Monday, June 20, 2011

Keystone XL, politics & the King’s Speech

Even before the original Keystone cross-border pipeline project aimed at bringing Canadian crude oil to the doorstep of US refineries had been completed, calls were growing for an extension. The original pipeline which links Hardisty (Alberta, Canada) to Cushing (Oklahoma) and Patoka (Illinois) became operational in June 2010, just as another, albeit atypical US-Canadian tussle was brewing.

The extension project – Keystone XL first proposed in 2008, again starting from Hardisty but with a different route and an extension to Houston and Port Arthur (Texas) is still stuck in the quagmire of US politics, environmental reticence, planning laws and bituminous mix of the Canadian oil sands.

The need for extension is exactly what formed the basis of the original Keystone project – Canada is already the biggest supplier of crude oil to the US; and it is only logical that its share should rise and in all likelihood will rise. Keystone XL according to one of its sponsors – TransCanada – would have the capacity to raise the existing capacity by 591,000 barrels per day though the initial dispatch proposal is more likely to be in the range of 510,000 barrels.

Having visited both the proposed ends of the pipeline in Alberta and Texas, the Oilholic finds the sense of frustration only too palpable more so because infrastructural challenges and the merits (or otherwise) of the extension project are not being talked about. To begin with the project has a loud ‘fan’ club and an equally boisterous ‘ban’ club. Since it is a cross-border project, US secretary of State Hillary Clinton has to play the role of referee.

A pattern seems to be emerging. A group of 14 US senators here and 39 there with their counterparts across the border would write to her explaining the merits only for environmental groups, whom I found to be very well funded – rather than the little guys they claim to be – launching a counter representation. That has been the drill since Clinton took office.

One US senator told me, “If we can’t trust the Canadians in this geopolitical climate then who can we trust. Go examine it yourself.” On the other hand, an environmental group which tries to get tourists to boycott Alberta because of its oil sands business tried its best to convince me not to land in Calgary. I did so anyway, not being a tourist in any case.

Since 2008, TransCanada has held nearly 100 open houses and public meetings along the pipeline route; given hundreds of hours of testimony to local, state and federal officials and submitted thousands of pages of information to government agencies in response to questions. The environmentalists did not tell me, but no prizes for guessing who did and with proof. This is the kind of salvo being traded.

Send fools on a fool’s errand!

It is not that TransCanda, its partner ConocoPhillips and their American and Canadian support base know something we do not. It is a fact that for some years yet – and even in light of falling gasoline consumption levels – the US would remain the world’s largest importer of crude oil. China should surpass it, but this will not happen overnight.

The opponents of oil sands have gotten the narrative engrained in a wider debate on the environment and the energy mix. Going forward, they view Keystone XL and other incremental pipeline projects in the US as perpetuating reliance on crude oil and are opposing the project on that basis.

Given the current geopolitical climate, environmental groups in California and British Columbia impressed upon this blogger that stunting Alberta’s oil sands – hitherto the second largest proven oil reserve after Saudi Arabia’s Ghawar extraction zone – would somehow send American oilholics to an early bath and force a green age. This is a load of nonsense.

Au contraire, it will increase US dependency on Middle Eastern oil and spike the price. Agreed the connection is neither simple nor linear – but foreign supply will rise not fall. Keystone XL brings this crude foreign product from a friendly source.

Everyone in Alberta admits work needs to be done by the industry to meet environmental concerns. However, a 'wells to wheels' analysis of CO2 emissions, most notably by IHS CERA and many North American institutions has confirmed that oil sands crude is only 5 to 15 per cent ‘dirtier’ than US sweet crude mix.

The figure compares favourably with Nigerian, Mexican and Venezuelan crude which the US already imports. So branding Canadian crude as dirty and holding up Keystone XL on this basis is a bit rich coming from the US. Keystone XL increases US access to Canadian crude. Who would the Americans rather buy from Canada or Venezuela? Surveys suggest the former.

The pragmatists at CAPP

Over a meeting in Calgary, Dave Collyer, President of Canadian Association of Petroleum Producers (CAPP) told the Oilholic that they have always viewed Keystone XL as an opportunity to link up Western Canada to the US Gulf coast market, to replace production that would otherwise be imported by the US from overseas sources most notably Venezuela and Mexico where production is declining according to available data. There are also noticeable political impediments in case of the former.

“We don’t see this pipeline extension as incremental supply into that orbit, rather a replacement of existing production through a relatively straightforward pipeline project, akin to many other pipeline projects and extensions that have been built into the US,” Collyer said.

Energy infrastructure players, market commentators and CAPP make another valid point – why are we not debating scope of the Keystone XL project and its economic impact and focussing on the crude stuff it would deliver across the border? CAPP for its part takes a very pragmatic line.

