Keystone XL: Decision. Discussion. Potential Implication

Written by: Sanjay Patel

Since this is my first blog, I was initially unsure what topic I should talk about.  However, by looking at all the top headlines and burning issues, I very quickly figured that I should begin with the Keystone XL pipeline project.

The Canadian oil sands industry has recently received a great deal of media attention in connection with the Keystone XL pipeline project – a project which is critical to future expansion of this industry.  The Keystone XL, a 2,763-kilometre long pipeline project, when complete, would deliver up to 830,000 barrels a day of crude from the oil sands in Canada and the northern U.S. to the Gulf Coast.

While some local residents are worried about the possibility of a pipeline leak - this pipeline will pass through an environmentally sensitive area in Nebraska – many environmentalists (including some celebrities) see opposing the pipeline project as an opportunity to slow oil sands development overall.  Despite clear advantages to the U.S. in terms of job creation and other economic benefits, planned construction of the pipeline faced such strong opposition by environmental groups that U.S. president Barack Obama announced last week that he will not make a final decision on its construction until after the November 2012 elections.

TransCanada, an owner of the $7 billion pipeline project, agreed to reroute the pipeline and expressed confidence that it will be able to address environmental concerns raised by opponents. However, oil sands proponents believe that, if the Keystone pipeline project doesn’t proceed, major impacts on the oil industry can be offset by another project (Enbridge’s Northern Gateway Project – a new twin pipeline project running from near Edmonton, Alberta, to a new marine terminal in Kitimat, British Columbia), which will help solve the problem of marketing Canadian oil.

There are, however, many reasons for the caution.  The Keystone XL project faces a “dirty oil” challenge and the Gateway pipeline project could face similar challenges, including, but not limited to, aboriginal rights issues.  While it is beyond anyone’s capacity at this stage to predict what’s going to happen, the recent decision to defer the Keystone XL pipeline project is definitely not good news for both the U.S. and Canada.

Currently, the U.S. is the only market for Canadian oil, including products from the oil sands.  Canada is by far the largest exporter of crude oil to the U.S. In 2010, Canada exported almost 2 MBPD (million barrels per day) of oil to Americans. Of this volume, 1.8 MBPD came from Western Canada and 1.1 MBPD of that came from the oil sands of Alberta.  By 2035, Canadian oil sands production is expected to rise two to four times from its current production level.  Canada and the U.S. are two of the most important stakeholders in the Keystone project and are those that have the most to gain and lose. Canada and the U.S. both need to maximize profits from the oil sands, since, economically, both countries could use a boost from the energy sector (a main driver for growth) to help recover from the recession.

The U.S. is the most natural market for oil sand products.  Pipelined oil can reach the U.S. quickly and at low cost and the U.S. has experience in processing oil sands products. But existing pipeline capacity is already very tight.  If the oil sands are not given appropriate access to markets via critical projects like Keystone XL, oil sands expansion will be slower and more painful, a possibility that has broad economic, social and political ramifications in North America and the world.  If this happens, environmentalists should not celebrate, because the needed oil will just come from elsewhere, and will likely be dirtier, more expensive, its supply less reliable, or all of these.

In 2010, U.S. import of foreign oil was about 9 MBPD (U.S. oil demand in total was about 19 MBPD, including biofuels) and Canada supplied about 1.8 MBPD of that.  If the U.S. decides to displace Canadian oil from their market, it will not reduce their total overall demand for oil but simply ensure that it will be met from other sources – Saudi Arabia, Venezuela, Mexico or Nigeria.  For example, by displacing 2 MBPD of Canadian oil, the U.S. could put an additional $58 billion dollars (or more) every single year into the pockets of Saudi Arabia and other counties – assuming a price of U.S. $80/bbl of oil.  $58 billion dollars per year is a lot of money to empower countries whose interests often conflict with the U.S.

We are living in a world with a very tight oil supply-demand relationship.  The supply of conventional oil is declining and unconventional crude oil is now beginning to supplement this supply.  The U.S. Energy Information Agency (EIA) estimates that global oil production from unconventional sources will rise from 4% of the total in 2010 to 13% by 2035.  They estimate that, among all sources of unconventional oil, Canadian oil sands have the greatest potential to complement conventional crude oil, with production expected to increase from 1.5 MBPD in 2010 to 5 MBPD in 2035.  With the threat of a double-dip recession looming over world economies, getting a grip on rising oil prices is a particularly pressing need. To do this we need to increase, not decrease, the world’s oil supply.

