Bloomberg News

Enbridge Gateway Win Shows Stopping Keystone Won’t Halt Oil (1)

December 20, 2013

Keystone XL backers say the proliferation of alternative projects, such as one to carry oil-sands crude to a Canadian seaport that advanced yesterday, undercuts opponents who claim blocking the pipeline will keep the high-carbon fossil fuel in the ground.

Canadian energy regulators yesterday recommended approval with conditions of Enbridge Inc. (ENB)’s Northern Gateway pipeline, a project that would bring as much as 525,000 barrels a day of crude to Kitimat, British Columbia. The recommendation, by the National Energy Board, leaves the final decision up to the federal government.

The ruling follows an expansion of rail terminals to haul crude and other proposals, such as one by Kinder Morgan Energy Partners LP (KMP:US) to almost triple the capacity of a line to Vancouver, or TransCanada Corp. (TRP)’s plan to convert a gas line to oil. Imperial Oil Ltd. (IMO), an oil-sands producer, and Kinder Morgan are planning a 100,000 barrel-a-day loading terminal in Edmonton to handle as many as three trains a day, and its capacity may more than double in the future, the companies said today.

“The fact that there are other routes means that the pipeline isn’t a significant source of emissions,” said Kevin Book, managing director of ClearView Energy Partners LLC, a Washington-based consultant. High-carbon Canadian crude is finding its way to market without Keystone XL, he said in an interview.

Environmental Flashpoint

President Barack Obama has said he won’t approve TransCanada’s application to build the Keystone line between Alberta’s oil sands and U.S. Gulf Coast refineries if it were found to substantially boost carbon-dioxide emissions, which scientists say are raising the Earth’s temperature.

“To say yes on the terms that the president has established, there have to be other pathways for the crude to get to market,” Book said.

Keystone has emerged as a flashpoint in the debate over global warming. Pipeline critics say the project poses a risk to the climate because it would encourage increased production from Alberta’s oil sands, a process that releases more carbon dioxide than the extraction of some conventional forms of oil.

Environmental groups such as Sierra Club and the Natural Resources Defense Council oppose Keystone and say it would exacerbate global warming.

State Department

“Keystone is critical for expansion of tar sands and that remains the case even with the further developments in the existing pipeline proposals,” Susan Casey-Lefkowitz, director of international programs at the Natural Resources Defense Council, said in an interview. “If Keystone is rejected, its going to have a significant impact on the expansion plans for tar sands.”

The U.S. State Department is completing a final report assessing the environmental risks of building the proposed $5.4 billion project. A draft version released in March found that Keystone wouldn’t have a big climate impact because oil sands would be developed even if the administration blocked the project, with the crude moving by rail or other pipelines instead. The U.S. Environmental Protection Agency and others disputed that conclusion.

Kinder Morgan wants to almost triple the size of its Trans Mountain pipeline from near Edmonton, Alberta, to Vancouver to 890,000 barrels a day, by 2017. TransCanada is considering converting a gas line to oil so it could transport as much as 1.1 million barrels a day of crude to refineries in eastern Canada.

Other Hurdles

“The State Department is generally right,” Michael McKenna, a Republican strategist and president of MWR Strategies Inc., a Midlothian, Virginia-based lobbying firm, said in an interview. “That oil is going to come to market.”

Not all proposals to haul oil sands will come to fruition. Almost a decade after it was proposed, the C$7.9 billion ($7.4 billion) Northern Gateway project still faces opposition from aboriginal groups, including the Yinka Dene Alliance as well as the Haisla and Haida First Nations. In addition, the pipeline is opposed by the New Democratic Party, Canada’s official opposition party. Yesterday’s ruling by the regulators recommended 209 conditions, including assurances the project would not endanger the environment and that the company has an emergency response plan.

Keystone Delays

The city council in South Portland, Maine, this month voted to place a 180-day moratorium on development related to hauling oil sands by pipeline through the city. Rail transport costs more than pipelines, poses its own safety risks and will lead to 8 percent more greenhouse gas emissions than if Keystone were built, according to the State Department.

