The Keystone XL Pipeline dispute is one of the hottest political issues for the President Obama. Backers claim that it will provide jobs and detractors claim it’s an disaster waiting to happen. The dispute has torn apart the Democratic Party, with unions calling for the jobs and environmentalists working feverishly to stop the pipeline. Both of these claims are rooted in facts, but both are overblown.
Rather than make a decision on the pipeline, however the administration has delayed the pipeline yet again, probably until after the November 2014 midterm election. This upset nearly everyone. But in terms of what is actually needed, this is probably the best thing to happen. The reason for this lies deep in Canadian oil and politics, quite apart from whatever we have going on in the US.
The Keystone XL pipeline is an addition to the Keystone network of pipelines, already under construction or operating, that bring oil from Alberta to the heart of US refineries located in Texas and Louisiana. In order to understand what is unique about it, we have to start with the various grades of oil and their relative value.
Crude oil can be classed as “light” or “heavy” based on how thick it is. Light Crude is cheaper and easier to transport and refine, and so is worth more. Crude also comes in “sweet” and “sour”, based on how much sulfur is contained in the oil, a by-product of how the oil was laid down millions of years ago. This sulfur has to be removed to keep it out of the air as acid rain and to prevent it from destroying catalytic converters in cars, so again Sweet Crude is worth more.
In the middle of all ranges is West Texas Intermediate (WTI), which stands as the benchmark for oil grades. After many years of running about $20 per barrel (42 gallon) it started climbing in 2000 as world demand for oil increased, and now stands around $100 per barrel. North Sea Brent oil, light and sweet, is about 10% more. Venezuelan oil, heavy and sweet, is about 10% less.
Oil from the tar sands of Alberta is both very heavy and sour, and worth about 20% less. That’s just above the break-even price of $75 per barrel that this nasty sludge costs to remove from the tar – although in recent years some claim that cost has fallen now that they have some experience with it. Though the stuff is easy to obtain, residing on or near the surface, no one wanted to touch it until WTI hit $100.
That takes us to the odyssey of pipelines in Canada, which are show in the map below.
Note that for all the oil in Alberta, there are very few pipelines across Canada to take it anywhere. Most of it flows south, into the US, where pipelines are easier to build. Canadian provinces have fairly unilateral veto power over pipelines, meaning that in the 40 years of Alberta oil almost no infrastructure to handle it has been built. Canada’s dirty little secret is that about 10% of their GDP comes from stripping commodities out of the ground and shipping them across the border without adding any value to it with good Canadian jobs – something like an undeveloped nation.
In 2006 Alberta oil officials proposed building the Northern Gateway pipeline to a terminal in British Columbia to move the heavy tar sands out by tanker to Asia. It was clearly going nowhere, bogged down by opposition in the environmental review process. They quickly pivoted in 2008 to “Plan B” – build a pipeline all the way across the US to export the tar sands through a terminal in Louisiana.
That may sound crazy, but it beats dealing with another province. It helps that the largest interest in Alberta tar sands is owned by the Koch Brothers, the US barons of oil (their dad, Fred Koch, invented the modern refining process) and contributors to all things right-wing. Approval of this pipeline, an extension to the Keystone network called Keystone XL, seemed like a snap.
Then Obama was elected, and the whole thing fell to Democratic, not Republican politics. The current firestorm erupted and everything bogged down. Keystone XL is going nowhere. In late 2012, Alberta decided to start seriously looking into “Plan C” – a pipeline to eastern Canada at a cost of $12B. A series of events have made this look like more than just an alternative.
The first was the terrible explosion of a train carrying oil from North Dakota’s Baken fields that leveled the town of Lac-Mégantic, Quebec, killing 47 people, in July 2013. With no pipelines to move oil, Canada relies heavily on rail cars to ship it east – at great expense. While the safety record of this method is being debated it clearly demands more handling. The rapid expansion of the Baken field, where the US is behind in pipeline infrastructure, has skyrocketed the amount of crude transported by railroad from 9,500 in 2008 to 407,642 in 2013 – a 40X increase that is clearly taxing the capabilities of the system. Lac-Mégantic and other disasters have shown this is not the way to go and support for the Energy East Pipeline has grown.
The search for alternatives to Russian oil for Europe also entered the discussion at the start of 2014, and Canada is eager to become a net exporter to Europe – reversing its use of North Sea Brent Oil on the east coast. The Energy East pipeline is now a matter of national security as well as safety. You may want to hum “Oh Canada” to yourself as you read up on the arguments for it.
Rarely mentioned in any of these articles is the obvious idea that the nasty tar sands can be partially refined in Alberta to produce a light, sweet crude product that is more palatable for transport and final refining. That’s being considered as well, and will likely be necessary to get the approval of so many provincial governments if the Energy East pipeline is finally built.
Keystone XL was always a somewhat twisted “Plan B” to continue to get around Canadian politics. Stalling the project as long as we have produced two very important developments that are starting to look like a genius master. Canada will finally start building the oil infrastructure it needs to handle its own oil, and will clean it up before sending it out of Alberta. The plan is good for Canada and for Europe. And even British Columbia may be willing to build the Northern Gateway pipeline to the west.
It means that there will be no US jobs building the new pipeline, but there will also be no heavy, sour tar being crammed through the US with remarkably little benefit to us after the pipeline is built. We’ll have access to the partially refined oil through the existing Keystone network, so we don’t really lose out much.
The contentious issue of Keystone XL is one of those rare issues that actually goes away the longer it’s stalled with no decision. In many ways, it was an issue meant for the Obama administration all along.
This piece deliberately punts on the US debate over Keystone, which you can read about in many places. This point of view, while rare in the media, is backed up by the links. Please follow them if you have any questions.