Canada’s key to oil-sands growth: Export routes
The US is likely to approve Keystone XL. But Canada has realised that other export routes are necessary, too
Keystone XL (KXL) is one pipeline on a continent crisscrossed by almost 1 million km of them. Yet no other infrastructure project symbolises Canada’s broader aspirations to become a global oil player – the “energy superpower” of prime minister Stephen Harper’s dreams – than TransCanada’s proposed 1,900 km conduit to the US Gulf Coast.
Now in its fifth year of review by the US State Department, a final decision on the controversial proposal is expected before the end of the year.
However, KXL also exposes the difficulty in capturing new markets for Canada’s rising tide of bitumen and synthetic crude. Regardless of KXL’s fate, Canada now knows it needs more pipelines.
Canadian regulatory authorities expect oil-sands output to reach 3.8 million barrels a day (b/d) by 2023. But producers fear their production will remain trapped in land-locked Alberta without access to global markets and global prices.
A glut of Canadian oil in the US Midwest has driven down the price of oil-sands crude versus global benchmarks like WTI and Brent. Last year, the discount reached as much as $40 a barrel. Some observers suggest those discounts are costing the Canadian economy as much as $40bn per year.
This is the business case for KXL. Its proponents say it would help close this price gap and allow Canadian producers to secure world prices. But the theory has proven to be much more difficult to put into practice.
Because it crosses the Canada-US border, KXL requires a presidential permit from the US State Department, which is presently reviewing comments on a revised supplementary environmental impact statement (Seis) that was released on 1 March.
The Seis concluded KXL poses no significant environmental threat, but that has not stopped the pipeline from becoming a rallying point for activists opposed to oil-sands development. TransCanada chief executive Russ Girling acknowledged that KXL has become a proxy for the sins of the entire industry.
“It’s become an ideological debate. There are certain folks who are convinced Canadian oil is bad,” he told Petroleum Economist. “But I think their view is that all oil is bad and Canadian oil is a part of that. It’s (KXL) just a starting point for their goal, which is to shut down the Canadian oil sands.”
Canadian government officials, including prime minister Stephen Harper, have lobbied US politicians to win their backing for the pipeline. Harper appeared before the Council on Foreign Relations in New York on 16 May, where he told policy makers that KXL “absolutely needs to go ahead” to ensure greater North American energy security.
Canada and the US share the largest integrated energy market in the world, worth $100bn in 2011, according to the US embassy in Ottawa.
Plans B, C and D
TransCanada originally wanted KXL operating by 2014. The constant delays mean start-up would now be 2016, at the earliest. The pipeline’s struggles have exposed the dangers of relying on a single market, the US, which buys 98% of Canadian oil exports.
Indeed, such is the growth in output expected from Canada’s oil sands – a doubling of production between 2012 and 2023 – that export-pipeline capacity equivalent to three KXLs will be needed, say executives in Calgary. The possibility that KXL will be rejected, denying Canadian exporters access to refineries near the US Gulf Coast, is making the situation more acute. So a desperate push is under way to find new outlets for the crude, especially in Asia.
On Canada’s west coast. Enbridge’s Northern Gateway would ship 525,000 b/d to Kitimat, a port about 650 km north of Vancouver starting in 2017. Also in 2017, Kinder Morgan’s TransMountain expansion would increase present capacity from 300,000 b/d to 890,000 b/d through Vancouver itself.
TransCanada’s proposed Energy East would reverse sections of existing pipe in Ontario and Quebec to move 850,000 b/d of oil sands crude 4,400 km to the Irving refinery and marine terminal in Saint John, New Brunswick, on Canada’s eastern seaboard. The company is seeking binding commitments from shippers in an open season that closes on 17 June.
A final start date hasn’t been determined, but it would take the least amount of time to permit and complete – 2016 at the latest. On paper, it’s an almost exact replacement for KXL, and uses the same right-of-way through the western provinces without crossing the US border.
If all three came on stream they would soak up 2.25m b/d of capacity, or more than all the projected oil-sands production increase for the next 10 years. KXL could stand empty.
