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Oil Sands Still Face Pipeline Problems

Oil Sands Still Face Pipeline Problems

In recognition that its campaign is heading for near certain failure, TransCanada hopes to delay the review process of its proposed Keystone XL pipeline until the next administration.

TransCanada sent a letter to Secretary of State John Kerry asking for a “pause” in the review process. The letter is a last ditch effort on behalf of the company to save the project, presumably hoping for a Republican in the White House in 2017.

Environmental groups hailed the move as a win, but want U.S. President Barack Obama to administer a coup de grace by rejecting the pipeline outright. They may just get the total victory they are seeking. The Washington Post reports that the administration is preparing a rejection, citing anonymous sources familiar with the process. And on November 2, White House Press Secretary Josh Earnest alluded to the fact that TransCanada won’t get its wish to punt on the project until the next president. “[O]ur expectation at this point…is that the president will make a decision before the end of his administration on the Keystone pipeline, but when exactly that will be I don’t know at this point,” he said. Related: What The Oil And Gas Industry Is Not Telling Investors

Even if rejected, TransCanada could always reapply under the next administration. But even under the most optimistic scenario, the project remains years away from operation (TransCanada estimates it will take 2.5 years to construct the pipeline after it receives necessary permits).

In the meantime, what will TransCanada and Canada’s oil industry do?

Maybe the failure of Keystone XL is not a big deal, given the fact that U.S. oil imports from Canada have increased in recent years even without Keystone XL. Tens of thousands of barrels per day of oil is imported by rail from Canada. As pipeline projects stalled, more rail links have been constructed. That has allowed oil imports from Canada to rise. Related: Putin Is Taking A Big Risk With China Gas Deals

But the level of rail imports is rather small, and is obviously not a permanent solution. Rail costs a lot more than pipelines, and won’t be able to handle hundreds of thousands, or the millions of barrels per day in additional oil that the producers in Alberta have in store. The Canadian Association of Petroleum Producers (CAPP) predicts that Canada will be able to increase oil production from 3.7 million barrels per day in 2014 to 5.3 million barrels per day in 2030. That will obviously require a huge build out in pipeline capacity. Rail won’t be the answer. CAPP predicts that 450,000 to 950,000 barrels per day of pipeline capacity will need to be added by 2020 alone.

Thus the focus on Keystone XL. But alternatives to Keystone aren’t looking good either. TransCanada addressed these options when it reported third quarter earnings on November 3. Earnings dropped by 12 percent, but the company sounded confident about the prospect of its $12 billion Energy East pipeline – a project that will carry 1.1 million barrels of Alberta oil sands per day to Eastern Canada for refining and export.

But Energy East has also been bogged down by environmental opposition. TransCanada ran into a roadblock for the planned crude export terminal in Quebec along the St. Lawrence River, which would allow for Alberta oil to be exported abroad. The terminal threatened beluga whales, and as a result, TransCanada shelved the proposed site earlier this year. The decision will delay the project by two years, pushing back completion to 2020 if it does not receive further hiccups. In the earnings call on November 3, TransCanada’s executives said that the new site will be announced “shortly.” Related: Major Oil And Gas M&A News That Has Yet To Make The Headlines

CEO Russ Girling said the company was still on track to meet its 2020 target for the completion of Energy East, but also admitted that the price tag for the project could rise given the incoming Liberal government’s promise to overhaul the process for approving major energy projects, which could include more stringent standards. “No question, these things cost more money going forward but at the end of the day, if the result is a safer, more reliable set of infrastructure then that makes sense for us,” Girling said.

The new Canadian government may not be the rubber stamp for pipeline projects that the Harper government was, but a Liberal Party source told Reuters that TransCanada will get the greenlight if it passes a robust environmental review.

Higher costs for the pipeline, if it does move forward, will be passed onto oil producers in Alberta, who are desperate for an exit route. The shortage of pipelines is already having an effect. Shell just backed out of its Carmon Creek project, an 80,000 barrel-per-day oil sands site, citing the dearth of pipeline capacity.

However, as evidenced by the misfortunes of TransCanada, the pipeline problem will linger for a while longer.

By Nick Cunningham of Oilprice.com

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  • Robert G. Holmes on November 05 2015 said:
    The most direct pipeline route from Tar Sands to tidewater, is via Hudson's Bay.

    This alternative is less problematic with respect to environmental and political factors.

    Why is it that feasibility is not being considered?

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