Is Keystone Still Viable Amid Low Oil Prices?

Yves here. Keystone illustrates the kabuki that passes for politics on the so-called left. In terms of climate change issues, it’s small beer, diverting resources and attention away from much bigger issues, like the environmental damage done by fracking and the need for much more aggressive energy conservation policies. Thus by virtue of having a small number of potential beneficiaries in economic terms from the project, it’s a group that Democrats could safely afford to alienate while throwing a bone to their base. The irony, as this post points out, is that the fracas may prove to be irrelevant now that oil prices have fallen so dramatically.

By Andrew Topf, a business journalist and mining reporter, with expertise in the oilfield services and heavy construction industries. Follow him on Twitter @astopf. Originally published at OilPrice

On Monday the Keystone XL pipeline project crossed another hurdle when legislation approving construction of the proposed line to connect Canadian oil sands crude with Gulf Coast refineries was passed by the United States Senate.

The bill sailed through 63 votes to 32 in the Senate, which is now in the hands of the Republicans following November mid-term elections, along with the House of Representatives, which passed the same Keystone legislation last week.

With the bill well on its way to becoming law, it will up to President Obama to decide on whether or not to veto it, a decision he has held off for six years. Obama has criticized the project as adding to greenhouse gas emissions, despite an environmental assessment to the contrary by the State Department released a year ago, and because he argues it would help Canadian producers to deliver crude for export, against the claims of the proponent, TransCanada Corp, which maintains the oil will be processed in US refineries and consumed domestically.

While the political machinations of Keystone, with all the horse trading it inevitably entails, certainly make for some excellent headlines, an equally pressing question is whether the project is even viable with today’s oil prices, which dropped further on Monday to below $46 a barrel in North America.

The rationale for Keystone was a way to bring together booming US oil production, and to a lesser extent, production from the oil sands in Northern Alberta, to Gulf Coast refineries that were facing declining imports from Mexico and Venezuela. The project was first proposed in 2008 and was supposed to begin carrying 830,000 barrels a day in 2012.

But the market didn’t wait for the pipeline to be built, and landlocked Canadian crude has found its way to Texas and Louisiana refineries by rail instead. Canadian oil exports by rail tripled to a record 182,000 barrels a day in the third quarter, according to Canada’s National Energy Board. The United States has also been importing Canadian oil like gangbusters, showing that the trade will happen with or without the pipeline extension (Keystone XL is an addition to the existing pipeline). Data from the US Energy Department showed US imports of Canadian crude reached a record 3.1 million barrels a day in September.

So with some of the project’s goals already being met, in terms of increased production flowing from Canada to the US, the question has become, why is a pipeline needed anymore? And now, with the oil price down more than 50 percent since June, Canadian production is certain to fall, lessening demand for oil transportation and thus casting doubt on the economics of the project according to observers.

“Right now with oil prices down and a glut of oil on the global marketplace, the answer is no, we don’t need Keystone right now,” Phil Flynn, senior market analyst at the Price Futures Group in Chicago, told a reporter from the San Luis Obispo Tribune last week.

Some are predicting low oil prices could delay the project even if Obama passes it, or it could be shelved altogether.

Chris Lafakis, an energy economist for Moody’s Analytics, equated the situation with Keystone to an earlier proposal to build a natural-gas pipeline from Alaska to the Midwest. Despite being approved by then-Governor Sarah Palin, the pipeline was never built due to new gas supplies which pushed prices down by two-thirds. “If oil were to stay as cheap as it is right now, you might very well get that Palin pipeline scenario,” Lafakis said.

Ironically, the low oil price could also be used as a justification by Obama to cancel Keystone, according to a low-price scenario envisioned by the State Department when it made the determination that constructing the pipeline wouldn’t increase GHG emissions.

As reported by the Globe and Mail, in its analysis the State Department concluded that with prices above $90 a barrel, approval of the pipeline wouldn’t affect oil sands production because the oil would find its way to market anyway through more expensive means i.e. rail.

However with a lower oil price, the State Department concluded that the project would be more attractive to producers (about $8 per barrel less than by rail), leading them to boost production and thus increase emissions:

“Oil sands production is expected to be most sensitive to increased transport costs in a range of prices around $65 to $75 per barrel,” it said. “Assuming prices fell in this range, higher transportation costs could have a substantial impact on oil sands production levels … Prices below this range would challenge the supply costs of many projects, regardless of pipeline constraints, but higher transport costs could further curtail production.”

For its part, the company behind the pipeline, TransCanada, refuses to yield on its rationale for the pipeline. CEO Russ Girling told the Globe and Mail that lower crude prices make the project more attractive to producers both in Canada and the US, who are looking for the most cost-effective way to transport oil to refineries.

