The Keystone Pipeline Dilemma

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TransCanada Corp (the Alberta-based company that builds, owns, and operates Keystone XL pipeline project) aims to link the Canadian heavy oil sands to refineries on the Gulf Coast in United States. According to Canadian Association of Petroleum Producers, Canada has the third largest oil reserves total with 174 billion barrels (behind Venezuela and Saudi Arabia), while the oil sands in Alberta, Saskatchewan, and offshore by Newfoundland and Labrador compose more than 96 % of this Canadian resource (CAPP). Although building the Keystone pipeline reduces America’s dependence on oil from the Middle East and other countries, environmental groups seem to oppose the project. Nevertheless, there are forces behind the Keystone project that make it contentious.

The Keystone Status

Originally planned to cover 1,179-mile (1,897 km) with 36-inch-diameter crude oil pipeline that began in Hardisty, Alberta, and extended south to Steele City, Nebraska, the Keystone XL pipeline has since undergone multiple expansions (TransCanada). The southern Keystone XL section is expected to be finished by the end October 2013 and the middle portion has already been completed. The northernmost portion, originating at Cushing, as well as the addition of a terminal at Cushing, still remained to be completed. The Gulf Coast pipeline to Nederland (Texas) from Cushing (Oklahoma), aims to speed the flow of crude out of Cushing, the delivery point for West Texas Intermediate futures traded on the New York Mercantile Exchange (NYMEX).

Keystone XL Pipeline
Figure 1: Keystone Pipeline Project Route Map. Source: Keystone Pipeline.

It has been more than five years that TransCanada applied for the permit while U.S. has been dragging its feet to approve the latter section as president Obama is not expected to decide on Keystone XL review until next year (Reuters). Environmental concerns are at the heart of this review.

While Obama has received intense lobbying from environmental groups against the Keystone pipeline, he stated that the net effects of the pipeline’s impact on the climate are critical to OK the project (IBTimes).

Tar Sands Oil and Greenhouse Gas Concerns

The prominent environmental issue is whether the net change in emissions resulting from the production enhancement, distribution, refining, and final consumption of the tar sands product would affect the climate significantly or not.

According to a recent Congressional Research Service report by Richard K. Lattanzio, greenhouse gases (GHG) associated with Canadian oil sands would be 14-20% higher than a weighted average of transportation fuels now sold or distributed in U.S. on a per unit of fuel consumed basis. While compared to other imported oils, Canadian oil sands crudes are 9-19% more emission-intensive than Middle Eastern Sour, 5-13 % more emission-intensive than Mexican Maya, and 2-18 % more emission-intensive than various Venezuelan crudes. Assuming that the Keystone pipeline would operate at the maximum capacity of 830,000 bpd to deliver to refineries on the Gulf Coast, Lattanzio concluded that an increase of 0.06 to 0.3% in total annual GHG emissions will be accounted for the U.S. (Harvard Magazine). The increase of 0.06 to 0.3% in annual GHG emission maybe eye-catching, but is “hardly game-changing,” according to Harvard Magazine.

The Opposing View

Since the Keystone pipeline has become one of the most controversial topics in recent U.S.-Canada relations, proponents of the project would use every opportunity to emphasize what’s really at stake. T. Boone Pickens, billionaire energy entrepreneur, goes as far as claiming the pipeline from Canada to the U.S. would make “OPEC obsolete” (CNBC). In an interview with CNBC, he reiterates his view by saying Canada is sitting on the same oil reserve as Saudi Arabia, while the Canadian oil could be available to U.S. without the hassle of shepherding a cartel daily through the Strait of Hormuz to get only 10% of that shipment at the end of the day in U.S. Also, supporters of the Keystone, like Pickens, believe that the pipeline would enhance access to Canadian oil, significantly increasing North American energy security.

Canadian Oil Prices

Considered to be to the most prevalent Canadian oil benchmark, Western Canadian Select (WCS) is a blend of conventional oil, bitumen, and synthetics. WCS is heavier and more difficult to process than both WTI and Brent; thus, it is priced lower than the two benchmarks due to a higher refining as well as transportation costs.  While WTI and WCS tend to move in the same direction, WCS has been traded at a discount to WTI. According to a report published by TD in March 2013, the spread between WTI and WCS is expected to stay around the $23 per barrel range through December 2015 (BNN). The historical comparison of the NYMEX WCS vs. WTI Futures is seen in Figure 2 below:

NYMEX Futures WTI vs. WCS
Figure 2. WCS vs WTI Futures Comparison. Data Source: NYMEX.

Final Phase                                          

President Obama is facing a dilemma to approve construction of the final phase as approval would undoubtedly draw some criticisms from environmentalist groups. To make matters more complicated, Canadian Prime Minister Stephen Harper expressed his firm standing on the topic by saying Canada does not “take no for an answer” on the project (IBTimes). According to International Business Times, Harper continued to say even if the project gets rejected, “that won’t be final until it’s approved and we will keep pushing forward.” Harsh words from Stephen Harper like this show what an important topic the Keystone project is in U.S.-Canada relationship.

If Canadian oil were not delivered by the Keystone pipeline to U.S. refineries, it would probably be transported by truck and train in the short-term, which are both conventionally more carbon-intensive means of transport.

Canadian oil could find its way to Asia if the Keystone is not approved soon, but there are sound economic and security reasons for U.S. to encourage development of the Canadian resource.

Going forward, a more balanced approach may be needed to solve the challenge. Regarding the Keystone project, Michael B. McElroy, Harvard’s Gilbert Butler professor of environmental studies, recommends the approval of the Keystone XL project if it is subject to conditions (Harvard Magazine). He believes commitments by Canadian authorities to reduce the GHG footprint, along with the initiatives already announced by the U.S. president to reduce national emissions, are sufficient to minimize environmental damage from the Keystone XL pipeline.

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