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Obama calls off the Keystone XL project

After seven years, the Keystone XL project has been called off by President Obama, surprising few

The president bemoaned the extreme political positions that had swelled up around the pipeline, which would have shipped 0.83m barrels a day (b/d) from Canada’s oil sands to the Gulf Coast.

“The Keystone Pipeline has occupied what I, frankly, consider an overinflated role in our political discourse”, Obama says. “This pipeline would neither be a silver bullet for the economy, as was promised by some, nor the express lane to climate disaster proclaimed by others.”

In the end, Obama says it was climate change concerns ahead of COP21 that swung his decision. “America is now a global leader when it comes to taking serious action to fight climate change. And frankly, approving this project would have undercut that global leadership”, he says.

In bemoaning Keystone’s largely symbolic role in the US energy debate, though, he appeared to embrace it as a symbol in international climate negotiations. Based on his own administration’s analysis – along with nearly everyone else’s - Keystone XL on its own would have a negligible impact on global climate change. So if it wins any goodwill at the Paris talks it will be on symbolic rather than policy grounds.

Domestically, the response was uproarious, if predictable, following years of well-rehearsed arguments over the project. Republicans and the oil and gas lobby were heavily critical of the decision. Environmentalists rejoiced after a hard-won battle. TransCanada said it was disappointed in the decision and that it still backed the project, implying it could wait out the current administration and push it once again if a friendlier Republican takes over the White House after the 2016 elections.

While the political fury surrounding the decision has been significant, the immediate market fallout will be minimal. The oil sands industry has largely moved beyond Keystone XL, utilising rail and expansions at existing cross-border pipelines to move crude. More than 1m b/d of new transport capacity from Canada’s oil sands into the US has been added in the last four years. That has allowed US imports of Canadian crude to soar to record levels, even as the country’s import needs have shrunk. The US imported a record 3.4m b/d of Canadian crude in August this year, about 80% higher than when TransCanada first proposed Keystone XL in 2008.

Rerouting markets

There appears to be ample scope to expand rail and pipeline capacity to meet expected production growth through the end of the decade. Enbridge’s Line 3 expansion, for instance, could add another 300,000 b/d or so of new capacity by the end of the decade. Others will likely press expansions in the wake of the Keystone XL decision, though they may wait to see how the politics unfold following the 2016 election. Moody’s says that there is as much as 0.55m b/d of unused rail capacity around the oil sands that could also fill the gap. Moreover, there are several projects that have been proposed to take oil to both Canada’s Pacific and Atlantic coasts, though all face fierce domestic opposition.

The decision, however, will make it much more difficult for Canadian crude to reach the Gulf Coast where the cost of rail shipments adds about $15 a barrel (/b) of oil. Only around 310,000 b/d, about a third, of Canada’s oil exports to the US go to the Gulf Coast refineries. The Keystone XL decision will be welcomed by Venezuela, Mexico and Middle Eastern suppliers that could have seen their heavy oil exports to the Gulf Coast pushed out by Canadian crude. Keystone XL’s 0.83m b/d capacity, for instance, is roughly equal to what Venezuela has been sending to the Gulf Coast. And it is quite a bit more than the 0.7m b/d or so that Saudi Arabia has been sending to the area’s refineries.

For now, the most pressing challenge for oil sands producers is prices, not pipelines. With US WTI crude languishing at less than $50/b, projects are being shelved and the long-term growth outlook has dimmed considerably. Shell was the latest to put their project on ice, saying that it wouldn’t go ahead with the 80,000 b/d Carmon Creek project. First Energy Capital, an investment bank, says that the dearth of new project sanctions means there are no new commitments from 2018 onwards, meaning oil sands growth could slow considerably from then on.

The long-term implications for the industry, however, are more troubling. Killing Keystone XL is undeniably a major victory for the environmental movement, which committed huge resources to the effort. It also provides a template activists will try to emulate in future fights with the oil and gas industry. Not that it will be easy to replicate – an unlikely confluence of market and political factors led to Keystone XL’s demise.

The challenge for the oil and gas industry will be to keep future projects from becoming so starkly embedded in political discourse. There is little doubt that in the end the Obama administration’s conclusion was based purely on a political assessment.

The heightened political attention to energy projects will make the 2016 election a particularly high-stakes event for the industry. A Republican administration would likely roll back much of Obama’s environmental initiatives. A Democrat in office and an energised environmental movement, though, could make life very difficult for the oil and gas industry. The Keystone XL decision could come to be seen as an important turning point.

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