Has Keystone XL Become Obsolete?

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By Irina Slav, a writer with the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry. Originally published at OilPrice

Keystone XL may have become obsolete before it was even built, at least according to some sources close to TransCanada, which has gone on a hunt for clients. A Wall Street Journal analysis quotes these sources as saying Canadian producers and U.S. refiners are just not interested in the pipeline that is supposed to carry 830,000 barrels daily of Alberta heavy crude to Gulf Coast and Midwest refineries.

This lack of interest seems to be driven by TransCanada’s quest for long-term commitments, with producers and refiners seemingly unwilling to make such commitments in the current price environment. Also, according to the WSJ, Canadian crude comes at a higher cost than alternative heavy crude blends, which is contributing to the lack of enthusiasm for long-term commitments. That is likely to change over the long term, however, when declining imports from Mexico and Venezuela will benefit Canadian crude.

The company behind the project itself seems upbeat. Already having spent US$3 billion on the project and planning to spend another US$5 billion before it is completed, TransCanada remains confident that it will find enough customers to fill Keystone XL at 90 percent of capacity over the next few months.

For the time being, producers and refiners are moving the oil by rail – a much more expensive and riskier option than pipelines. According to the WSJ sources, companies are opting for railway transportation, even with the added expense, because it does not require long-term commitments. It’s not an easy choice; railway rates for a barrel of oil are two to three times higher than pipelines, Bloomberg notes. This is an additional burden on already strained budgets.

Oilprice wrote last month about a looming pipeline capacity crisis in North America, which is likely to result in an increase in railway oil shipments. If Goldman Sachs is any indicator, railways have a bright future as an alternative to pipelines, although its long-term sustainability at current oil prices is questionable.

TransCanada is ready to start the construction of Keystone XL in 2018, with hopes of completing it by 2020. By then, Canadian crude production will have increased thanks to investments that were made over the last couple of years despite the price crash. U.S. shale production is also widely expected to continue rising, although doubts are starting to emerge that if prices remain subdued, this, too, can change.

What is unlikely to change, though, is U.S. Gulf Coast refineries’ need for a combination of light and heavy crudes to operate. Canadian crude may not be their only choice, but as producers north of the border focus on bringing down production costs just as much as their peers south of the border, it may become more competitive.

Keystone XL still needs the green light from Nebraska before construction begins. The state’s Public Service Commission held a public hearing on the project last month, saying it would make its final decision by November 23 at the latest. There is a lot of opposition against any pipeline projects in general, and against Keystone XL specifically, so the commissions’ decision is not yet a done deal. If it decides against the project, Canadian producers, which next year are seen to extract 4.2 million bpd in Western Canada, will find themselves in a tighter spot: the pipelines servicing the oil-rich region only have a capacity of 3.3 million bpd.

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23 comments

  1. divadab

    NO worries the war machine is stomping around other oil-producing areas and soon enough will cripple supply sufficient to raise prices, as it did with the invasion of Iraq.

    Reply
  2. Kenneth Gallaher

    The shale crude that pipe is supposed to carry is not economic.
    End of story.
    That shale will stay in the ground.

    Reply
    1. Ken

      It is not shale crude. It is diluted bitumen (dilbit) from the tar sands of Alberta. Think of bitumen as gooey coal. Dilute the bitumen with natural gas liquids or other solvent and deliver it to the very few refineries equipped to handle this glop. The Texas refineries that refine the very heavy crude oil from Venezuela are some of the few equipped to refine the Alberta dilbit. The price of Western Canadian Select crude oil, which contains the Alberta dilbit, can be $10 per barrel (42 gallons) lower than the benchmark West Texas Intermediate crude oil due to its lower quality.

      Crude oil from fracking shale is higher quality and not bound for the KXL pipeline.

      Reply
  3. jfleni

    Its a fact not, welcomed by the grease monkeys and plutocrat monkeys, that oil everyhere is well on its way to becoming perilously stranded asset. And all the incantation and hope and “bidness” propaganda cannot change this.

    Its time now for the natives in ND and the thousands of pipeline opponents elsewhere to proclaim the truth: Dumb as rocks “bidness” grease monkeys are going to lose, lose, and lose and that’s the plain truth! Rub it in, and maybe things will start to change.

    Reply
    1. Dots

      I hope you’re right that fossil fuels will b replaced, or that cleaner fossil fuels will substitute for dirtier fossil fuels, but in my homes in the developed and developing worlds I see people buying bigger and bigger cars. maybe new big cars r more efficient than previous big cars, but they r also more numerous

      electric cars r a tiny fraction of the total auto fleet, so far. I fear there is a lot of turnover still to come before these underground assets can b ignored

      large, serious actors such as nation states, public biznesses, and private biznesses r still choosing to invest lots of money in fossil fuel prospects. I am not smarter than them

      Reply
  4. EoinW

    The pathetic thing is that Canada needs to ship its oil to the gulf coast. That’s because Canada has no refineries of its own. Oil is the cornerstone of the Canadian economy yet Canada doesn’t even try to control its most important commodity. Once a colony, always a colony.