Of the two west coast proposals, Kinder Morgan’s TransMountain is the most likely to succeed because it twins a pipeline that has already been in service for more than 60 years.
Oil tankers already operate in Vancouver harbour. Nonetheless, Vancouver is also the spiritual home of Canada’s environmental movement, and many locals are adamantly opposed to any pipeline.
That said, Northern Gateway faces bigger hurdles. British Columbia is the only Canadian province that has yet to conclude land claims treaties with its First Nations and the pipeline has become a complicating factor in the negotiations. This is not to say Gateway will not be built, but it’s going to take more time. It probably will not be on line before 2020.
Of all the proposals, the Energy East project is the most certain, because it uses existing right-of-ways and has already won approval from the governments of Ontario and Quebec.
It would also replace nearly 1m b/d of oil Canada presently imports into eastern Canada at Brent-denominated prices. So the project comes with clear strategic and economic incentives.
However plausible – or not – Canada’s plan B options look, KXL is still likely to be approved. US oil companies account for half of Canadian oil output, and the broader cultural and economic ties between the two countries make it unlikely that the US will turn down the project. (Canadian officials have also talked of unspecified repercussions for the trade should the pipeline be blocked.)
KXL would be the first cross-border pipeline to be rejected, too, rupturing many decades of energy cooperation between the two countries. The US Army Corps of Engineers built Canada’s first oil export pipeline, from Norman Wells in the Northwest Territories, in 1943.
When it comes, US approval for KXL is likely to have conditions attached.
These may include demands for some environmental improvements from Canada, perhaps designed to harmonise its climate-change policies with those in place in the US. Congressional Democrats have mooted that kind of deal, though the details remain vague.
It would give oil-sands producers the global market access they crave, but also offer some consolation to the environmentalists that sought to block the pipeline.
But approval will not stop Canada from trying to open new markets.
The country has ambitions to become a world oil and gas force. But it is tough to be a global energy superpower when you only have one customer.
Keystone XL timeline
17 March: President George W Bush grants a presidential permit for the Keystone Pipeline. Later that month, TransCanada announces Keystone XL (KXL) expansion.
4 November: Barack Obama is elected the 44th president of the US, vowing action on climate change.
11 March: Canada’s National Energy Board approves the Canadian leg of KXL. That month the US Natural Resources Defence Council reports Keystone will thwart efforts to increase reliance on clean energy sources.
21 July: The US Environmental Protection Agency criticises the KXL environmental review for lack of adequate information, including a comparison of greenhouse gas emissions from imported crudes into the US.
26 August: The US State Department’s environmental impact statement finds “no adverse effects” from KXL.
20 October: Secretary of State Hilary Clinton says she is “inclined” to approve KXL.
January: TransCanada agrees to 57 safety measures requested by the State Department and the Pipeline and Hazardous Materials Safety Administration relating to the construction, operation and design of the pipeline.
August-September: Protesters in Washington call on the Obama administration to reject KXL. High-profile activists, including actress Daryl Hannah, are arrested at the steps of the White House.
10 November: The State Department suspends permitting for KXL until re-routing to avoid the Nebraska Sand Hills is complete.
18 January: President Obama announces he will not approve the construction of the KXL pipeline in its current form, but will allow TransCanada to re-apply.
27 February: TransCanada announces it is dividing the KXL project into two parts and will proceed with the Gulf Coast project from Cushing, Oklahoma, which does not cross an international border and therefore does not require a presidential permit.
22 March: President Obama says the Gulf Coast Project from Cushing, Oklahoma, has presidential support and he will expedite the permitting.
4 May: TransCanada submits a revised application for the portion of KXL that runs from the US-Canada border in Montana to Steele City, Nebraska.
7 November: Barack Obama is re-elected president of the US.
22 January: Nebraska governor Dave Heineman approves the revised KXL route around the Sand Hills and hands the file back to the State Department.
1 March: The State Department releases a revised supplementary environmental impact statement that once again finds no adverse environmental effects from the pipeline, prompting a new wave of opposition.