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Keystone XL conundrum after Obama veto

Supporters of the Keystone XL pipeline are weighing their options following US president Barack Obama’s veto of legislation submitted to him by Congress, which would have cleared the way for the scheme to go ahead

Obama, who has expressed scepticism over the benefits of the project, said he would not support the legislation, because it would have bypassed an as-yet uncompleted review of the project by the US State Department. The review is likely to be concluded in the next few weeks.

Environmental groups welcomed the decision, while leaders of the US Congress – where opposition Republicans in favour of Keystone XL command a majority – were scathing. The Republican Speaker of the House of Representatives, John Boehner, called the decision a “national embarrassment”.

The veto triggers another hiatus in the six-year struggle to get the pipeline built. The project, being developed by TransCanada, would carry more than 800,000 barrels a day of oil-sands crude from Alberta to the US state of Nebraska and then to US Gulf coast refineries.

Those in favour of Keystone XL’s construction claim it will contribute to the creation of thousands of jobs and stimulate the US economy. Opponents say the high greenhouse emissions created by oil sands production – 17% higher than those for conventional oil, according to a January 2014 US State Department report – are too high if global warming is to be successfully curtailed.    

The pipeline’s proponents now face the challenge of what to do next. While Republicans command a comfortable majority in the US Senate, they are unlikely to command the two-thirds majority needed to overturn the veto. A more likely route to success could be to include legislation approving Keystone XL in a bill containing a wider package of less contentious legislation later this year, which might prove difficult for the president to veto.         

Consideration of the project is taking place against the fast-changing dynamics of the Canadian oil sands industry. The State Department’s January 2014 report concluded that oil output from Alberta’s oil sands was unlikely to be reduced if Keystone XL was not built – in other words, the oil would find a way to market, and the same amount of emissions would be produced, either way, so building the pipeline would not materially affect overall emissions.

However, that assumption was made at time when oil was around $100 a barrel. Since then the oil price has collapsed and several proposed oil sands developments have been put on hold, raising the question of whether building Keystone XL and the consequent improvement in market access could now make the difference between marginal projects going ahead or not. 

Research just released by Wood Mackenzie suggests operational costs in the oil sands of between $37/b for in situ projects and $40/b for mining projects – comfortably below the current price of oil, which has been trading in the $45-60/b range recently. The consultancy also says oil sands projects remain viable in the long-term.   

However, with Wood Mac estimating that cash flows from the oil sands are likely to fall by $23 billion in total over this year and next, the next few years look set to be tough for Albertan producers, so opponents of Keystone XL could argue that the pipeline’s construction would be supportive of a polluting industry that would otherwise be pulling its horns in for the short to mid-term.

The emissions issue could be thrown into sharper relief at the end of this year, when global climate change talks in Paris take place. They could result in a tough agreement on reducing greenhouse gas emissions that would put pressure on governments to steer clear of emissions-heavy new projects. That provides another reason for Keystone XL supporters to push for approval of the project as soon as possible.  

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