Tomgram: Michael Klare, Will the Keystone XL Pipeline Go
Down?
[…]
Extracting and processing tar sands is an extraordinarily
expensive undertaking, far more so than most conventional oil drilling
operations. Considerable energy is needed to dig the sludge out of the ground
or heat the water into steam for underground injection; then, additional energy
is needed for the various upgrading processes. The environmental
risks involved are enormous (even leaving aside the vast amounts of
greenhouse gases that the whole process will pump into the atmosphere). The
massive quantities of water needed for SAGD and those upgrading processes, for
example, become contaminated with toxic substances. Once used,
they cannot be returned to any water source that might end up in human drinking
supplies -- something environmentalists say is already occurring. All of this and the
expenses involved mean that the multibillion-dollar investments needed to
launch a tar-sands operation can only pay off if the final product fetches a
healthy price in the marketplace.
And that’s where geography enters the picture. Alberta
is theoretically capable of producing five to six million barrels of
tar-sands oil per day. In 2011, however, Canada itself consumed only
2.3 million barrels of oil per day, much of it supplied by conventional (and
cheaper) oil from fields in Saskatchewan and Newfoundland. That number is
not expected to rise appreciably in the foreseeable future. No less
significant, Canada’s refining capacity for all kinds of oil is limited to 1.9
million barrels per day, and few of its refineries are equipped to process tar
sands-style heavy crude. This leaves the producers with one strategic option:
exporting the stuff.
And that’s where the problems really begin. Alberta is an
interior province and so cannot export its crude by sea. Given the geography,
this leaves only three export options: pipelines heading east across Canada to
ports on the Atlantic, pipelines heading west across the Rockies to ports in
British Columbia, or pipelines heading south to refineries in the United States.
Alberta’s preferred option is to send the preponderance of
its tar-sands oil to its biggest natural market, the United States. At present,
Canadian pipeline companies do operate a number of
conduits that deliver some of this oil to the U.S., notably the
original Keystone conduit extending from Hardisty, Alberta, to Illinois and
then southward to Cushing, Oklahoma. But these lines can carry less than one
million barrels of crude per day, and so will not permit the massive expansion
of output the industry is planning for the next decade or so.
In other words, the only pipeline now under
development that would significantly expand Albertan tar-sands exports is
Keystone XL. It is vitally important to the tar-sands producers because
it offers the sole short-term -- or possibly even long-term -- option for the
export and sale of the crude output now coming on line at dozens of projects
being developed across northern Alberta. Without it, these projects will languish and Albertan production will have to be sold
at a deep discount -- at, that is, a per-barrel price that could fall below
production costs, making further investment in tar sands unattractive. In
January, Canadian tar-sands oil was already selling for $30-$40 less than West Texas Intermediate
(WTI), the standard U.S. blend.
The Pipelines That Weren’t
Like an army bottled up geographically and increasingly at
the mercy of enemy forces, the tar-sands producers see the completion of
Keystone XL as their sole realistic escape route to survival. “Our
biggest problem is that Alberta is landlocked,” the province’s finance
minister Doug Horner said in January. “In fact, of the world’s major
oil-producing jurisdictions, Alberta is the only one with no direct access to
the ocean. And until we solve this problem... the [price] differential will
remain large.”
Logistics, geography, and finally timing. A presidential
stamp of approval on the building of Keystone XL will save the tar-sands
industry, ensuring them enough return to justify their massive investments. It
would also undoubtedly prompt additional investments in tar-sands projects and
further production increases by an industry that assumed opposition to future
pipelines had been weakened by this victory.
A presidential thumbs-down and resulting failure to build
Keystone XL, however, could have lasting and severe consequences for tar-sands
production. After all, no other export link is likely to be completed in the
near-term. The other three most widely discussed options -- the Northern Gateway pipeline to Kitimat,
British Columbia, an expansion of the existing Trans Mountain pipeline to
Vancouver, British Columbia, and a plan to use existing, conventional-oil
conduits to carry tar-sands oil across Quebec, Vermont, and New Hampshire to
Portland, Maine -- already face intense opposition, with initial construction
at best still years in the future.
The Northern Gateway project, proposed by Canadian pipeline
company Enbridge, would stretch from Bruderheim in northern Alberta to Kitimat,
a port on Charlotte Sound and the Pacific. If completed, it would allow
the export of tar-sands oil to Asia, where Canadian Prime Minister Stephen
Harper sees a significant future market (even though few
Asian refineries could now process the stuff). But unlike oil-friendly
Alberta, British Columbia has a strong pro-environmental bias and many senior
provincial officials have expressed fierce opposition to the project. Moreover, under the
country’s constitution, native peoples over whose land the pipeline would have
to travel must be consulted on the project -- and most tribal communities are adamantly
opposed to its construction.
Another proposed conduit -- an expansion of the existing
Trans Mountain pipeline from Edmonton to Vancouver -- presents the same set of
obstacles and, like the Northern Gateway project, has aroused strong opposition in Vancouver.
This leaves the third option, a plan to pump tar-sands oil
to Ontario and Quebec and then employ an existing pipeline now used for oil
imports. It connects to a terminal in Casco Bay, near Portland, Maine, where
the Albertan crude would begin the long trip by ship to those refineries on the
Gulf Coast. Although no official action has yet been taken to allow the use of
the U.S. conduit for this purpose, anti-pipeline protests have already erupted
in Portland, including one on January 26th that attracted more than 1,400 people.
With no other pipelines in the offing, tar sands producers
are increasing their reliance on deliveries by rail.
This is producing boom times for some long-haul freight carriers, but
will never prove sufficient to move the millions of barrels in added daily
output expected from projects now coming on line.
The conclusion is obvious: without Keystone XL, the price of
tar-sands oil will remain substantially lower than conventional oil (as well as
unconventional oil extracted from shale formations in the United States),
discouraging future investment and dimming the prospects for increased
output. In other words, as Bill McKibben hopes, much of it will stay in
the ground.
Industry officials are painfully aware of their predicament.
In an Annual Information Form released at the end of 2011, Canadian Oil Sands
Limited, owner of the largest share of Syncrude Canada (one of the leading
producers of tar-sands oil) noted:
“A prolonged period of low crude oil prices could affect the
value of our crude oil properties and the level of spending on growth projects
and could result in curtailment of production... Any substantial and extended
decline in the price of oil or an extended negative differential for SCO
compared to either WTI or European Brent Crude would have an adverse effect on
the revenues, profitability, and cash flow of Canadian Oil Sands and likely
affect the ability of Canadian Oil Sands to pay dividends and repay its debt
obligations.”
The stakes in this battle could not be higher. If
Keystone XL fails to win the president’s approval, the industry will certainly
grow at a far slower pace than forecast and possibly witness the failure of
costly ventures, resulting in an industry-wide contraction. If approved,
however, production will soar and global warming will occur at an even faster
rate than previously projected. In this way, a presidential decision will have
an unexpectedly decisive and lasting impact on all our lives.
