A year ago, the Keystone XL pipeline controversy was portrayed by the 24-hour news cycle as a battle between the classic, saintly environmentalists and the evil, money-hungry capitalists.
Oil advocates were touting the benefits the pipeline would bring to the economy and the energy security that importing from Canada would provide…
At the same time, environmentalists were condemning the heavy carbon dioxide emissions produced by extracting oil from the Alberta tar sands and the risk of oil leaking along the route – like the recent spill in the Yellowstone River.
It was a raucous battle for sure. But things are different today.
With the world in the midst of an energy market crash and U.S. oil suffering, an unlikely partnership has formed between tree huggers and oil companies.
And as a result, the Keystone deal will face opposition from both sides…
An Efficient U.S. Industry Killer
Without a doubt, a pipeline is the most efficient way to transport crude oil. It costs about $7 less per barrel than rail cars and about $10 to $12 less than trucking. When you consider that it’s meant to transport 830,000 barrels per day, those small savings add up very fast.
It’s easy to understand why the Canadian oil industry is so eager to complete the project (half of it is already built).
The current proposal that protestors are fighting would allow the pipeline to reroute and make a shortcut from its original proposed route. The company behind the project, TransCanada, is already pursuing eminent domain claims in places like Nebraska in anticipation of approval.
But, it’s this efficiency that makes finishing the pipeline a much less important issue for oil industry proponents today than this time last year.
You see, when oil is selling for $100 per barrel, there’s room for everyone, even the tar sands oil that would make its way through the pipeline from Alberta to the southern U.S. ports on the Gulf Coast.
The only shouts of protests would come from those worried about the environmental effects. Crude produced from tar sands makes about 17% more carbon pollution in the extraction process than conventional or shale extraction, and spills are always a possibility.
But with crude oil prices in the mid $40s, and the likelihood they’ll head lower in the short term, allowing more oil to flow from Canada to the rest of the world will only exacerbate the pressure on U.S. shale producers – who are already fighting to survive.
Seeing the Common Ground
The hard truth is that many shale producers won’t survive the current plunge if prices remain below $55 or $60 for longer then 12 to 18 months. Hedges put in place last year to sell oil at $75 to $100 will begin to expire, and the reality of debt service will set in.
It’s just not easy to pay off loans when your revenue projections are sliced in half.
Extracting oil from the Alberta tar sands isn’t a cheap method of production either, with costs ranging from $50 to $70 per barrel. On top of that, it’s an extra $10 to $12 per barrel for transportation, hence the push by the Canadians to pass the deal.
But it’s this greater expense that creates the wiggle room that will allow some U.S. producers to survive the crash.
Plus, finishing the pipeline would hurt job growth, something the liberal Democratic administration definitely doesn’t want.
You see, the U.S. energy industry employs millions of people. Several thousand people work in the higher-cost shale regions alone!
The Keystone pipeline would create only a few hundred jobs during its design and construction, and then even less once it’s operational. That’s because the whole point of a pipeline is to eliminate the need for more labor-intensive transportation methods, such as a freight train.
The Keystone pipeline is a great idea, but the industry couldn’t get it done fast enough – and now the timing could not be worse.
The economic benefits for the Canadians are outweighed by the economic losses that will be faced by the U.S. shale industry at current prices.
Thus, it’s highly unlikely that the pipeline will be approved by the current administration, and the oil industry won’t push it.
And the chase continues,
Karim Rahemtulla