THE HARSH LIGHT OF SCRUTINY
In a sprawling 7,000-page study, the U.S. State Department answers whether Keystone pipeline would shift market behaviour and enhance fuel efficiency
Would a cut in U.S. demand for crude oil eliminate the need for the Keystone XL pipeline? And would the pipeline alter market conditions such that there would be less rapid adoption of fuel efficiency, alternate fuels, or other measures that would reduce the demand for crude oil?
The U.S. State Department spelled out these two crucial questions in its long-awaited final environmental impact statement on the pipeline project last week and seems — at least in its mind — to have found the answers it was looking for.
The department concluded that the “proposed project’s likely impact on finished transportation fuel prices would not be large enough to influence market behaviour in development of more fuel efficient vehicles, development of alternative transportation fuels (including electrification of the vehicle fleet), or reduction of total vehicle miles traveled.”
In addition, the report noted that even if the U.S. and other countries adopt policies that aggressively reduce crude oil consumption and stabilize carbon emissions in line with the two-degree global goal, “there is likely to be a market demand for substantial increases in the volume of crude oil such as those derived from the oil sands over the next 20 to 25 years.”
These pronouncements pepper the State Department’s 7,000-page study on Keystone XL. The detailed study also examines alternative modes of transport and projections for both the Canadian and U.S. energy sector.
While pipeline proponents have lauded the report and detractors have called it a “farce”, the department’s multi-layered study provides insightful details that may have been lost in the rush to judgment from both sides.
GREENHOUSE GAS EMISSIONS
If Keystone XL proponents welcome the report, they must also acknowledge this: the oil sands is not easy on the environment. Oil sands’ GHG emissions are at the higher end of the scale — at between 533 and 568 kilograms of carbon dioxide equivalent (kgCO2e) per barrel on a wellto-wheels basis, compared to 485 to 533 kgCO2e per barrel of Venezuelan oil and 470 to 549 kgCO2e of Mexican Maya crude.
While there is a danger that GHG emissions may intensify as Canadian producers drill lower-quality reservoirs, the department says that “decreased steam use and new hybrid steam-solvent techniques could reduce WTT [well-to-tank] GHG emissions by as much as 5% to 20% for in situ production.”
Clare Demerse, director of federal policy at the Pembina Institute, says while Ottawa has been talking about environmental regulations for some time, new rules have yet to emerge.
“Environment Canada says that while the industry has reduced intensity by 26%, several forces are working that may drive emissions up… It is not safe to assume oil sands will continue to improve on emission intensity, and in fact we may see the opposite,” Ms. Demerse said.
Clearly, the report does not end the debate regarding the oil sands, wrote David Watt, chief economist at HSBC Bank Canada in a note to clients.
“The GHG implications of oil from the oil sands might still feature prominently in future discussions over the fate of Keystone XL, particularly in the [Environmental Protection Agency’s] assessment. Thus, the State Department report, though it has lowered the hurdle to approval of the Keystone XL pipeline, does not guarantee that the project will receive White House approval.”
‘NO ACTION’ ALTERNATIVE
What if Keystone XL is denied or the project is not implemented? It would have little impact on Canadian production, and Western Canada Select may still find markets via rail/pipeline, rail/tanker and rail directly to the Gulf Coast, the department concluded.
Without Keystone XL, Lloydminster — the city that straddles the AlbertaSaskatchewan border — could rise to prominence as a new oil transportation hub, the State Department said. The city has ready access to both the Canadian Pacific and Canadian National railroad systems.
However, a rail/barge scenario from Lloydminster, to Wood River-Ill., and barge to the Gulf Coast via the Mississippi River, would see transportation costs rise by US $5US $8 per barrel, compared to US$2.35 by pipeline.
A surge in rail terminals would not cut down emissions, though. The annual GHG emissions (direct and indirect) attributed to rail links be 4,364,611 tonnes CO2e, “about 40% greater than for the entire route encompassing the KXL project at 3,123,859 tonnes CO2e,” the department said.
If Keystone XL is denied, Canadian crude may access the Gulf Coast from Houston via the Panama Canal, or head east to Asia. It will cost US$4.7 per barrel to transport crude oil in a tanker from Prince Rupert, B.C. to Houston, compared to US$2 per barrel if it’s transported to Dalian, China.
SOCIO-ECONOMIC IMPACT
The 875-mile northern leg of the pipeline will take up to two years to complete and contribute US$3.4-billion to the U.S. GDP, the report said.
Construction contracts, materials, and support bought in the U.S. would reach US$3.1billion, with another US $233million spent on construction camps, apart from taxes and other forms of revenues. The project would also require 42,100 annual jobs during construction, the department said. “Once the proposed project enters service, operations would require an estimated 50 total employees: 35 permanent employees and 15 temporary contractors,” the report said.
SPILL WORRIES
The U.S. Pipeline Hazardous Material Safety Administration (PHMSA) data show there were 215 pipeline incidents in the U.S. between July 2012 and August 2013, of which 81% involved spills of fewer than 50 barrels. Another 17% included spills of 1,000 barrels per day and 2% involved a spill of more than 1,000 barrels. The incident rate per mile-year stood at 0.003%.
The original Keystone pipeline reported more incidents in its first year compared to other pipelines, but only one resulted in a spill (of fewer than 50 barrels).
The State Department also noted that Enbridge Inc.’s infamous Kalamazoo River spill in 2010 highlights that spills could have an “immediate to short-term” negative impact on the housing sector “so long as the noxious effect of the use or facility exists.”
GULF COAST REFINERS
The United States has 55% of coking capacity — crucial for oil sands processing — with the Gulf Coast making up 56% of that capacity, making it the preferred destination for Canadian crudes, as well as competing blends from Venezuela and Mexico.
As domestic U.S. tight oil displaces foreign blends of similar gravity, the U.S.’s imports are getting “heavier” said the department.
With Mexican and Venezuelan production declining, the path is cleared for greater flow of Canadian crude to meet demand. Analysts are divided whether a resurgent Mexican and Venezuelan production would return to the U.S. in a big way — but the State Department seems confident those two countries will be looking elsewhere.
Finally, the State Department study noted that apart from Keystone, just over 6.1 million bpd of new pipeline capacity is expected to come on line by 2016, while additional pipelines.