The new pipeline debate

The debate over TransCanada Corp.'s Keystone XL oil pipeline has forced Americans to confront their complicity in the development of Canada's oilsands. Northeastern Alberta would still be moose pasture, after all, if not for the world's biggest oil consumer on our doorstep. With the release of a favourable environmental impact statement on April 15, the U.S. State Department moved a step closer to approving Keystone XL. But the administration has lurched from one side to the other on the issue before, and the only certainty is that the final outcome will reflect wide-ranging political priorities, not narrow regulatory ones.

The proposed 2,673-kilometre line from Hardisty, Alta., to coastal Texas not only lays bare the causal relationship between American demand and what many consider an environmental catastrophe in Canada. It also faces the challenge of any greenfield infrastructure project in this day and age, convincing stakeholders (in this case, all the way down the Great Plains states) to let it pass. While 39 Republican members of Congress signed a letter supporting the project, the governor and two senators from Nebraska, and landowner groups are opposed. The Environmental Protection Agency, meanwhile, asked State to review its environmental impact assessment.

"It's fascinating that this pipeline has become a symbol for so many issues," says Steven Paget, energy infrastructure analyst with FirstEnergy Capital in Calgary. For its supporters, it's a symbol of energy security. For its detractors, it's a symbol of unwillingness to combat climate change or heed the risks of a spill like those Enbridge experienced in the Midwest last summer.

Since the State Department began its review of Keystone XL in 2008, it has prolonged discussion and repeatedly put off a decision, prompting a frustrated Alberta energy minister, Ron Liepert to wish out loud that President Barack Obama would "sign the bloody order." There remains, of course, the possibility he won't. "The political signal that would send would be pretty significant," allows Brenda Kenny, president and CEO of the Canadian Energy Pipeline Association. But it won't, as Keystone's environmentalist opponents hope, curtail future oilsands development; bitumen exports to the U.S. have already soared without the pipeline expansion. What it will do is hamper the efficiency of North America's oil markets.

As the civil war in Libya illustrated recently, there is no one price for a barrel of oil, with the price varying depending on grade and location. Brent, the ocean-going tanker standard, shot up to US$116 on fears of supply disruptions, even as West Texas Intermediate (WTI), the North American benchmark, had not yet crossed the $100 threshold. The storage hub for WTI delivery is Cushing, Okla., currently the end of the line for the Keystone system, which in part explains the discounted prices there. North America's traditional pipeline configurations run west-east, bringing Albertan crude to refineries in Ontario, Quebec and the U.S. Midwest. However a much larger market, representing nearly half of North American refining capacity, lies on the Gulf Coast of Texas and Louisiana, built up to handle crude from Texas and offshore, as well as imports from Mexico and Venezuela. Imports from the latter two countries are in decline, leaving the Gulf Coast refineries thirsty for new feedstock. Moreover, many of them are designed to process heavy grades from Venezuela. It doesn't take much tweaking for them to handle bitumen from the oilsands, making it unnecessary for oil producers to build multi-billion-dollar upgraders in Canada.

Until 2006, however, you couldn't get there from here. That year Enbridge Inc. reversed the flow on an old line it had acquired to bring oil from the Midwest to Cushing — a roundabout solution, but it worked, immediately shrinking the price gap between "Edmonton par" and WTI from more than US$10 a barrel to mere pennies. Since then, other such patches have been added, increasing the flow of bitumen to the Gulf. The Keystone Gulf Coast Expansion, or Keystone XL, would bolster that network with the first north-south line direct from Alberta to Texas, its 500,000-barrel-per-day capacity transporting a quarter of Canada's current oil exports to the U.S. Rivals Kinder Morgan and Enbridge have similar proposals in the works, along with interim solutions such as piping bitumen all the way to the East Coast for transport by tanker to Texas.

While doing little to hinder oilsands development, a rejection would prolong price distortions in oil markets. "Keystone solves a lot of American problems, especially by connecting Cushing to the Gulf Coast," where the same barrel sells for about $10 more, Paget says. A "no" from the State Department would cause pipeline companies to redirect capital to fixing those inefficiencies in piecemeal ways. Without crossing an international boundary, these band-aids would be regulated by the Federal Energy Regulatory Commission, not State, with less risk of their becoming politicized.

The reason the Alberta Federation of Labour would like to see Keystone crumble is the hope of retaining upgrader jobs. "Good jobs are leaking out of the province right now," AFL president Gil McGowan says. "But that leak will turn into a gusher if the Keystone XL pipeline is approved." Whether a halt to Keystone would create jobs in Canada is debatable, though. The economic reasons for refining bitumen in the U.S. were compelling even before you could ship it to Texas, as evidenced by the Midwestern refineries converted to handle the ultra-heavy crude. Jobs are already on the move in response to price differentials, and the oil, one way or another, will follow.

Canadian Business Online, Apr 21 2011

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