nav-left cat-right

Questionable Economics Threaten The Keystone XL Pipeline — Not Court Rulings

Questionable Economics Threaten The Keystone XL Pipeline — Not Court Rulings
Now that a federal judge has squelched the Keystone XL Pipeline, the question facing its owner, TransCanada Corp., is whether the oil economics justify its completion. Not only is the price of oil still relatively low and falling but, competing pipelines are coming out of Canada and into this country.

While the price of a barrel of oil has risen from $50 in recent years to $75 in recent months, it is now down to about $60. At that price, it is difficult to rationalize the pipeline’s $8 billion cost. The line, which would go through Montana, Nebraska and South Dakota, has languished since 2008.

Enbridge Inc. and Kinder Morgan Inc. also want to send Canadian oil into the United States using their existing pipeline routes. Oil traffic is now backed up in Canada, preventing some of it from getting to market. That has caused a $15 billion hit to the oil economy there, says Scotiabank. For its part, TransCanada says that it “remains committed” to the project.

“Canada’s oil patch once again finds itself with too much crude and too few pipelines, depressing the value of Canadian crude relative to U.S. and global benchmarks,” the multinational bank says.

The District Court for the District of Montana ruled against President Trump’s January 2017 permit to allow TransCanda to finish the nearly 1,200 mile pipeline prong. The entire line would stretch 2,600 miles and go from Alberta, Canada to the refineries in Texas. The court said that the president failed to consider the effects that the pipeline would have on climate change — the very thing that caused President Obama to reject the line in 2015 and just as he was ready to sign the Paris climate agreement.

The court went on to say that Trump’s decision to permit the line didn’t properly consider oil prices, the environmental impact it would have on cultural resources or the consequence of oil spills. In fact, a sister project of the Keystone pipeline suffered a spill of 5,000 barrels, or 210,000 gallons, a year ago.

The U.S. Department of State, which has say over the pipeline because it crosses national boundaries, must reasonably explain why it is reversing the Obama administration’s policy. While it may reconsider its earlier decision, the agency can’t do so on a whim.

“The major spills that occurred between 2014 and 2017 qualify as significant,” the federal court said. … Moreover, the Trump administration “simply discarded prior factual findings related to climate change to support its course reversal.”

Canada at a Crossroad

The U.S. State Department said it is reviewing the court ruling and that it could appeal the decision to the 9th Circuit Court of Appeals. Trump called last week’s ruling a “disgrace,” saying that the project would reduce oil prices and create jobs at home. But over the last decade, the United States has been able to access both unconventional shale oil and gas. That means this country is able to supply more of its own needs and that it has less need to import oil.

The Keystone XL Pipeline would transport up to 800,000 barrels a day of Canadian tar sands, which is considered one of the dirtiest fossil fuels there is. Tar sands are thicker than standard crude oil and thus, it is both tougher to clean up and 17% dirtier. That is why the Obama administration chose to reject the pipeline, adding that the project would only create 50 permanent jobs while leading to greater CO2 emissions.

“As the court has made clear yet again, the Trump administration’s flawed and dangerous proposal should be shelved forever,” said Jackie Prange, senior attorney at the Natural Resources Defense Council.

Economically speaking, experts say that Canadian production is expected to hit 850,000 barrels a day in a couple years. Keystone can carry 800,000 barrels a day — and it would bulldoze its way through now unplowed, sensitive areas. The two separate lines proposed by Enbridge and Kinder would traverse through existing routes and have a combined capacity of 960,000 barrels a day. Any oversupply would thus drive down oil prices, adding substantial economic risk to the Keystone undertaking — all on top of the surrounding environmental controversies. 

But the Canadian government is thinking much longer-term — that eventually the market will support the oil flows coming out of Canada and into Texas refineries. Moreover, in this case, the liberal Trudeau government, sees the Trump administration as its ally and its immediate hope of getting permission to complete the Keystone XL pipeline.

“Pipeline approval delays have imposed clear, demonstrable and substantial economic costs on the Canadian economy,” says Scotiabank.

Nevertheless, TransCanada may decide to ship the oil via the rail lines. Scotiabank said that this strategy would mitigate harm to the Canadian economy by about $5 billion, or from $15 billion to $10 billion. Oil moves by pipeline 70% of the time but also accesses trucks, barges and rails for the balance of the time, although the cost to do so is more expensive, say experts.

The Keystone XL Pipeline has become the literal and figurative line in the sand for climate activists. While the Trump administration favors construction, the math does not, at least for now. The pipeline company is thus ensnared in a Catch 22: does it pursue a permit while the politics favor it or does it wait until the markets expand. It can afford to sit tight. But if the oil is eventually needed, it will find a way to cross the border.

keystone pipeline protestors in silhouette with man holding ‘NO XL’ sign (XXXL)Getty


Source: Forbes
3 mins read

By:  Ken Silverstein

I write about the global energy business.


Leave a Reply

Your email address will not be published. Required fields are marked *