Keystone XL Pipeline in Changing Times

Canada's decisions will be market driven no matter what US decides

With the turn in the US election the Keystone Pipeline is back on the agenda for the start of the next Congressional session in January 2015.  Unfortunately the economics that drove this process when it was first announced have changed dramatically.  The Canadian Government after extreme frustration without passing Keystone earlier has explored other routes.  Most of the pipeline has been or will be built and operated in any case. It will, or could support the development of US oil and natural gas resources in the north central region. The only issue is whether Keystone XL will connect to Canada, providing a more efficient means to transport oil sands product to US Gulf refineries. US laws prevent US refineries from processing oil for export, but says nothing about Canadian Oil.  So 100% of Canadian oil will be for export.


First, Canada investigated creating a pipeline westward to sell oil in the Asian markets.  A portion of the pipeline needed to pass through the lands owned by the First nations.  This became too formidable to overcome thus an exploration to the east.  Announced right before the US elections is a new pipeline that runs the from the tar sands to Montreal and to St. John, New Brunswick. The oil will be processed in Montreal and St. John for international markets.  One interesting point is that St. John is the closest port to India in North America and India has agreed to receive this oil. 


It also is worth noticing that Enbridge, a Canadian firm, has built and is operating a pipeline delivering petroleum from the US Bakken Shale region to refineries in Canada -- without opposition or any real controversy from either the US or Canada.


So in the short term, Keystone will assist moving oil from the tar sands to the international market.  Questions remain at what volume Keystone will operate over the long term.  Canada will no longer beholden to the US to refine and ship oil globally.  Canada will have the capacity to ship oil from the tar sands to a Canadian refinery and reach global markets cost efficiently. 


One common argument is that increasing supplies of Canadian oil would reduce U.S. dependence on potentially unstable and unreliable sources such as Venezuela, Saudi Arabia, and Nigeria. A recent advertising campaign challenges this conclusion, arguing that the pipeline would simply provide a way to deliver heavy Canadian crude to Gulf Coast refineries for processing and export to foreign markets, notably China. United States is already a net exporter of petroleum products such as gasoline, diesel, and jet fuel. The transition from net importer to net exporter took place two years ago, resulting from competitive cost advantages enjoyed by refiners benefiting from increased supplies of U.S. crude oil and inexpensive domestic sources of natural gas. Delivery of Canadian crude to the Gulf Coast would make at most a modest contribution to the trend already under way.


The economics of tar sand oil development will likely have more impact than Keystone XL or other pipelines. Michael McElroy’ Harvard Magazine article stated “Like other energy sources, its profitability is a function of revenues minus expenses. Tar sands are costly to extract and process, and are not profitable unless oil prices are above about $100 per barrel. The EROEI, or "energy return on energy invested" for tar sands is very low, reportedly in the range of 5:1, much lower than deepwater oil (about 15:1), and much lower than US wind energy (close to 30:1). In general, oil extraction is costing more and more each year to harvest smaller amounts of lower quality fuel.” Economics play a huge role in the decisions about what to extract and what to leave in the ground.


This price of production is a very disputable number.  Five years ago producers were saying $50 or $60 a barrel was enough to make money.  This past week two other processes to extract oil from the tar sands in the US were announced at $3 or $4 a barrel.  So the cost of extraction is ever changing. 


The approval (or not) of the Keystone XL pipeline has much has to do with symbolic special interests’ political power. If there is economic need for the oil, it and other transport will happen. Once Canadian figured out a way to build its own line, it will do so no matter what the cost to control the supply chain and not be beholden to the US.  With Keystone you will end up with three routes for oil to leave the tar sands, putting pressure on transportation costs to be competitive. In the short term...


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