Further, Girling pointed out that low prices haven’t reduced the need for the pipeline either. “On the contrary, TransCanada has 100 per cent of its original contracts still in place and producers are keen to reduce their transportation costs in order to increase per-barrel revenue, or netback,” the Globe reported on Sunday.

It would certainly be ironic if after six years of delay, rhetoric and political maneuvering, what really kills Keystone XL is the oil price, not Obama nor the environmental movement that has lobbied so hard against the project.

Whether or not the pipeline is passed by the White House, it appears that the economics of Keystone XL are just as muddy as its politics.

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33 comments

    1. different clue

      Keystone “oil” pipeline is a diversionary disnomer. It isn’t oil that would move through the pipeline. It is thick tar . . . diluted with enough of the super-carcinogenic chemical benzene to become a liquid mixture and flow like oil. At the receiving end they take back out the benzene ( what hasn’t leaked or vaporized off before receiving)
      and then refine the tar.

      So if/when the pipeline ruptures/leaks under the impact of nasty corrosive benzene-tar, all that super cancer juice (benzene) will flow and blow all around, and the de-benzenated tar will set back up stiff and semi-solid. So it will indeed cause some major environmental and health problems if/when it ruptures/leaks. Plus all the destruction to farmland, watersheds, crossed waterways, etc. in the meantime.

      So if they build it, it would be one more among a thousand cuts which we expect to die by.

  1. PlutoKun

    My understanding is that the reason the oil industry is so keen on Keystone is precisely because it is needed to keep tight oil (i.e. fracked oil) viable. Oil refineries can’t take any crude – they are tuned for specific grades. Tight oil is very light (it couldn’t be extracted through fracking otherwise). It can only be refined in existing Gulf Coast refineries by mixing it with heavier grades – i.e. Canadian oil. So higher costs for the latter results in higher costs for refined gasolines from North Dakota tight oil.

    The two are linked together, so I believe campaigners are quite correct to see preventing keystone as a key tactic in undermining the oil industries attempts to expand.

    1. John Zelnicker

      A number of Gulf Coast refineries are tuned (good concept) for the heavy crude that has been coming in from Venezuela. And, no surprise, some of them are owned by the Kochs. With Venezuelan oil imports declining they need more stock to keep the refineries running.

      1. PlutoKun

        I’ve always loved the irony that the Koch’s played such an important role in keeping Venezuela’s economy going. They always kept that quiet.

        I suspect that displacing Venezuelan heavy crude is one of the key motivations behind Keystone XL. Whether they anticipated that Venezuelan exports would decline (as they have), or whether the oil industry wanted to play Canada against Venezuela seems less clear. Either way, all this seems just one more unintended consequence of the huge expansion of tight oil production – and most likely it will be yet another casualty of its now seemingly inevitable collapse.

  2. rjs

     as we pointed out in November, the Canadian Energy Research Institute estimated that oil-sands projects need a price of $85 a barrel to be profitable in the current cheapest (in situ) method, and that new mines will require $105 a barrel oil to be profitable; other estimates of costs for tar sand extraction are similar…terminal prices for West Canada Select (heavy) crude oil were below $35 per barrel all last week, and Canadian projects are shutting down even faster than those in the US, and some of that started even before prices fell; Norwegian oil giant Statoil pulled out of their tar sands project in September…in the past year, Shell, the French oil giant Total, and SunCor of Canada all cancelled their tar sands projects…even China’s CNPC International pulled out of the oil sands and withdrew its support for Enbridge’s Gateway project to deliver tar sands oil to the west coast…Suncor, single largest tar-sands producer, just announced Tuesday they’re cutting 1000 jobs….and with current tar sands production already flowing into the US through the Alberta Clipper pipeline to Wisconsin and the Flanigan South pipeline through Illinois & points south, there may not be enough tar sands output to justify construction of another redundant pipeline…so if approval of the pipeline from the US is forthcoming, and there is no tar sands oil to be shipped, it now seems quite likely that TransCanada would either delay or cancel the Keystone XL project altogether…

    1. grizziz

      The problem is forked at do we or don’t we use the tar sand oil (TSO). If we don’t, then no XL. If we do then the TSO goes through a complicated distribution network with many price signals on its way to final burning. A single price signal, say West Canada Select, might satisfy a NY trader on the future pricing of a TransCanada bond issue, but not likely to change the capital budget of TransCanada or affect the will of the TransCanada board and its bankers.TransCanada is going to compete for the movement of the existing 2 million barrels per day of production against trains and trucks. Owners of capital loathe to see it sit idly, especially if its burdened by debt.
      That said, a utilitarian argument regarding the overall safety in the distribution of this icky substance might be in order. I’m going to guess here that moving TSO is safer and uses less total energy that trains or trucks. If that is the case, then killing the XL and then letting another capital project in the form of more train and truck infrastructure grow would be a mistake. These smaller train and truck projects would grow under a diffuse media eye which may garner local opposition, but not have the national profile of the XL. Killing the XL might be a pyrrhic victory for long suffering national environmental organizations and might get Obama a bit of green cred for a man whose presidential stature is equal to Buchanan. Still it is doubtful that killing the XL will lower the rate of CO2 emissions into the atmosphere absent a prohibition or draconian price on the TSO.

