Keystone delay unlikely to stall big oil companies

November 11, 2011

With the Keystone XL pipeline on hold, the giant companies tapping Canada’s oil sands will turn to Plan B — existing pipelines to the United States.

Those pipelines, which now carry slightly more than 1 million barrels a day from Canada’s oil sands to the United States, can be expanded by adding pumping stations. Some companies, notably Enbridge, already have plans to boost the capacity of their lines and speed the journey of crude from Alberta to Texas.

“It’s inevitable that it will get here. This oil will have to find a market,” said Fadel Gheit, oil analyst with Oppenheimer & Co. “All these competing pipelines are going to rethink their strategy.”

That would disappoint foes of the Keystone XL pipeline, who hope that the delay or defeat of the project would impede the growth in output from the oil sands, whose exploitation releases 5 to 15 percent more greenhouse gases than the average crude used in the United States.

Asked what the Keystone delay would mean for oil sands development, a spokesman for Chevron, which owns 20 percent of one of the oil sands projects, said: “The Keystone decision has no implications for Chevron.”

The Canadian Association of Petroleum Producers forecasts that oil sands output will nearly double from 1.5 million barrels a day in 2010 to 2.9 million barrels a day by 2020. Proponents of the Keystone XL pipeline warned that a rejection of the project would lead to exports to China via a pipeline to Canada’s west coast, or shipments to the United States using barges, trucks and railroads, thus creating a larger carbon footprint.

Many Canadians prefer a pipeline to be built from Alberta to eastern Canada, which still imports oil from Saudi Arabia.

But oil analysts said Friday that existing pipelines to the United States offer the easiest and most likely fallback plans.

Enbridge is a likely choice for oil companies seeking additional pipeline space over the next two or three years. The company’s 1,000-mile long Alberta Clipper line, which went into operation last year, goes from Hardesty, Alberta, to Superior, Wis., and has an initial capacity of 450,000 barrels a day. But it can be pushed up to 800,000 barrels a day, the company says. That alone would make up for half of the capacity Keystone XL would have added.

From Wisconsin, the oil can connect to other parts of Enbridge’s extensive pipeline network. The company is also proposing a 500-mile Wrangler pipeline that would have an initial capacity of up to 800,000 barrels a day and take oil from Cushing, Okla., to the big refineries in Port Arthur, Tex. Cushing, a major terminal and hub, has a glut of crude oil from Canada and the Bakken field in Montana and North Dakota.

None of those projects would need State Department approval.

“We’re very pleased,” said Enbridge spokesman Larry Springer, who said the company just closed two periods in which oil producers bid for access to a proposed pipeline. “We are looking at routing possibilities. We’re in the field talking to landowners and public officials.”

TransCanada, which still hopes to win approval for the Keystone XL line, has a smaller 435,000-barrel-a-day Keystone line that could be expanded by 150,000 barrels a day. Kinder Morgan is also building a line to Vancouver that could be expanded.

These pipelines might face more scrutiny than before the Keystone XL battle.

“We’re going to fight every pipeline proposed for tar sands oil,” said Susan Casey-Leftkowitz, the Natural Resources Defense Council’s international director. But, she added: “Keystone facilitates expansion of the tar sands in a way Wrangler does not.”

“There’s no doubt that Trans­Canada and other exotic oil interests will try to find temporary ways to increase the flow of tar sands oil to America even without the Keystone XL pipeline,” said Mike Tidwell, founder of the Chesapeake Climate Action Network and a Keystone foe. “But pretty soon, major expansion of tar sands oil use will require a new, dedicated pipeline.”

But when? Analysts say that the oil giants in Alberta — including Royal Dutch Shell, Exxon Mobil, Chevron and Marathon Oil — often miss production targets because of the harsh conditions, difficulty of extracting bitumen from the sands and the corrosive nature of the crude. Big facilities upgrade the oil so that it can be used in pipelines and refineries without damaging them.

“There also remains ample offtake for oil sands, so eliminating Keystone hardly cuts off the ‘dirty oil,’ it just no longer goes over Nebraska on the way,” said one oil analyst who spoke on the condition of anonymity to preserve his company relationships. He said that Enbridge is charging $3.85 a barrel to take oil from Alberta to Chicago. Without competition from Keystone XL, he said, Enbridge “stands to make a lot more money.”

Former Alberta premier Peter Lougheen, another Keystone XL opponent, has proposed building refineries in Alberta and creating jobs there rather than in Texas.

But a refinery costs far more than pipelines.

Steven Mufson covers energy and other financial news.
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