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Andrew Topf

Andrew Topf

With over a decade of journalistic experience working in newspapers, trade publications and as a mining reporter, Andrew Topf is a seasoned business writer. Andrew also…

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Is Keystone Still Viable Amid Low Oil Prices?

Is Keystone Still Viable Amid Low Oil Prices?

On Monday the Keystone XL pipeline project crossed another hurdle when legislation approving construction of the proposed line to connect Canadian oil sands crude with Gulf Coast refineries was passed by the United States Senate.

The bill sailed through 63 votes to 32 in the Senate, which is now in the hands of the Republicans following November mid-term elections, along with the House of Representatives, which passed the same Keystone legislation last week.

With the bill well on its way to becoming law, it will up to President Obama to decide on whether or not to veto it, a decision he has held off for six years. Obama has criticized the project as adding to greenhouse gas emissions, despite an environmental assessment to the contrary by the State Department released a year ago, and because he argues it would help Canadian producers to deliver crude for export, against the claims of the proponent, TransCanada Corp, which maintains the oil will be processed in US refineries and consumed domestically.

While the political machinations of Keystone, with all the horse trading it inevitably entails, certainly make for some excellent headlines, an equally pressing question is whether the project is even viable with today's oil prices, which dropped further on Monday to below $46 a barrel in North America.

Related: Keystone XL Saga Continues, Obama Threatens Veto

The rationale for Keystone was a way to bring together booming US oil production, and to a lesser extent, production from the oil sands in Northern Alberta, to Gulf Coast refineries that were facing declining imports from Mexico and Venezuela. The project was first proposed in 2008 and was supposed to begin carrying 830,000 barrels a day in 2012.

But the market didn't wait for the pipeline to be built, and landlocked Canadian crude has found its way to Texas and Louisiana refineries by rail instead. Canadian oil exports by rail tripled to a record 182,000 barrels a day in the third quarter, according to Canada's National Energy Board. The United States has also been importing Canadian oil like gangbusters, showing that the trade will happen with or without the pipeline extension (Keystone XL is an addition to the existing pipeline). Data from the US Energy Department showed US imports of Canadian crude reached a record 3.1 million barrels a day in September.

So with some of the project's goals already being met, in terms of increased production flowing from Canada to the US, the question has become, why is a pipeline needed anymore? And now, with the oil price down more than 50 percent since June, Canadian production is certain to fall, lessening demand for oil transportation and thus casting doubt on the economics of the project according to observers.

“Right now with oil prices down and a glut of oil on the global marketplace, the answer is no, we don’t need Keystone right now,” Phil Flynn, senior market analyst at the Price Futures Group in Chicago, told a reporter from the San Luis Obispo Tribune last week.

Some are predicting low oil prices could delay the project even if Obama passes it, or it could be shelved altogether.

Chris Lafakis, an energy economist for Moody's Analytics, equated the situation with Keystone to an earlier proposal to build a natural-gas pipeline from Alaska to the Midwest. Despite being approved by then-Governor Sarah Palin, the pipeline was never built due to new gas supplies which pushed prices down by two-thirds. "If oil were to stay as cheap as it is right now, you might very well get that Palin pipeline scenario," Lafakis said.

Ironically, the low oil price could also be used as a justification by Obama to cancel Keystone, according to a low-price scenario envisioned by the State Department when it made the determination that constructing the pipeline wouldn't increase GHG emissions.

As reported by the Globe and Mail, in its analysis the State Department concluded that with prices above $90 a barrel, approval of the pipeline wouldn't affect oil sands production because the oil would find its way to market anyway through more expensive means i.e. rail.

However with a lower oil price, the State Department concluded that the project would be more attractive to producers (about $8 per barrel less than by rail), leading them to boost production and thus increase emissions:

“Oil sands production is expected to be most sensitive to increased transport costs in a range of prices around $65 to $75 per barrel,” it said. “Assuming prices fell in this range, higher transportation costs could have a substantial impact on oil sands production levels … Prices below this range would challenge the supply costs of many projects, regardless of pipeline constraints, but higher transport costs could further curtail production.”

Related: British Columbia Bars LNG Pipelines From Carrying Oil Sands

For its part, the company behind the pipeline, TransCanada, refuses to yield on its rationale for the pipeline. CEO Russ Girling told the Globe and Mail that lower crude prices make the project more attractive to producers both in Canada and the US, who are looking for the most cost-effective way to transport oil to refineries.

Further, Girling pointed out that low prices haven't reduced the need for the pipeline either. “On the contrary, TransCanada has 100 per cent of its original contracts still in place and producers are keen to reduce their transportation costs in order to increase per-barrel revenue, or netback,” the Globe reported on Sunday.

It would certainly be ironic if after six years of delay, rhetoric and political maneuvering, what really kills Keystone XL is the oil price, not Obama nor the environmental movement that has lobbied so hard against the project.

Whether or not the pipeline is passed by the White House, it appears that the economics of Keystone XL are just as muddy as its politics.

