Thursday, February 14, 2013

The Impact of Blocking the Keystone XL Pipeline on Tar Sands Production

Tar sands processing plant (photo credit: The Interior)
by Nick Cunningham

A major climate rally will be held in Washington DC this Sunday, February 17. The primary focus of the protest is the Keystone XL pipeline, which will run from Canada down to the Gulf of Mexico, carrying tar sands oil along the way. Tar sands release an estimated 20% more greenhouse gas emissions than conventional crude oil. Environmentalists hope to block the pipeline. If they did, what would the effect be on the tar sands industry?

It has been a political hot potato, with both supporters and opponents trying to figure out when the State Department (but, ultimately the White House) will come to a decision on whether or not to approve the project.

Keystone supporters have dismissed the claims of environmentalists, saying that blocking the pipeline will do little to stop the production of Canadian tar sands. On its face, this argument seems credible. Blocking the pipeline does little to reduce oil demand, the ultimate driver of why and how much oil is produced. This argument is made compellingly by Michael Levi and Andrew Revkin in particular. If there is a market for the oil, it will somehow get extracted from the ground. Better to focus on cutting demand. 

Tar sands producers have said something to the effect of “if America doesn’t want the oil, we will send it to China.” To fulfill that promise, the tar sands industry has said they will build a pipeline to the west coast of Canada, and export oil from there. In other words, blocking the pipeline would be like squeezing a balloon, the oil would just go somewhere else.

However, in reality, the industry is hurting.

Just look at the discount that tar sands producers are selling their oil for relative to the WTI benchmark, which is the price for oil in the U.S. In January, Canadian crude sold at an astonishing $41 per barrel discount. What this means is that Canada can’t get its tar sands out, so it has a glut on its hands. It has recently turned to shipping tar sands oil by rail, a much pricier route than by pipeline. They are even considering shipping the oil north to the Arctic, and exporting it from there.

Price discounts are especially painful for tar sands (compared to conventional drilling) because profit margins are thin. Producing oil from tar sands and transforming it into something useful is expensive. It requires extracting lots of dirt and sands in what resembles an open pit mining operation. Lots of energy and water are used in the process. After refining the product you get something resembling heavy oil. Some estimates say that new tar sands project require oil prices over $80 per barrel to break even, meaning the current discounts are making projects unprofitable.

This is evidence that blocking the Keystone XL pipeline would have a measurable impact on tar sands production. If gridlock on the pipeline system is forcing discounts, that means producers operating on the margins are going to have to cut back. A significant portion of projects are not going to be profitable at these lower prices, so production will be shut in.

The bluster about sending it to China is just that. Residents of British Columbia are even more opposed to a pipeline than Americans, and tar sands producers also have to deal with native tribes fighting to defend their territory from being marred by a pipeline passing through it.

If TransCanada had easier options, they would not have spent over four years on permits and lobbying the U.S. government to get the Keystone XL route approved. This one pipeline would not be such a big deal to them. But, it is.

Blocking the pipeline could be a major blow to the tar sands. 

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