The Keystone XL pipeline has thus far endured a rather fitting, extra-long journey. To date, TransCanada Corp.’s Keystone XL project has been held up due to delay, political setback and endless trips on the regulatory-go-round. Now, the pipeline that was to take Alberta oil-sands production down to the Gulf Coast is being used as a political platform, as the most recent U.S. Department of State press release said it was going back to the drawing boards to restudy the planned route, citing the path through the Sand Hills area of Nebraska, and emissions from oil-sands production as potential environmental issues. To that effect, the Obama administration will now put off the decision until after the 2012 election.

Thus, TransCanada, which had originally filed its Presidential Permit close to forty-one months ago in 2008, to build and operate the $7-billion, 1,660-mile Keystone XL Pipeline from Hardisty, Alberta, to Cushing, Oklahoma, is now facing another setback.

The Keystone oil pipeline’s route moves through delivery points at the Cushing metering and delivery station in Oklahoma. Source: TransCanada Corp.

The blatant political ramifications of this decision are disheartening to some who have rallied in support of the pipeline, such as Sothern Power Co., ConocoPhillips Co., Exxon Mobil Corp., Royal Dutch Shell Plc, Chevron Corp., Marathon Oil Corp., Statoil Plc and BP Plc.

Others, like Enbridge Inc. and Enterprise Products Partners LP, are taking the opportunity to fill lack of take-away with pipeline reversals. Recently, Enbridge and Enterprise announced a decision to reverse the flow on the Seaway pipeline from South-North to North-South, a project that will be a further detriment to the expediency of TransCanada’s proposal. The new direction of flow does exactly what Keystone XL would have accomplished, as it directs oil from Cushing, Oklahoma, (West Texas Intermediate’s pricing point and, as of late, a source of a glut of supply) to Gulf Coast refineries in and around Port Arthur and Houston, Texas.

International relationships

According to T. Boone Pickens, entrepreneur and oilman, the state department’s decision is unnecessarily harming the nation’s ties with Canada. “That line should be built and we should capture the oil from Canada, but the government says this will not be acted on until the second-quarter of 2013,” says Pickens, who recently spoke to attendees at Hart Energy’s DUG Conference in Pittsburgh. “I promise that if they wait that long, Enbridge will build a pipeline out of Fort McMurray and go west to Kitimat, where the oil will go to the Chinese.”

“We should capture everything in North America so that we can cut off the purchases from OPEC and use our own resources.” – T. Boone Pickens, founder, BP Capital

Boone, never one to mince words, cautions that the outcome will be less than desirable for the U.S. markets. “If that happens we are complete fools in this country. We should capture everything in North America so that we can cut off the purchases from OPEC and use our own resources,” he says.

Not far off his estimate, recent company announcements have shown that the Chinese government is more than willing to woo Canada for its oil-sands production. In fact, in November, CNOOC Ltd. one of China's three main state-owned oil and gas producers, agreed to buy Canadian oil-sands producer OPTI Canada Inc. for $2.1 billion. This recent acquisition expands a growing Chinese presence in Canada's oil-sands industry following multibillion-dollar investments by other state-owned companies. OPTI owns a 35% working interest in Long Lake and three other project areas in the Athabasca region of northeastern Alberta. This could signal growing relations with China, even as relations with the U.S. cool off.

For those looking for a tangible reason as to why Canada ought to diversify its export markets for crude oil and natural gas, the answer can be found in the political dynamic between the U.S. and its northern neighbor. This decision sends a message that the U.S., under its current president, can no longer be counted on as a reliable energy market.

Canadian energy policy

Some, like Simon Dyer, policy director at the Pembina Institute, feel that the project’s newest holdup is an opportunity for the U.S. to encourage Canada to re-examine its energy policy, or lack thereof.

“Canada has made commitments in Copenhagen to achieve emission reductions, but has not implemented any regulations on the oil and gas industry to actually get us there. So at a bare minimum, implementing regulations that would achieve that level of reduction would be necessary. The science is clear that the targets the country has committed to aren’t strong enough to prevent catastrophic climate change,” he says.

According to Dyer, the Keystone XL pipeline decision might be something of a catalyst for new regulation. The data, he notes, speaks for itself. Canada has no climate policy, and is not addressing this issue, which will only increase as oil-sands production growth continues at a rapid pace.

“Clearly we have to start talking about economic development and the environmental policy in the same breath, and that’s not happening.” – Simon Dyer, policy director, Pembina Institute

“Clearly we have to start talking about economic development and the environmental policy in the same breath, and that’s not happening,” he states.