      1. different clue

        But killing Keystone WILL remove that particular risk of massive benzene/tar pollution of the Oglalla Aquifer and high-quality farmland, plus whatever surface water a vast pulse of Keystone benzene/tar would enter if it ruptures near a surface waterway. So killing Keystone will at least kill that extra added special Keystone-specific pollution risk.

        1. grizziz

          No doubt that the XL sucks if you are in agriculture or ranching in Montana, South Dakota or Nebraska.

          1. different clue

            Or if you eat food that comes from Montana, South Dakota or Nebraska. Or if you are downstream or downplume from any natural waterfeature that may get filled with tar and benzene when Keystone rupturesplodes.

            But strictly limiting our consideration to carbon skydumping, you are entirely correct. Carbon skydumping will carry on, with or without Keystone.

            Still, those other reasons seem good enough reasons to kill it, if indeed it can be made to die.

            1. FrY10cK

              With all the reading I do on petroleum issues, I can’t believe this is the first I’ve read about Keystone TSO being diluted with benzene.

              This info really needs to get out to the TV watching public.

              1. different clue

                Here in America the Mediasphere is bifurcated, or bi-layered . . . if one wills. The CFP MSM is controlled one way or another to deliver “All The News That Fits”. Then there is a whole asteroid belt of obscure little specialty media outlets where one learns all kinds of facts. I suppose the MSM GoverDustrial Complex thinkers feel that their target audience will never find its way to the obscure little journals and niche magazines.

                Anyway, here are a couple links on “dilbit” (“diluted bitumen”).
                http://en.wikipedia.org/wiki/Dilbit

                http://insideclimatenews.org/news/20120626/dilbit-primer-diluted-bitumen-conventional-oil-tar-sands-Alberta-Kalamazoo-Keystone-XL-Enbridge

                http://www.api.org/oil-and-natural-gas-overview/exploration-and-production/oil-sands/diluted-bitumen

              2. different clue

                It will never be allowed to reach the the broadcast TV watching public or the Cable TV watching public. How EV er . . . it could be made to reach the You Tube watching public, which is millions of people right there. All it needs is for some media-skilled people to make a You Tube about it which is so compellingly worth watching that it gets viralized to millions of people. And slap it up on You Tube.

                1. FrY10cK

                  Dilbit!

                  Now the picture is coming into focus. The word is common in my reading. No wonder nobody wants to speak the details.

                  Thanks for the links. I’ll spread them around.

      2. Stelios Theoharidis

        This might be kabuki theater on the part of politicians but in the case of TransCanada it seems like they may be playing the long game. I really don’t see why they would give up at this point. They have clearly made the up front investment into getting the approval they might as well see approval to the end regardless of whether they are going to put the pipeline into play now or sometime in the future. It might even look positively on their books if they have a turnkey project with approval to sell down the line. I am not exactly certain how long their right to pursue this project lasts. We might have low prices for a few years due to poor demand and production. I hope by that time renewables are even more competitive than they are presently. But, if they aren’t or the demand is there in a five or ten year horizon then they will probably have interest in constructing this pipeline.

  3. PeppermintPanda

    If you think oil prices will stay this low for years, I have ocean front property in Alberta to sell you. By the time the pipeline is finished, oil prices are likely going to be in the $100/barrel range again, and the US will need the pipeline.

    Remember, the regimes that control OPEC nations need high oil prices to retain power; and eventually they will have to cut production.

    1. Yves Smith Post author

      The Saudis have sovereign wealth funds that will carry them at least three years, plus unused borrowing capacity.

      I doubt the shale industry can hold out that long.

      1. different clue

        Unless it successfully convinces Congress and President Whomever to keep giving it enough money to stay alive, on the field of petro-battle, pumping, and drilling drilling drilling. It would be sold as a matter of national security.

  4. MartyH

    Keystone has nothing to do with what the oil market wants or even the biggest Energy-Sector players. It’s some Squillionaire’s private project and they will project their will on the Nation and the face of the earth to prove some irrelevant point … to someone … if only that they can “make it happen.”

