Fate of Canadian pipeline proposals will determine if there is even oil sands crude to ship in Keystone XL
The Keystone XL pipeline is in the news. Again. Why doesn’t TransCanada just abandon the 830,000 barrel a day project and move on?
Because the Canadian oil sands is at a crossroads, that’s why.
The Canadian government and oil sands producers are desperately seeking alternatives to the American market, where sellers take a significant haircut over international prices. Analysts estimate that producers lose billions of dollars a year because they are locked into a north-south market.
You can only imagine how the Canadian government feels about losing all that tax revenue.
The Holy Grail for the Canadian oil and gas industry is to sell into the rapidly expanding Asian market at much higher international prices.
Three significant pipeline projects are currently in the works to get bitumen to tidewater: Northern Gateway and Trans Mountain expansion (both 525,000 b/d) to the West Coast, Energy East (1.1 million b/d) to the East Coast. Combined with Keystone XL, these projects total nearly 3 million b/d of transportation capacity, enough to allow the oil sands to comfortably expand for the foreseeable future.
The fate of those pipelines will dictate, to a large extent, the near to medium-term future of the 179 billion barrels of bitumen available from the oil sands and the role it might play in the “American-led energy Renaissance,” as Christi Craddick, a commissioner for the Texas Railroad Commission, described the shale and tight oil revolution to me in an interview. She advocates more Canadian bitumen exports to the USA, especially the Texas Gulf Coast refineries that require 2.7 million b/d of heavy crude and would be quite pleased to process the cheap landlocked oil sands product.
There are three general scenarios that could play out.
One, none of the pipelines are approved. This would be a disaster for industry and the environmental movement’s wet dream. Mother Nature wouldn’t be happy, either, because it would mean far more oil by rail shipments, and likely a dramatic increase in derailments and explosions, some of them perhaps as catastrophic as the 2013 crash in Lac Megantic, Que. where 47 people died.
Two, all the pipelines are approved. Oh, happy days for the Canadian producers! This is their best case scenario, which would enable the maximum expansion of the oil sands in coming years and the best returns for companies.
Three, some pipelines are approved, some are not. This scenario depends upon which projects are approved. Is it one pipeline or two or three? And which one(s)?
Well, Northern Gateway is a dead pipeline walking. Enbridge’s proposal was approved by the National Energy Board, but the company completely and utterly botched the review process. British Columbia First Nations, who hold unusual authority over their traditional territories, are allied with a powerful environmental movement, and together they have persuaded 70 per cent of provincial voters that Northern Gateway should never be built.
Kinder Morgan thought it was smarter than Enbridge, but it has run in to an even more potent opposition in the Lower Mainland of BC because local mayors like Derek Corrigan of Burnaby are vowing to throw themselves in front of the bulldozers before allowing Trans Mountain X through their communities. Kinder Morgan is likely to suffer the same fate as Enbridge.
The bright spot for Canadian pipeline proposals is Energy East. A recent premiers conference approved a national energy strategy that has been criticized by industry supporters, who have missed the significance of the document: Alberta Premier Rachel Notley now has a framework to negotiate a “GHG emissions reduction for pipelines” deal with Ontario and Quebec, which have a cap-and-trade system they would like Western provinces to support.
Then’s there Keystone XL, stuck in limbo waiting for President Barack Obama to make up his mind. The White House said yesterday that Obama will definitely decide before he leaves office, but the odds of approval are slim given the President’s many disparaging comments in the past.
But that doesn’t mean Obama’s successor wouldn’t approve Keystone XL. Republican candidates have made the project a heart and soul campaign issue and even Hillary Clinton has sounded supportive in the past.
So, what’s the most likely scenario?
The only one that wouldn’t be positive for Keystone XL is if the West Coast pipelines and Energy East are approved. That would remove Canada’s urgency for southbound exports.
The odds of that happening, however, are very, very slim. I wouldn’t take the bet.
But wait a moment. Every race has a dark horse, which in this case is Eagle Spirit Energy, a First-Nation led and billionaire family-backed energy corridor from Alberta to the West Coast through Northern British Columbia that already has support of all the First Nations along the route. Eagle Spirit is proposing an oil sands bitumen pipeline whose capacity could be as high as 2.5 million b/d.
The project has not submitted a formal proposal to the National Energy Board and if it does there will certainly be significant opposition. But Eagle Spirit has First Nations endorsement, something Enbridge and Kinder Morgan could not pull off, and that will make all the difference.
If Eagle Spirit is successful, its combined capacity with Energy East would be around 3.6 million b/day, meaning Keystone XL might look much less attractive.
However these scenarios play out, Gulf Coast refineries still require all that heavy crude. It’s probably fair to say that Venezuela and Nigeria, usual suppliers to those American refineries, are rooting for Canadian pipelines to succeed.
Craddick and Gulf Coast refiners, on the other hand, will likely be cheering for them to fail.
In the meantime – say, the next five years or so – maybe it’s a good thing that Keystone XL isn’t built. Why not let the Canadian pipeline situation play out, thus determining if there is even a supply of crude available to ship south.
After seven years in the approval process, what’s another five between friends?