The oil sands will play a very important role in moderating world oil prices if production is allowed to grow as per expectations.  If growth is prevented, global implications will be very severe. Take, for example, the case of Greece – one of the countries hardest hit by the 2008 financial crisis. In order to handle its debt obligation, Greece is facing massive tax increases and spending cuts. Thousands of people are now out of work and facing hardship, businesses are closing down and citizens, including immigrants, are leaving the country to settle somewhere else.  The most dramatic sign of Greece's economic pain, however, is the surge in suicides experienced earlier this year. About 40% more Greeks killed themselves in the first five months of this year than in the same period last year, according to Greece’s health ministry.  This fact is disturbing.  While economic crises and high oil prices don’t significantly impact celebrities, high oil prices are believed to be one of the root causes of the 2008 economic meltdown, a financial crisis that has taken a significant toll on people’s mental health.

The relationship between the U.S. and Canada is among the closest and most extensive in the world.  About 300,000 people cross the shared border every day. According to the U.S. department of State, the U.S. and Canada trade the equivalent of $1.6 billion a day in goods – and energy is a big part of that trade relationship. According to CERI (Canadian Energy Research Institute), if Keystone XL and other oil sands projects proceed as planned, the impact on U.S. GDP from 2010-2020 is estimated at CAD $134 billion.  By 2020, U.S. employment totals related to this project are expected to grow from 80,000 jobs to 179,000.

Despite these benefits, opposition to the oil sands continues, mainly because of a perception that the industry is not doing enough to reduce its environmental footprint.  Among all the challenges that this industry faces, the most visible and controversial is the emission of green house gases (GHG) and their impact on climate change.  According to the IHS CERA (Cambridge Energy Research Associates),  Canadian oil sands produce only 5 to 15% more GHG emissions than conventional crude oil and are responsible for less than 0.1 % of the world’s total GHG emissions.  However, as oil sands production increases, the overall environmental impact, including GHG emissions, will increase.

To tackle this problem, technological advancement is necessary and the industry is spending billions of dollars to make it happen. For instance, Shell’s Quest Project will use CSS (Carbon Storage and Sequestration) technology to capture its GHG emissions and pipe them underground. Suncor is spending $1.2 billion this year to improve tailings management and Syncrude is spending $1.6 billion on its desulphurization units.

According to a growing number of environmentalists and activists, we cannot continue to rely on oil because of its GHG emissions and because of the fact that we will run out of oil soon anyway.  They say we should replace oil with renewable energy sources.  This is our long term goal but, unfortunately, the world’s reliance on oil isn’t just a political problem, it’s a technological problem.  There is simply no alternative to power the transport sector. With the technology available today, trucks, ships and planes cannot be powered by batteries, solar or wind power.  There is no realistic substitute for oil now and there is no guarantee that we will find one in the next few decades.

It is often argued by environmental groups that energy from renewable sources is relatively expensive because oil companies benefit from massive subsidies not available to renewables.  While this was true in the past, it has not been the case for years. Consider the U.S. case.  According to the U.S. Department of Energy, in 2010 wind energy producers received 42% of all federal subsidies for electricity production while only producing 2.3% of all electricity generated.  Coal received 10% of these subsidies and produced 44.9%. Natural gas and oil received 3.6% of these subsidies and produced 25%.  Nuclear received 19.8% of these subsidies and produced 19.6% of electricity generated.  Renewables receive a greater share of federal dollars than any other single source of energy and this share of total energy funding, which is close to 40%, is considerable.  Particularly if we keep in mind that they only provide 8% of total power generated.  The point is, political mandates can force an increase in the share of renewables in the energy mix, but they do not have the power to make them cheap, at least not in the short and medium term. More modest (and realistic) goals will have virtually no impact on oil demand and ambitious renewable projects are very likely to fail, or could negatively impact the already difficult post-recession economic recovery.

The world is searching for the right balance between finding a continuous supply of oil to secure our energy future and maintain high living standards, while at the same time protecting the environment – particularly in the face of climate change concerns.  Achieving the right balance is a very difficult task and often involves complex trade-offs and compromises.  But, among all the choices we have today, clearly Canadian oil is our best hope to bridge the gap between now and a full transition to renewable energy in the future.   The future of the oil sands development is of great importance to the economy of Canada, and the U.S. and it has global implications as well.

The pipeline projects such as Keystone XL has a very important role to play in ensuring oil sands growth by removing marketing constraints.  There is too much at stake – for Canada, the U.S. and the rest of the world. Let us hope that policy and decision makers on both sides of the border will take a balanced approach and negotiate a deal which will allow the expansion of oil sands in a responsible manner.

(Note: Above opinions are my own and not of Suncor Energy Inc.)