Canada Desperate for Keystone XL

Brian Hicks

Written By Brian Hicks

Posted April 22, 2013

As President Obama continues to deliberate over the pressing matter of the Keystone XL pipeline, it’s becoming clearer that Canada may in fact need the pipeline far more urgently than originally thought.

Last month, a U.S. State Department report declared that development in the Canadian oil sands would likely continue at the same rate whether or not the pipeline gets built. However, this report assumed that in the absence of the Keystone XL pipeline, the Canadian heavy crude would be moved by rail. This was, partly, to go around environmentalist concerns that the pipeline would contribute to a sharp rise in greenhouse emissions.

pipeline obamaThe greater picture behind this was that the State Department sided with champions of the pipeline, who pointed out that the pipeline itself would be far cleaner and less environmentally damaging than rail transport. However, new concerns have now emerged regarding the viability of the rail-transport model. In short, will it be feasible?

The biggest problem is cost. Apparently, the cost would be alarmingly high, to the point where it may not be worth sending the crude all the way to Texas and Louisiana. And even if it got there, it probably would not approach the quantities possible via the hypothetical pipeline.

Moreover, the Bakken Shale in North Dakota is proving to be a bountiful reserve. It’s also 900 miles closer to the Gulf. What with its unending supply of light crude, and the traditional imports from Mexico, Saudi Arabia, and Venezuela, surely the Gulf Coast refineries can do fine without Canadian crude.

All of this adds pressure to the U.S. government, which has to make a final decision regarding the Keystone XL issue by the end of this year. That pipeline, if approved, could mean an additional 830,000 barrels per day from Canada.

Trains can move oil rather effectively (Berkshire Hathaway’s Burlington Northern Santa Fe already does this), but the question is whether it’d be economically feasible on a larger scale. While the State Department asserts that the costs would be around $10 per train, the industry claims it’d be as much as $30 per train.

Canada’s Oil

In any event, this does not solve Canada’s growing pipeline problem. Canada currently has the world’s third-largest oil reserves and is now the sixth-largest producer in the world, thanks to the Alberta oil sands. It is the biggest supplier to the U.S., which buys 98 percent of all Canadian oil exports.

But there are two problems. One: the U.S. is on track to become the world’s biggest oil producer by 2020 (meaning it might be able to afford reducing its Canadian imports). Two: Canada needs more pipelines to help support its booming oil industry. Since existing pipelines focus on the U.S., it needs new networks to route oil to hungry Asian markets over in India and China.

Long story short, Canada definitely needs to create a link to the export terminals in Texas and the U.S. Gulf Coast so that it can export its overflowing oil to markets abroad. That’s why the Keystone XL is something of a necessity to the Canadian economy.

Four new pipelines are also underway—two connecting Alberta to the Pacific Coast and two to the Atlantic coast. All of these have come under withering criticism from environmental groups, who point out that oil sands operations are vastly more “dirty” compared to conventional oil projects—with up to five times more carbon emissions, in fact.

TransCanada’s (NYSE:TRP) Keystone XL project is illustrative of the absolute necessity for pipeline infrastructure to keep pace with burgeoning oil and gas production across North America. One thing that has made matters more difficult than they need to be is the Canadian government’s stubborn refusal to respond to environmental concerns—this has obviously furthered animosity from these quarters toward such pipeline projects.

At the same time, Canada is hoping to boost crude production to 4.7 million barrels a day by 2020 from the current 3 million barrels a day.

The Global Post highlights the gravity of the issue:

“As it stands now, oil production in the West could soon outstrip available export capacity. If this happens, investment and expansion will grind to halt,” according to the Canada West Foundation research institute.

Whether Keystone XL is built or not, it won’t answer the more pressing problem lurking in the background: what to do with all this oil?


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