    1. Left in Wisconsin

      See the link from rjs above: “the Alberta Clipper pipeline to Wisconsin”. Also, here is an update from my local paper:
      http://host.madison.com/wsj/news/local/environment/enbridge-pipeline-expansion-larger-than-keystone-drawing-some-dane-county/article_6e0902a9-cf15-5fcc-8bf6-81ce96f370ba.html

      The story that we are hearing is that the pipeline co is allowed to increase the capacity of the existing pipeline, and to change the type of gunk running through it, without serious new additional environmental oversight. (The co is also contemplating building another pipeline alongside the existing ones, which would trigger a new environmental review.) But several county boards in the state are trying to require additional commitments from the co (mostly in the form of more insurance in case of a spill, I think) and the co is fighting them, saying they aren’t required to.

  5. Demeter

    Personally, politically and economically, I’m against anything that subsidizes the Koch Brothers.

  6. wbgonne

    Keystone, which is more appropriately called the Tar Sands Pipeline, is primarily symbolic now, which is why the GOP made it its first order of business. Red meat for the Red State rubes and a poke in the eye for the Hippies. As Yves points out, while the American Vichy Left has “battled” the pipeline to a draw so far, Obama has turned the United States into a de facto OPEC member. A transient victory in a lost war.

  7. DJG

    I don’t understand why Keystone is small beer. The tar sands are already barely viable energy expended / energy produced. Further, the devastation in Alberta is already widespread. Easing the use of tar sands compounds our environmental problems. Maybe someone can explain why I shouldn’t be concerned: I’m no persuaded by the main article or the comments.

  8. DJG

    Basic question about Obama’s behavior: Why hasn’t he worked to have it canceled? If it was up to the state department to cancel or not cancel, he surely could have arranged it. Did he ever have legal power to cancel it, which he then conveniently and typically did not use?

    Now, I doubt the he will veto it. This behavior goes back to Lambert’s recent comments about the Tom Frank article. Obama isn’t being thwarted by the Republicans. Like Bush, he is intellectually and morally lazy. Yet the liberals are already lining up to await the veto…

  9. Luke The Debtor

    The oil will most likely end up in India but neoliberals do not want any of that. They cite the greenhouse effect and shroud it as immediate climate change danger. India will have to wait it’s turn – no prosperity for you.

    1. Vatch

      “neoliberals do not want any of that. They cite the greenhouse effect and shroud it as immediate climate change danger”

      What? When have Neo-Liberals ever let concerns about climate change or any environmental problem motivate them?

  10. different clue

    As other commenters have noted upthread, economic and price arguments are beside the point. Keystone is a hill the Merchants of Carbon are prepared to kill for, and to die on.

    If the Keystone project ends up getting okayed, then the people in its path will have to decide whether to submit or to risk guantanamization through counter-Keystone acts of monkeywrenching. And make no mistake, anyone who can be accused of physically monkeywrenching Keystone WILL WILL WILL be guantanamized.

  11. susan the other

    But wait! If the resolution to our energy woes was on a long timeline we would have the opportunity to make wise decisions. The purveyors of debt want to be paid back before any good (or bad) can come of any project. We live in a world of short-termism imposed by skeptical debt mongers. Because hey, they want their money before they die, right? So one solution to this frantic imperative is to do what our banksters have done in their own behalf, pooling money but skimming all the proceeds to themselves in an untimely manner – and when they can’t do that they write derivatives to hedge every possibility, yes?… so what we need to do is cut them out of the picture altofuckinggether and do some mutual salvation operation that allows time for projects to pay off while simultaneously giving back some portion to those who demand their pound of flesh. I’m thinking pension funds. It is all possible but it is a question of scale. But. Above and beyond the logistics of debt and debt servicing, we now have global warming and unprecedented toxic pollution. So that is another creditor with a much more relentless timeline. Who you gonna pay? We might just consider 100 year IOUs for now. Since we’ve managed to step into it right up to our crotches. Oh yes, and tar sands and pipelines? That energy might be absorbed by the atmosphere if it is not burned up in an overwhelming rush to pay off all the panicked creditors.

  12. Rosario

    One could argue it is more viable (better word important) than ever. Barrel-per-barrel, train shipment is far more costly (ironically, costly in carbon as well). The only way tar sands can remain viable at current oil prices is by cutting out as many intermediate costs as possible, and this is assuming natural gas remains inexpensive as it is essential to tar oil extraction. Considering this, fighting against the pipeline now may be more important than it was 3 years ago because not building it could prove financially disastrous to Canadian producers in the near term, and this is exactly what is needed to force divestment and in turn renewable investment.

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