By Andrew Topf of Oilprice.com

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  • Tim on January 15 2015 said:
    Obama is a strict leftist idealogue, so he will never let the final (and most critical) portion of the pipeline be built, regardless of whether the market warrants it or not. Mark my words. This man is lawless. He only pushes non-selfsustaining energy initiatives like wind and solar, which gives us endless Solyndras and Fiskars. This is not a muddy issue, Mr. Topf. We will need that portion of the pipeline, it's simply a matter of when demand catches up with supply again, which can be any day.
  • David Hrivnak on January 15 2015 said:
    Interesting to hear you say solar does not work since I power BOTH my house and power my electric car from my rooftop solar. My bill for the last 10 months has been the connection fee of $7.21. And we heat and cool via electric and I drive about 800 miles a month.
  • Tim on January 15 2015 said:
    Dave,

    How much of the manufacture of your electric car, installing your panels, was subsidized (i.e. paid for by taxpayers)? There's a guy here at work who went "off the grid" but was only able to do so because Congress gave crazy incentives to do it. I (a taxpayer) essentially paid for his panels. Wind and solar are almost always subsidized heavily. Solar can work in limited areas, but you can't tell me it is nearly as flexible as oil or coal in the sense that you can extract it at any time and use it anywhere. You can't transport the sun or wind and the cost to move the energy the distances you would need to to make it accessible to the same audience is incomprehensible. Why do we demonize the greatest energy sources God gives us? For some man-made myth that is human dictated climate change. That's my take. I'm glad it works for you, because for every one of you, there are several others who can't make it work. Try using solar panels in Pittsburgh, where I live. Good luck. They have, and they always have to be supplemented by something else.

    Tim
  • Lee James on January 15 2015 said:
    Tim, To each his choice of poison. I would much prefer to subsidize solar panels than buy the next increment of oil production. The tar sands contribution to oil supply carries with it an approximately 19% pollution penalty beyond that of conventional oil extraction and processing.

    I too resent subsidizing things I do not agree with: a plethora of tax breaks for fossil fuels, and even for oil wars in the Middle-East. Do we task our 7th Fleet with protecting fields of solar panels? No, it is all about oil. "Other people" get to pay for compromised water supply and health problems from polluted air.

    As much as I think oil is a miracle fuel -- packing so much concentrated energy into one compact space, and so easily transportable -- I do think it is time to move on from fossil fuels.

    Pumping today's oil patch has diminshing returns. Alternatives to fossil fuels are the future.
  • David Hrivnak on January 15 2015 said:
    The subsidies are a lot less than the war in Iraq. Or the fleet we have stationed in the Persian Gulf. Or the extremely attractive lease arrangements to keep the oil and coal flowing.
  • David Hrivnak on January 15 2015 said:
    PS I grew up in Pittsburgh and the solar in NE Tennessee is very similar to Pittsburgh. It can work and with large batteries now in EV'S it is not hard to time shift.

    And while you might "believe" in climate change I chose to look at the data and unfortunately the world is warming, with the ice melting and the sea levels rising. What do you contribute that to?

    Finally growing up in Pittsburgh in the 60 ' s it is nice to see blue sky again. That is something we missed in the city before the clean air act.
  • Tim on January 16 2015 said:
    Wow, Dave. You had to roll the Iraq War in there. I mentioned nothing about it. Lee, I don't believe in "pollution penalties." Who determines if it's a pollutant? If it's a government agency, then they will follow the will of the administration, which we know is anti-self sustaining energy. Dave, the batteries store energy much better now, but what happens with those fancy batteries once they're expelled (not that I think they pose an issue)? They are generally disposed of, taking up both space and putting it in the ground. And why do progressives use the term "climate change?" Because the hoax of man-made (as opposed to natural) "global warming" fell flat after 10+ years of global cooling. And why would we suddenly move on from such a wonderful resource like oil and coal, when they are still abundant and cheaply extracted? You are naive and fall into the lie that we truly have an energy crisis, when the evidence shows supply is abundant. The only crisis is warlords and power-crazed government bureaucrats who think they know best for me and have no tolerance for dissenting opinion. I support an "all the above" approach to energy with the stalwarts leading the way, supplemented by alternatives like wind, solar, geothermal, nuclear, hydro-electric. But, we should not shun something that has worked (and still does) so well for over a century because someone cried a river about its harm when there's no proof to back it up, or to show there is no harm in the alternatives. You'll be happy once the great government that brought us such awesomely indebted and lackluster programs like Medicare, Social Security, and Head Start achieves its goal of dictating what we will eat, drink, and when, and the body implants to track our every move begin. It will happen, in time, because you will embrace it.
  • Tim on January 16 2015 said:
    Even if there was man-made global warming, who's to say it would be a catastrophe? After last year's brutal winter here, I could use some. The sun and oceans dictate our weather, sorry, it's been that way for however long the earth is here. Was it not warming and cooling prior to human fossil fuel use? Little Ice Age, anyone? http://www.telegraph.co.uk/news/earth/environment/climatechange/10294082/Global-warming-No-actually-were-cooling-claim-scientists.html

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