense more cost to petrol. This is why Gulf spill and Kalamazoo pipeline spill magnified beyond reasonable. Just politics to damage image and cost petrol. We had a cooperative just dump plans for coal fluidized bed electric generation plant. They had cheap source of fuel “coke” leftovers from petrol. Sierra Club basically just savaged the project per their Lawyer army of concerns. The utility solved problem by investing in a neighboring utility coal plant built in 70′s scheduled to be shut down. So, keep the old nuclear and coal plants running instead of investing in modern efficient, lower polluting and safer plants the cure for U.S. electric? Unfortunately, modern politics and others in hunt for popularity, fame, and fortune exploit their constituency. They cater to the nonsense for personal benefit. Instead of hard issues with much conflicting compromises we get simple solutions. Goldy Locks notions i.e. wind energy is free.

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    • By Robert Rapier on December 19, 2013 at 9:55 am

      “As long as the supply is there, the oil will find a way to market”. Doesn’t it still depend on economics?

      Yeah, that should have read “demand.” Proof something 10 times and things like that still get through. Making that correction.

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  5. By Mark on December 19, 2013 at 9:14 pm

    RR: I echo others who have commented their thanks for investigating and writing up this series of first-person reports on the Tar Sands. You’ve accomplished a lot of research here which I hope gets bound up in a single, illustrated pdf document for others outside of this blog to learn from. Kudos. Good job!

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  6. By robert wilson on December 20, 2013 at 4:21 pm

    The joint review panel for the Northern Gateway pipeline has just recommended government approval subject to 209 conditions that cover everything from caribou to researching the fate of a potential spill. However, approval from the federal, BC and Alberta governments is still required. The pipeline would be consistent with Canadian energy policy, which endorses diversification of the customer base among other things, so federal approval is better than an even bet. BC’s response could come down on either side, with perceived political fallout from approval likely to be a significant factor in the decision.

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  7. By Jonathan Koomey on December 22, 2013 at 2:58 pm

    Robert,

    Thanks for this excellent review, which is both thorough and accurate.

    I do think you present a caricature of the reasons for not approving the northern leg of the Keystone XL pipeline. There may be environmentalists who believe that shutting this pipeline down is the key to stopping all tar sands development, but more sophisticated observers have a more subtle argument: We need to slow and ultimately stop all fossil fuel development and start phasing out these fuels, and anything that slows down that development, even for a few months, is worth doing. Not approving the pipeline will also be a healthy shock to the system of investors in fossil fuels, making them realize that they are probably going to lose their investments in high carbon resources in the medium term, so they should be more cautious (and require a higher rate of return, thus making tar sands exploitation more expensive). Finally, there are differences of opinion among informed observers about whether rail is truly a substitute for pipelines. The risk characteristics are certainly different, and the probability of accidents (as well as the costs) are probably higher with rail. You do make a persuasive case that rail ultimately can substitute for the pipeline in terms of quantities, but cancellation of the XL pipeline would certainly delay things by at least a few months or a year while rail capacity is built to fill the gap, and that’s a salutary result.

    So while I don’t agree that this one pipeline is “game over for the climate” I do think that we’ve got to stop building such infrastructure sometime (soon), so it might as well be with this pipeline.

    Keep up the good work. You are one of the most careful researchers on these topics, and I always read your posts with interest.

    Jon

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    • By Clee on December 23, 2013 at 3:40 am

      Robert, I have been wondering if transportation of tar sands oil by pipeline really is safer than by rail. Is it true that if they ship the bitumen by rail, and if it spills, it’s so solid they can just shovel it up with little effect on the environment? For pipelines, I understand that they must dilute the bitumen before it can flow in a pipeline. How much diluent do they need? Do they need as much diluent as there is bitumen? Where do they get diluent? Is it from the Bakken oil fields of North Dakota? How do they get the diluent, by pipeline, rail or truck? Is it really worth the cost, the transportation fuels and the possible spills to transport the diluent back and forth? I probably should have asked this before you went on the tour. Thank you for the excellent series on Athabasca oil sands.

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      • By Robert Rapier on December 23, 2013 at 12:07 pm

        They don’t ship it solid (though I have heard that proposed). They dilute it or keep the rail cars warm to ship it. The diluent for both rail and pipeline is usually piped in, although the companies with upgraders make fractions that could (and might be) used as diluent.

        Having to deal with diluent absolutely increases their costs. They have to pay for it, and then it takes up space in the pipeline or rail car.

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    • By Robert Rapier on December 23, 2013 at 12:10 pm

      “We need to slow and ultimately stop all fossil fuel development and start phasing out these fuels, and anything that slows down that development, even for a few months, is worth doing.”

      Of course that exact statement is where we differ. It’s back to my analogy of the guy with the hangnail and the brain tumor. We might say “anything that eases his discomfort is worth doing.” I would say that if you have limited resources, you better spend the effort where it has the most impact. Treating a hangnail might ease his discomfort, but if you lose sight of the brain tumor while engrossed in the hangnail, he’s still going to die.

