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Low crude prices have oil producers more worried than pipeline’s defeat.
Oil producers aren’t certain there’s a bright future in pulling crude from Alberta’s tar sands. But it’s cheap crude, and not the defeat of the proposed Keystone XL pipeline, that has them worried.
Instead, one year of depressed oil prices has inflicted more damage on the outlook for Canadian bitumen production than seven years of fervent opposition to the pipeline and the oil it would carry by environmental groups and property owners.
Symbolically, the Keystone XL pipeline was an important stand for both environmentalists and the oil industry. Practically, the project was just one of many ways to move Alberta’s oil, and its defeat is unlikely to have a meaningful effect on producers, who have easy access to rail shipping and other pipelines.
A significant amount of oil sands crude already makes its way into and through the U.S., including on pipelines that were envisioned as the southern extension of Keystone XL. The northern leg, which was rejected Friday, would have carried as many as 830,000 barrels per day from Hardisty, Alberta, south to Steele City, Neb.
And if that flow of oil does stop growing or shrink, it will likely be due to oil prices and it will likely happen in the next decade, said Jim Burkhard, head of oil market research at consulting group IHS Energy.
The largest oil sands projects cost billions of
dollars and take years to build, insulating them from short swings in oil prices. Oil companies have several in the works now, and analysts forecast that many will continue to completion. Others that are currently operating need only cover operating costs to stay active, a low enough bar that the most robust are unlikely to halt production.
IHS projects that total oil sands production will grow from 2.2 million barrels per day currently to 3 million barrels per day by 2020.
“Once these projects are up and running, they’re not going to stop because they have to ship by rail instead of pipeline,” Burkhard said.
Past 2020, the future of bitumen from Alberta’s oil sands is much less certain. Mining the bitumen and turning it into serviceable crude requires a higher price than most drilling to turn a profit.
At anything below $75$80 per barrel oil, it’s unlikely companies will be willing to invest, said Skip York, vice president of integrated energy at energy consulting group Wood Mackenzie.
“If I’m in a $45 world, the fact that you’ve taken away Keystone XL doesn’t matter, because I’m not sanctioning a new project anyway,” York said.
On Friday, benchmark U.S. oil prices ended trading down 91 cents at $44.29 per barrel. The last time crude crossed the $70-perbarrel mark was in November 2014.
The Obama administration’s rejection of a permit for Keystone could have fallout if it helps build momentum that leads to defeats of several major proposed pipelines that would carry diluted bitumen out of Alberta, York said.
Those projects include an expansion of Houstonbased Kinder Morgan’s 300,000-barrel-per day Edmonton-to-Vancouver Trans Mountain line to 890,000 barrels per day; TransCanada’s 1.1-million-barrel-per-day Energy East pipeline, which would run from Alberta east to New Brunswick; Enbridge’s 525,000-barrelper-day Northern Gateway line, which would run from near Edmonton west to the coast of British Columbia; and a separate Enbridge expansion of its existing Mainline system, which runs south into the U.S. and on to the Gulf Coast, from 450,000 barrels per day to 800,000 barrels per day.
Each of those projects has faced significant controversy, though none has attracted the scope of opposition that TransCanada’s Keystone XL did. Only Enbridge’s Mainline expansion project crosses the border, and its permitting process is different because it already holds a U.S. permit for the original line it is expanding.
Even if one or more of those pipeline expansions falls through, rail shipping could ramp up to move a significant amount of oil.
According to IHS numbers, only about 100,000 barrels of Alberta’s 2.2-million-barrel-per-day oil sand production moved on railcars. That number has ramped up rapidly in plays such as the North Dakota Bakken Shale and could do something similar if pipelines failed to materialize in the oil sands.
“Rail does not need approval to cross the border,” IHS’ Burkhard said. “That’s going to be a fallback option that’s proven to be flexible and responsible.”