“Do we think there is legitimacy in the argument that is being made against Keystone? No (for the most part) but the reality is that there has to be due consideration in the US. I would assume the US State Department is in a position where it has no alternative but to employ an abundance of caution to ensure that all due processes are met. What frustrates Canadians and Americans alike is the length of time that it has taken. However, at the end of the day when we get that approval and it is a robust one which withstands a strict level of scrutiny then it’s a good thing,” Collyer said.

T I M B E R!

Canadians and Americans first started bickering about timber, another Canadian resource needed in the US, about taxation, ethics, alleged subsidies and all the rest of it way back in 1981. Thirty years later, not much has changed as they are still at it. But these days it barely makes the local news in Canada each time the Americans take some reactive action or the other against the timber industry. Reason – since 2003 there has been another buyer in town – China.

In 2010, timber sales from Canada to China (and Japan to a lesser extent) exceed those to the US. Over the last half-decade timber exports from the province of British Columbia alone to China rose 10 times over on an annualised basis. Moral of the story, the US is not the only player in town whatever the natural resource. Canadians feel a sense of frustration with the US, and rightly so according to Scott Rusty Miller, managing partner of Ogilvy Renault (soon to be part of Norton Rose) in Calgary.

“We are close to the US, we are secure and we have scruples. Our industry is more open to outside scrutiny and environmental standards than perhaps many or in fact any other country the US imports crude oil from – yet there are these legal impediments. Scrutiny is fine. It’s imperative in this business, but not to such an extent that it starts frustrating a project,” Miller noted.

Ask anyone at CAPP or any Toronto-based market analyst if Canada could look elsewhere – you would get an answer back with a smile; only the Americans probably would not join them. The Oilholic asked Collyer if Americans should fear such moves.

His reply was, “As our crude production grows we would like access to the wider crude oil markets. Historically those markets have almost entirely been in the US and we are optimistic that these would continue to grow. Unquestionably there is increasing interest in the Oil sands from overseas and market diversification to Asia is neither lost on Canadians nor is it a taboo subject for us.”

CAPP has noted increasing interest from Chinese, Korean and other Asian players when it comes to buying in to both crude oil reserves and natural gas in Western Canada. Interest alone does not create a market – but backed up by infrastructure at both ends, it strengthens the relationship between markets Canadians have traditionally not looked at. All of this shifts emphasis on Canadian West coast exports.

“Is it going to be straightforward to get a pipeline to the West coast – we’ll all acknowledge that it’s not. For instance, Enbridge has its challenges with the Gateway pipeline. There is an interest in having an alternative market. There are drivers in trying to pursue that and I would say collectively this raises the “fear” you mention and with some factual basis. However, the US has been a great market and should continue to be a great market...while some caution is warranted,” he concluded.

The King’s speech

We’re not talking about Bertie, (King George VI of England) but Barack (The King of gasoline consumers and the US President). On March 30th, the King rose and told his audience at Georgetown University that he would be targeting a one-third reduction in US crude imports by 2025.

“I set this goal knowing that we’re still going to have to import some oil. And when it comes to the oil we import from other nations, obviously we have got to look at neighbours like Canada and Mexico that are stable, steady and reliable sources,” he added. While I am reliably informed that the speech was not picked up by Chinese state television, the Canadian press went into overdrive. The Globe and Mail, the country’s leading newspaper, declared “Obama signals new reliance on oil sands.”

Shares of Canadian oil and service companies rose the next day on the Toronto Exchange, even gas producers benefited and 'pro-Keystone XL' American senators queued up on networks to de facto say “We love you, we told you so.” Beyond the hyped response, there is a solid reason. Keystone XL bridges both markets – a friendly producer to a friendly consumer with wide ranging economic benefits.

According to Miller, “Refining capacity exists down south. Some refineries on the US Gulf coast could be upgraded at a much lower cost compared to building new infrastructure. There are economic opportunities for both sides courtesy this project – we are not just talking jobs, but an improvement of the regional macro scenario. Furthermore, however short or long, it could be a shot in the arm for the much beleaguered and low-margin haunted refining business.”

The pipeline could also help Canadians export surplus crude using US ports in the Gulf and tax benefits could accrue not just at the Texan end but along the route as well. That the oil sands are in Canada is a geological stroke of luck, given the unpredictability of OPEC and Russian supplies. The US State Department says it will conclude its review of Keystone XL later this year. Subjecting this project to scrutiny is imperative, but bludgeoning it with impediments would be ‘crudely’ unwise.

This post contains excerpts from an article written by the Oilholic for UK's Infrastructure Journal. While the author retains serial rights, the copyright is shared with the publication in question.

Gaurav Sharma 2011 © Gaurav Sharma and Infrastructure Journal 2011. Map: All proposals of Canadian & US Crude Oil Pipelines © CAPP (Click map to enlarge)

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