TransCanada says delays in building the Keystone XL pipeline have resulted in more crude shipments by rail, which creates higher carbon emissions.

“What has actually occurred in the marketplace would corroborate the accuracy of those estimates, where they said rail and other things would allow the oil sands to continue to develop and Keystone wouldn’t have any impact on either refining or production,” TransCanada Chief Executive Officer Russ Girling said yesterday in an interview at Bloomberg’s Toronto office.

World demand for oil won’t decrease even if oil-sands production is halted, he said. “Consumption is where you get GHG emissions and as long as that consumption is met by some barrel, there is no net increase in GHG emissions.”

Venezuelan Alternatives

If oil-sands production is shut down, the U.S. will import crude from other places such as Venezuela, where emissions associated with crude production and consumption are higher on average than in the oil sands, he said.

Keystone could carry 830,000 barrels of oil a day to U.S. refiners. By comparison, an average of 175,000 barrels of oil were imported by rail each day this year, about 75,000 barrels of it heavy oil, according to the Canadian Association of Petroleum Producers, an industry group. About 45,000 barrels of oil was shipped to the U.S. daily on average in 2012, according to the group.

Oil-sands producers including MEG Energy Corp. (MEG) and Cenovus Energy Inc. (CVE) say they have booked capacity on rail cars in order to work around pipeline bottlenecks.

2008 Application

TransCanada applied for a permit to build Keystone XL in September, 2008. The State Department is reviewing the project because it crosses an international border.

Obama rejected the initial application after officials in Nebraska said the pipeline would imperil a sensitive ecosystem. TransCanada, which is headquartered in Calgary, re-applied in May 2012 with a new route through Nebraska, which has won approval from state officials.

As the environmental review has dragged on, investments in rail cars that carry crude have risen. The capacity of rail terminals to load crude oil in Alberta and Saskatchewan will quadruple by the end of next year to 905,000 barrels a day from 224,000 currently, according to an Aug. 26 report by Calgary investment bank Peters & Co.

“Rail seems to be an option for light sweet crudes,” Casey-Lefkowitz said. “What we’re seeing in practice is that companies aren’t willing to pay the high cost that transporting raw bitumen by rail.”

Climate Change

In their fight against Keystone, opponents have zeroed in on the section of the draft State Department report that concludes the pipeline wouldn’t worsen climate change because the oil would make its way to market anyway, by rail or other means.

NextGen Climate Action, a group funded by billionaire investor and pipeline foe Tom Steyer, sponsored an event in Washington this month designed to rebut that assessment.

“The pipeline changes the economics of this and makes it profitable for people to develop a ton more of it,” Steyer, the founder of Farallon Capital Management LLC, said in an interview. In September, Steyer said he would spend $1 million on an ad campaign against Keystone.

Even if Keystone XL is built, more pipelines and rail cars will be needed to handle the projected growth in oil sands output, according to the Canadian producers group. Canadian production is forecast to grow more than 50 percent to 4.9 million barrels a day by 2020, while U.S. output expands 37 percent to 11.1 million barrels, the International Energy Agency said in its World Energy Outlook in November.

An RBC Capital Markets report in September said that without Keystone, as much as 300,000 barrels of oil a day in development in the oil sands could be delayed. Increased reliance on rail in lieu of the pipeline could benefit companies including Burlington Northern Santa Fe, a unit of Berkshire Hathaway Inc. (A:US), that carry crude to refineries.

“Oil sands are either going to come to market or not come to market on the basis of underlying oil prices,” McKenna said. “Stopping Keystone isn’t going to stop the oil sands.”

To contact the reporters on this story: Jim Efstathiou Jr. in New York at jefstathiou@bloomberg.net; Rebecca Penty in Calgary at rpenty@bloomberg.net

To contact the editor responsible for this story: Jon Morgan at jmorgan97@bloomberg.net


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