Keystone XL

CEO Russ Girling, TransCanada, proponent of Keystone XL pipeline. CBC News photo.

If Canadian producers keep investing in new technology, Keystone XL could lower GHG intensity of heavy crudes refined on Gulf Coast

In this Feb. 25, 2015 column I argued that a key point was being lost in the Keystone XL debate: Texas Gulf Coast refineries need 2.7 million b/d of heavy crude oil and they have to get it from somewhere. Traditional suppliers included Mexico, Venezuela, and Nigeria, but supply those countries were declining or less reliable for a variety of reasons. So, if Alberta oil sands heavy crude replaces other heavy crude, the net impact is basically zero. And it may be positive given that Canadian producers and governments are committed to gradually lowering the carbon-intensity of oil sands crude. That argument needs to be underscored now that Rachel Notley and Justin Trudeau have introduced climate policies to reduce GHG emissions.

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President Barack Obama vetoed a Congressional bill supporting the Keystone XL pipeline Tuesday, falling back on his oft-repeated arguments the TransCanada project is bad for the environment. But does his argument stand up to scrutiny?

Keystone XLEach side in the debate can point to a heavyweight American government ally to support their position. President Obama is buttressed by the Environmental Protection Agency, which in a Feb. 2 letter criticized Keystone XL on variety of issues, including higher incremental greenhouse gas emissions than average crude refined in the USA. But the State Dept. argues that Canadian oil sands crude will find its way to market with or without Keystone XL, including by rail – which costs more, creates higher GHG emissions, and is less safe.

There are two reasons why State is right and the EPA is wrong.

One, the destination for oil sands crude is an important part of the Keystone XL story.

Market analysts IHS argue that 2.7 million bbls/day of refining capacity on the Gulf Coast has been optimized for heavy crude oil. Venezuela has long been a heavy crude supplier to those refineries, but is now shifting exports to the Chinese market. Alberta oil sands crude is filling the supply gap left by Venezuela.

keystone xlAnd that means comparing oil sands GHG intensity to conventional crude, as the EPA does, is misleading. The more accurate comparison is to the Venezuela crude it is displacing, which has a similar GHG intensity.

The prospects are good that the GHG intensity of Alberta oil sands crude will shrink over time. The Canadian Assoc. of Petroleum Producers claims oil sands crude is nine per cent higher on a well-to-wheels basis, while the EPA claims it is 17 per cent.

But there are new oil sands plants coming on stream in Canada whose product has the same or slightly higher GHG intensity compared to conventional crude oil. Imperial Oil’s Kearl Plant, for instance, uses a patented Paraffinic Froth Treatment Process, which eliminates the need for an upgrader and produces a higher grade of crude oil.

“With the addition of electrical co-generation, a barrel of Kearl bitumen will have about the same greenhouse-gas footprint as other oils refined in North America,” said Pius Rolheiser, Imperial spokesperson.

Long-term, the United States is far better off to get its heavy crude from Canada, where producers are investing in leading-edge technology to reduce GHG intensity of oil sands crude.

Two, President Obama is mistaken if he believes oil sands crude delivered by Keystone XL will simply be exported to other countries, leaving American with all the risk of spills and little of the economic benefit.

As the IHS report made clear, the biggest market for heavy crudes is the Gulf Oil refineries and they need Canadian feedstock.

“The reality is that the U.S. Gulf Coast is the world’s largest single refining market for heavy crudes such as oil sands, making it unlikely these barrels would be exported offshore,” said Aaron Brady, senior director for IHS Energy.

“And, the overwhelming majority of refined products produced in the Gulf are consumed in the United States, regardless of the crude source.”

IHS estimates that 70 per cent of the gasoline refined from oil sands crude would remain in the American market.

President Obama’s argument against Keystone XL is flat out wrong-headed. The pipeline would not increase GHG emissions compared to the crudes Gulf Coast refineries currently use and if Canadian producers continue to reduce the GHG footprint of their crude oils, could actually lower GHG intensity compared to Latin America heavy oil. The oil sands crude would also stay in America and most of the refined product would be consumed there.

The President should stare down his eco-activist allies – who thus far haven’t prevented one drop of oil sands crude from reaching American markets – and do the right thing, approve Keystone XL.