None of Canada’s hardships will appreciably affect the U.S. energy market — hence why Obama has not prioritized Keystone XL’s approval.
By
Stratforanalysts
Approval of Keystone XL, the controversial pipeline that
would move heavy Canadian crude to the U.S. Gulf Coast, has been stalled ever
since it was first proposed in 2008. And it appears as though the oil industry
may have to wait longer still.
The Republican-controlled Congress will vote on a bill
approving the pipeline’s construction Jan. 9, but President Barack Obama has
threatened to veto the bill if it passes.
Washington can afford to wait. U.S. oil production has
risen by nearly 4 million barrels per day since 2010, and refineries along the
Gulf Coast have plenty of access to foreign crude. But Canada is not so
fortunate. Transportation bottlenecks have kept local oil prices much lower
than international ones. With so many questions surrounding the Keystone project,
Ottawa must continue to look for alternate routes to export its crude —
something that will likely galvanize voters ahead of Canada’s federal election
in October.
Most of Canada’s oil production is found in the
landlocked province of Alberta, and nearly half of the United States’ refining
capacity is located in the Gulf Coast. Both countries have wanted a better
connection between the two for some time. From 2009 to 2013, Canada exported
only 125,000 bpd; the rest of its production went to the Great Lakes region.
With such poor market access, West Canada Select, the Canadian heavy oil
benchmark, has traded far below international prices for several years.
(Currently, it trades for $33 per barrel.)
The Keystone project was meant to solve this problem in
four phases. The first phase connects Alberta to the oil terminal in Patoka,
Ill., via Steele City, Neb. The second and third phases bring oil from Steele
City to Cushing, Okla., and then to Houston. All three entered service between
2010 and 2014. The fourth phase, Keystone XL, is the portion that would send
high volumes of crude from Canada to Steele City, where it would link up with
the second and third phases of the pipeline.
Plenty of obstacles stand in the way of Keystone XL’s
construction. Congress has to approve the bill, and it would have to overrule
Obama’s veto if he does, in fact, veto the bill. In addition, the project is
still undergoing a U.S. State Department review, which issued an environmental
study last January. Also complicating the issue is state approvals. The
Nebraska Supreme Court on Friday allowed the pipeline’s construction to
proceed. But South Dakota’s construction permit expired in June 2014. So if TransCanada
TRP, +0.58% the company in charge of the project, has to wait for a potentially
more friendly U.S. administration, it could delay the project until after the
U.S. presidential election in 2016.
Alternate routes
With Keystone XL apparently unavailable for now, Canada
has had to consider other transport options. Transporting oil to the United
States makes the most sense for Canadian companies because it faces less
political, environmental and social domestic opposition.
One pipeline, the Flanagan South, which entered service
in December 2014, connects the Great Lakes to Cushing, creating some market
competition among refiners. However, that link has the same problem as the
Keystone project: Getting crude oil across the U.S.-Canadian border to feed it.
To bring more Canadian oil to the Midwest, energy company Enbridge wants to
expand another pipeline, the Alberta Clipper, which connects Alberta to
Superior, Wisc., from 450,000 bpd to 800,000 bpd. But because it is a
transnational pipeline, it must go through the same approval process as
Keystone XL.
Of course, Canada could build more options to ship oil to
non-U.S. markets. The most direct routes would be from the Canadian Rockies to
the Pacific Coast — in fact, three proposed routes already exist — but British
Columbia has strongly opposed those routes. The Energy East pipeline, which
would send 1.1 million bpd to eastern Canada and then onward to foreign markets
through the Atlantic, has incurred comparatively less opposition, though it is
not universally supported.
The only other realistic option would be to expand
crude-by-rail deliveries. But transporting oil by train is more expensive than
by pipeline, and companies are loath to use trains even when oil prices are
high.
Beholden to Washington
Still, alternate modes of transportation can only do so
much. Canada produces roughly 4 million bpd, but Ottawa wants to increase
production to 6.5 million bpd by 2030. To reach that target, Canada must bring
more oil from Alberta to foreign markets, so any delays on pipelines like
Keystone XL and Alberta Clipper will necessarily delay production growth.
Production growth will come primarily from oil sands
production, increasing from about 2.5 million bpd in 2014 to about 6 million
bpd by 2030 (which includes synthetic sweet crude oil). In a study released by
the Canadian Energy Research Institute in mid-2014, the estimated production
costs per barrel for oil sands were as low as $50 Canadian dollars (about
US$42) and as high as $107 Canadian dollars, depending on which extraction
method is used.
These costs put a lot of pressure on expansion projects.
If oil prices remain as low as they are currently, profit margins will be
small, so production growth will likely never materialize until oil prices rise
or technology gains continue to drop prices. This need for growth makes
minimizing transportation costs a key issue.
Notably, none of Canada’s hardships will appreciably
affect the U.S. energy market — hence why Obama has not prioritized Keystone
XL’s approval. In fact, currently the United States is effectively the only
country to which Canada can export oil from Alberta. But slowed production
growth in Canada creates stronger demand from other heavy oil exporters,
including Venezuela, Mexico, Colombia and Ecuador. However, if Canada builds
alternate pipelines, U.S. oil refiners that receive discounted Canadian oil may
have to buy at higher prices, possibly undermining the advantage the U.S.
economy has over other countries with higher energy costs.
The Keystone XL will be hotly contested in Canada ahead
of federal elections in October. Prime Minister Stephen Harper of the
Conservative Party has been a staunch supporter of Keystone XL and other
similar Canada-based pipelines. He has tried to fashion Canada as a global
energy superpower, but he has come under heavy pressure from the Liberal Party
and its leader, Justin Trudeau. Trudeau favors Keystone XL, but he does not
approve of some Canadian-based options for non-U.S. exports, such as the
Northern Gateway Pipeline. The Liberals have fared better in the polls for much
of the past two years, but more recently the Conservatives have narrowed the
lead.
Canada knows that sharing a border with United States can
be economically beneficial, but sharing its geographic position, so far removed
from the rest of the world, can be detrimental. Ottawa may have its own goals,
sometimes distinct from its southern neighbor’s, but it is often beholden to
the political machinations of Washington.
The Duke was accompanied by his daughter Eugenie and boyfriend Jack
Brooksbank as they left the luxurious chalet in Verbier (John Nguyen/Daily
Mail/SOLO Syndication)
