The Stranded Oil Sands: A Worst-Case Scenario
October 29, 2011
The signs are there: the Keystone XL oil sands pipeline has festered into an uncomfortable election issue for the U.S. president, Barack Obama.
The upshot for Canada: a decision on whether to grant a Presidential permit, promised by year end, could once again be delayed.
The reality is that anything short of a go-ahead in December for Keystone XL would plunge the oil sands sector into disarray until new solutions move forward. The worst-case scenario? Stranded oil sands — for years.
Keystone XL, with a capacity to carry up to 830,000 barrels a day from Alberta to Texas, was due for startup in early 2013. There is no backup on the same scale or timeline.
“Everybody in the industry is thinking about this,” said Bob Dunbar, president of Strategy West Inc., an oil sands consultancy based in Calgary. “Keystone XL is not the only solution, but it is a very elegant solution and it really would have an impact on the industry if it doesn’t proceed in a timely way.”
Even optimists can’t ignore that the pipeline is becoming politically toxic: Anti-Keystone protesters are dogging Mr. Obama everywhere he goes; donors are threatening to pull campaign funding if he approves it; members of the Democratic party are rallying against it; allegations of conflict of interest have strangely emerged; Nebraska has called a special session of the state legislature to discuss whether to block it.
Rumours and anonymous warnings implying a delay is likely, such as the one from a U.S. government official this week, are making the rounds: “We’re carefully reviewing all of the information we’ve received, including the many comments from the public, and will make a decision only after we have weighed all of the facts,” the official told Reuters.
Meanwhile, Mr. Obama is keeping his distance, despite the pipeline’s promise of huge job creation in a struggling U.S. economy.
“We’re looking at it right now, all right?” is the response he gave this week to an anti-Keystone protester in Denver. “No decision’s been made and I know your deep concern about it, so we will address it.”
David Wilkins, former U.S. ambassador to Canada, said it’s obvious Keystone XL has gotten more political.
After the President failed to deliver key environmental reforms, the environmental lobby and the left wing of the Democratic party have made the pipeline and what it stands for, a proxy for fossil fuels growth and an impediment to renewable energy, their last stand.
“If there is a significant delay, probably the only rational conclusion you can reach is that it’s an effort on the part of the administration to placate the left-wing of the base of his party, and to placate them and to cater to them going into the election 13 months away,” Mr. Wilkins, who still hopes the project will be approved on its merits by the end of the year, said in an interview.
As the clock ticks, Canada’s oil patch has begun to weigh the implications of a lengthy time out.
It has been a long battle already. Calgary-based TransCanada Corp., proponent of the $7-billion project, first filed an application for a Presidential permit in 2008. The approval process has been delayed repeatedly. The most recent delays were caused by the Environmental Protection Agency injecting itself into the process and the State Department deciding to hold hearings in six states directly affected by the pipeline. A decision by the U.S. State Department on whether the pipeline is in the national interest is now due by Nov. 26. After that, eight agencies affected by the decision have 15 days to decide whether to object. If there are no objections, the pipeline is approved. If there are objections, the issue moves to the White House, which can take as long as required to render its decision.
Former Republican Congressman Tom Corcoran, managing director of the Centre for North American Energy Security and one of the pipeline’s top Washington lobbyists, said if a decision is not made by year end, the odds go up that it will be made in late 2012, following the Nov. 6 vote.
“There are two reasons there could be a delay,” Mr. Corcoran said. “One is that something unexpected was learned in the inter-agency review, which is going on at the moment, of the environmental impact statement, or something we learned in the public hearings. The other reason for delay would be a political decision. It’s a flashpoint. And so with politics, you don’t need a timeline, you don’t need substance, you don’t need an issue to be settled on the merits. And it could be that for whatever reason politics has intruded itself once again into this process, and a decision to carry it over into next year will be made, which I think would be most unfortunate.”
The widest impact of a delay is uncertainty. Would a delay lead to approval or to rejection? How long would it be? If Mr. Obama gets re-elected, would he feel he has the obligation to reward his political base by rejecting the pipeline or the strength to approve it in the broader national interest? As is often the case, until those questions are settled, market players may chose to remain on the sidelines. Those looking to buy oil sands assets may be reluctant to move ahead until they know there is a market.
Industry growth plans would also be in doubt. Aggressive expansions may be revisited if there is no way to sell the oil. According to a new study by international petroleum consultancy Purvin & Gertz Inc., existing pipelines to U.S. markets could run out of space by 2013 to 2016, depending on how quickly oil sands production grows. In fact, after looking at all pipeline options, the consultancy concluded that additional capacity would be needed to accommodate oil sands growth by 2017 to 2019, even if Keystone XL is in operation.
“We can’t ship more than pipelines can carry, so production would slow down and project development would likely slow down, until pipelines catch up,” vice-president Tom Wise, the report’s author, said in an interview.
Meanwhile, existing capacity could be rationed and other options are likely to be fast-tracked. Some involve building new lines, some would undo bottlenecks such as the one at Cushing, Okla., which is depressing prices of West Texas intermediate crude.
The most ambitious involve pipelines to Canada’s West Coast. Enbridge Inc. has proposed Northern Gateway to ship oil to Asia. Kinder Morgan Inc. is pushing forward an expansion of its TransMountain pipeline.
Asked about what it plans to do given uncertainty over Keystone XL, one oil sands developer, Cenovus Energy Inc., said it’s looking at what’s available, including sending its oil by rail and ship to Asia.
“It’s obviously quite a political football in the U.S.,” CEO Brian Ferguson said on a conference call Thursday in response to an analyst question. “There are other alternatives we are looking at and we are making sure we don’t have all our eggs in our basket.”
Yet conspiring against a quick ramp-up of alternatives is the fact that the forces that lined up against Keystone are regrouping to fight other plans. Already, more than 4,000 people and groups have registered to participate in regulatory hearings on Northern Gateway scheduled to start in January, promising a long and controversial review. Environmental organizations are also gearing up to fight the TransMountain plan and other solutions.
In a recent interview, Enbridge CEO Pat Daniel conceded Keystone XL’s outcome will affect all future pipeline projects. It’s one of the reasons Enbridge supports approval of Keystone XL, even though it’s proposed by a competitor.
“I think a horrible precedent would be set if that project were to be rejected because of concerns over oil sands crude or the inability of a pipeline to operate safely near an aquifer, which I think are the two biggest issues at stake,” Mr. Daniel said. “We are absolutely convinced that the system should be built for energy-security reasons in the United States and can be built and run safely.”
TransCanada, after spending nearly $2-billion on the project so far and putting it repeatedly on hold, has no Plan B. It would bear the biggest blow from a delay, which would also leave it wishing for a return to the good old days, when pipelines were just that, pipelines.
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