Bloomberg News

Keystone Pipeline Decision May Influence Oil-Sands Development

March 07, 2013

A U.S. decision on whether to approve TransCanada Corp. (TRP)’s Keystone XL pipeline has the potential to accelerate -- or slow --investments in Canada’s oil sands.

A decision on the 875-mile (1,408 kilometer) U.S. portion of the pipeline, designed to carry 830,000 barrels of crude a day to Gulf Coast refineries, is expected later this year. Stopping the pipeline would mean continued discounted prices for Canadian crude, making it harder for producers to sell their commodity at a profit and potentially slowing oil-sands development.

Current discounts of almost $30 a barrel are “unsustainable,” Enbridge Inc. (ENB)’s Chief Executive Officer Al Monaco said yesterday in a presentation at the IHS CeraWeek energy conference in Houston. “If we can’t attract world prices, then we will ultimately curb energy development.”

Canadian heavy-crude prices have plummeted relative to U.S. and international benchmarks because a lack of export capacity has created a glut in supplies. Western Canada Select, a blend refined from oil-sands bitumen, has fallen 23 percent during the past six months amid uncertainty over approvals for Keystone XL, Enbridge’s Northern Gateway and Kinder Morgan Energy Partners LP (KMP:US)’s TransMountain pipelines.

Slowing Development

“It’s fair to say that development has already slowed because of the discount,” said Robert Schulz, a business professor at the University of Calgary who specializes in the Canadian oil and natural gas industry. “Companies are certainly going to wait and see what the decision on Keystone is before moving ahead with development,” he said in an interview.

Suncor Energy Inc. (SU), Canada’s largest energy company by market value, has delayed a joint venture with Total SA and is considering whether to cancel an oil-sands processing plant being jointly planned with the French company, CEO Steve Williams said on a conference call on Nov. 1.

Environmentalists oppose Keystone XL because they say it would speed up oil-sands development and intensify global warming.

“Expansion depends on tar sands being able to reach the high prices of overseas markets,” said Anthony Swift, a lawyer with the Natural Resources Defense Council. Without Keystone XL, plans to expand oil sands “go off the rails,” he said in an e- mail yesterday.

Rail Shipments

The U.S. State Department in a March 1 environmental assessment report said Keystone XL would have little impact on the pace of oil-sands expansion, a sentiment echoed by Calgary- based TransCanada. Even if all of the pipeline projects being proposed were delayed, oil-sands development would continue because of the possiblity of crude exports by rail, said Alex Pourbaix, president of TransCanada’s energy and oil pipelines, in an interview March 5.

“They may be slightly less profitable than they were because moving that oil by rail is more expensive than moving it by pipeline, but at the end of the day the resource is going to get developed,” he said.

Shipping oil by rail is two to three times more costly than by pipeline and can reach as high as $15 a barrel for some distances, said Monaco of Calgary-based Enbridge.

Companies will likely invest about C$23 billion ($22.3 billion) this year to develop Alberta’s bitumen reserves, little changed from 2012, according to the Canadian Association of Petroleum Producers.

To contact the reporters on this story: Bradley Olson in Houston at bradleyolson@bloomberg.net; Jeremy van Loon in Calgary at jvanloon@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net


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