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      • By Jonathan Koomey on December 23, 2013 at 1:15 pm

        I agree with you about prioritizing our efforts, but I don’t think stopping Keystone precludes us from doing other things (like accelerating the adoption of electric and plug in hybrid vehicles, increasing vehicle efficiency standards, canceling all new coal export terminals and shutting down the existing ones, ramping down auctioning of coal leases on public lands, removing all subsidies for fossil fuel production of any sort on public lands, stopping all public financing for coal plants internationally, internalizing externalities by tightening up regulations on air pollutants, toxics, and mining waste, divesting from fossil fuel companies, etc). We have to start somewhere, and at this point a reversal of a major fossil infrastructure project would be a healthy reality check for an industry that seems to believe they can go on like this forever (witness the eagerness with which fossil fuel companies are considering drilling in the Arctic, now that the ice pack isn’t year round, precisely because of climate change driven by burning of fossil fuels).

        So I don’t agree with your assessment that stopping Keystone prevents us from taking other necessary steps in parallel, and buying us even a year of delay in tar sands exploitation is worth it, in my judgment. Fighting this battle also has created the beginnings of a grassroots movement like the one that ultimately toppled apartheid, and while it’s early days yet, having this project to rally around is a healthy thing.

        As you know, I don’t agree at all with the extreme position that this one pipeline is the be all and end all of the climate fight. I also think that fighting coal should be the highest immediate priority. But stopping Keystone doesn’t preclude us from doing other important things, and I’m hopeful we’ll do both.

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        • By Robert Rapier on December 23, 2013 at 1:26 pm

          “So I don’t agree with your assessment that stopping Keystone prevents us from taking other necessary steps in parallel”

          There are organizations devoted their fundraising efforts toward this. There are high profile campaigns and protests. Not only are these people diverting resources and losing time, they are misleading numerous people about the significance of the pipeline. If you go out and sell the pipeline as the fuse to the biggest carbon bomb on the planet, how do you then go back and say “Well, there is another carbon bomb that’s 10 times the size of that last biggest one we told you about?”

          Political capital is being spent, and people are devoting their time and effort into a cause that won’t in any way impact on the problem. Look back at that paper by Neil C. Swart and Andrew J. Weaver published in Nature Climate Change. All the oil sands in Canada won’t make a measurable difference. There is a hangnail and a tumor. All I hear about is how the hangnail must be fixed. So I would like to see more emphasis on the real problem, and less exaggeration. Even Nature this year wrote that the Keystone XL pipeline’s environmental impact is exaggerated. I fail to see how this helps, but I can see how it can hurt after people realize they were misled and politicians who spent political capital now are asked to spend it on something that might really matter.

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          • By Jonathan Koomey on December 23, 2013 at 1:52 pm

            My old friend, the late Stephen Schneider, said many times “Don’t exaggerate, the truth is bad enough.” I agree with him and you about the foolishness of making unsupported claims, and I’ve never made such claims about Keystone (although others certainly have, as you note). I’ve laid out what I think is a principled argument for canceling the northern leg of the pipeline, but it assumes that all the other efforts I list above (and more) are pursued in parallel.

            I also think that building a movement is not a zero sum game. If you spend political capital on this effort and stop the pipeline, it will likely engender further wins down the road, allowing the environmental groups to declare victory on Keystone and move on to stopping all US coal export terminals, for example.

            We agree more than we disagree on this. Your tactical and strategic concerns are real and proximate, and if environmental groups are not simultaneously pursuing other avenues for impeding fossil fuel infrastructure development, then they are making a grave error. I’m not plugged with the people making those decisions, so can’t speak to that point.

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  8. By Forrest on December 23, 2013 at 4:08 pm

    I’ve evaluated environmental concerns through a prism of continuous improvement and to that extent the U.S. has an incredibly good record and no doubt will get better. However, this concern is now a movement and has attracted or propagated an age of environmental fascism. Far left zealots whom seem to have religious like fervor to control decision making. They have chutzpah to think their wisdom is superior and righteous. You can’t reason with them as they have a moral high road. Some of it described in Bible prophesy of worshiping creation. We should respect creation, but it’s not holy ground reverent to those whom have the green card. Nature is for the people to enjoy; the masses. Not for restricting and prohibiting to the few park rangers and environmental advocates. To many people viewing PBS infomercials. To much hyperbole upon NPR. This extremism has to slowed. Schools and universities have to be made accountable to quality education and the high cost to society of indoctrination. Train the citizens to think and understand difficult complex compromises of pollution and energy. NPR always urges their audience to act up, speak up, and tell of their concerns. Notice they never tell them to educate themselves and do so within less biases media or learn the other side. They only jack up constituency to rage. They often retell and dress up old atrocities as told by the winning class action lawyers to the dreamy gleam of audience whom all full of self righteous indignation of evil business making profits. Much of this huffing and puffing just to gain power and game political control. It’s a dangerous play to intelligent decision making. Most of the story goes untold as it doesn’t serve their purpose. Some of this could be stopped per legislation to make them accountable for damages when playing games. Another good reason why government sponsored media is bad. Their is a long history of corruption when free easy government money is employed. Government and unions shouldn’t have the influence they currently have upon education systems. It will always be corrupted by those whom attempting power. These efforts seem to dissipate when hard earned money employed. Consumers won’t put up with the foolishness as they walk to better quality.

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