    Reply
    1. Jack

      Canada does have refineries, 19 of them. In fact Canada refines more annually than they consume. There are other reasons why no new refineries have been built there. See this article in the HuffPo.

      Reply
        1. JTMcPhee

          Works good for ISIS and other fun groups who pump petroleum by “right of conquest…” And of course Israeli and Turkish “businessmen” are happy to intermediate, for a leetle unterkoyfn…

          Reply
              1. John k

                Isis has many partners, not least us…
                if isis didn’t exist the Mic would have to invent it… or create it… or invent some other enemy… or both.

                Reply
  5. Larry

    So it would seem that demand is just fine for the project, but refiners don’t want the contracts due to price fluctuations. This must be about finding a happy medium for all parties and there would appear to be ample time for that.

    Reply
  6. Eugene

    Curious, if all the pipes for the project have been stacked in rows upon rows all these years, subject to the heat & cold of the many seasons, will those same pipes still retain their shape, or will they be useless and have to be replaced?

    Reply
    1. Synoia

      They do not deform, they may rust, but if protected from rusting, usable.

      Corrosion is the enemy of pipes and pipelines.

      Reply
      1. JTMcPhee

        …and explosives, and rifle bullets, and RPG rounds, and hackers, and desperate people who can’t afford the fuel in those pipelines run roughshod over the landscape, people whose rulers have sold the “legal right and title” to their national extractables to supranational looters, for a song and sixpence and a couple of million in an offshore bank…

        Don’t forget bad welds, and low bid valves and pumps, and minimal maintenance. I’m sure that is scarcely an exhaustive list, though.

        Reply
  7. Altandmain

    The issue is that should oil prices go back above say, $100 USD, this project would be far from obsolete.

    There would be lots of demand for it, along with Alberta tar sands oil. That’s the sad reality about the situation.

    Reply
  8. john bougearel

    I believe the CEO of TransCanada is on record for stating something to the effect that the industry most always overbuilds infrastructure. And that is well understood within the industry.

    Reply
  9. Synoia

    What is unlikely to change, though, is U.S. Gulf Coast refineries’ need for a combination of light and heavy crudes to operate. Canadian crude may not be their only choice, but as producers north of the border focus on bringing down production costs just as much as their peers south of the border, it may become more competitive.

    Not that easy. Refineries require work to switch between types of crude. A refinery is “tuned” for a specific crude, and “tuned more” for a specific set of products produced.

    Changes of supply and demand require work.

    Reply
  10. John k

    Venezuela has unlimited amount of heavy crude, will always be cheaper than tar sands, just needs stable and rational gov, might happen sooner than pipeline.

    Reply
    1. Blennylips

      …unlimited amount … will always…

      “Anyone who believes in indefinite growth in anything physical, on a physically finite planet, is either mad or an economist.”

      ― Kenneth E. Boulding

      “They got a lot of heavy crude …”

      A valid point. No need to exaggerate or fantasize.

      Reply
  11. christine

    What Venezuela needs is for the US not to be trying to destabilize it so we can take over the oil. See this issues London Review of Books piece on this https://www.lrb.co.uk/v39/n13/greg-grandin/down-from-the-mountain. We just will not allow socialist govts to exist if we can possibly destroy them, through right wing coups, controlling elections…wars…whatever. Clip from article:
    “Chávez also resurrected mechanisms by which Venezuela could distribute oil to poor countries while remaining faithful to Opec’s quotas and prices. These included the creation of a credit and barter system and the extension of long-term, extremely low-interest loans to finance the purchase of oil. Within a year of its founding in mid-2005, Petrocaribe, one of the organisations set up to administer this system, had extended a billion dollars in financing, matching the loans offered by the Washington-based Inter-American Development Bank. Chávez’s repoliticisation of oil caused fury in the US: it was a relic of a world that US neoconservatives and neoliberals alike thought they had left behind with the end of the Cold War. The administrations of both George W. Bush and Barack Obama pressured countries not to enter into deals with Petrocaribe. In 2006, for instance, the State Department lobbied Haiti not to take a 25-year line of credit, financed at 1 per cent interest, to buy Venezuelan diesel and unleaded fuel, even though, as the US embassy in Port-au-Prince acknowledged, the deal would save Haiti a hundred million dollars a year and protect its vulnerable economy from spikes in energy cost. At one point, Venezuela was even sending fuel aid to the Bronx and Boston.”

    Reply

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