In fact, the Canadian National Energy Board just released a new energy outlook that shows potential oil-sands production reaching 5.1 million barrels (bbl.) per day by 2035. “But there is no discussion in the document whether this is consistent with Canada meeting international greenhouse gas obligations,” Dyer says. “I do think that there should be a serious discussion about whether or not we need to proceed, and at what pace and scale.”

Environmentalists in the U.S. are also concerned that the U.S. government is overlooking the emissions records of oil-sands production, considered by some to be a dirty source of oil. Dyer points out that the Keystone XL pipeline’s newest environmental review is a chance for the Canadian government to start implementing some changes, so that production can continue at an appropriate scale.

“If the Canadian federal government really wanted to contribute to the approval of the Keystone XL, and influence the U.S. decision, the best thing in the next 18 months that they could do is to move quickly to demonstrate that it is serious about reducing greenhouse gas pollution and other environmental impacts of oil-sands production,” he says.

He points out that one of the major issues mentioned in the state department’s memo included statements that the climate implications would be reconsidered. “It would behoove the Canadian government to use this delay to fix some of these glaring gaps in the regulatory system,” Dyer says.

Oil-sands emissions

Nicole Spears, section head of National & International Policy of the Clean Energy Division of Alberta, feels that the energy policy in Canada is being addressed one step at a time.

“Growing energy demand, at least until 2035, is still expected to largely be met through fossil fuels,” says Spears. “So how do we meet that demand in a responsible manner?”

In the global context, according to Spears, the oil-sands make up one-tenth of 1% of global emissions. The challenge becomes, as that as production increases, to reduce the total emissions.

“Those numbers are going to continue to increase if we don’t put in place some significant measures,” she cautions. “However, greenhouse gas emissions from oil-sands production average only about 5% to 15% more than the typical average U.S. crude, on a life cycle, or well-to-wheels basis.”

According to Spears, the government of Alberta has taken steps to reduce emissions in a stepwise fashion. “Within the province, we looked at the emissions and decided that we needed to take action. We had to look at what our emissions profile was. When you look at other jurisdictions, a lot of the emissions are coming from the transportation sector.”

In Alberta, transportation only makes up about 15% of total emissions. “We realized that large facilities actually make up about 50% of Alberta’s total emissions. So we can capture about half of Alberta’s emissions just by looking to those large emitters,” says Spears.

Coal-fired power plants make up the largest number of emissions today. However, an overall decline will be coming in coal-fired generation, as progress is being made to move to carbon-capture and storage at some facilities, and other forms of electric generation arise, such as natural gas and other alternatives.

“When we looked at our situation, we knew that the oil sands were expected to continue to grow, and grow in resultant emissions. So we needed to start looking for ways to reduce those immediately,” she says.

“When we looked at our situation, we knew that the oil sands were expected to continue to grow, and grow in resultant emissions.” – Nicole Spears, section head of National & International Policy of the Clean Energy Division of Alberta

Thus, in 2008, Alberta released a climate-change strategy, and set forward goals for 2020 and 2050. By 2050, Alberta’s goal is to have a 50% reduction, which would be a 200 million tonne reduction of expected emissions levels.

“In support of our 2008 strategy, we put in place a policy to regulate large emitters, across all sectors. We’ve put in place a 12% greenhouse gas intensity requirement. So every facility that falls under this program that emits over 100,000 tonnes per year has to reduce their annual emissions by 12%,” says Spears.

“They have three options to meet this measure. They can reduce emissions through new technology or energy efficiency. They can purchase an accredited Alberta offset. Or they can pay $15 per tonne into our Climate Change Emissions Management fund,” she explains.

“Through this program, almost $260 million has been contributed into our fund. And of that fund, we have committed about $130 million into clean energy projects. The exciting thing about this fund is that it is really moving toward those transformational changes. It can be spent on projects for research and innovation. Part of it is allocated to reduce greenhouse gas reductions today through proven technology.”

Thus, according to Spears, oil-sands development and resulting emissions are being closely monitored in a responsible fashion, and the Keystone XL pipeline’s source of product is one that will continue to be closely watched and managed in the near future.

In Illinois, the Keystone pipeline moves product through the Hartford metering and delivery station. Source: TransCanada Corp.

TransCanada’s take

According to Sean McMaster, executive vice president corporate, and general counsel of TransCanada Corp., the company has done more than enough to meet safety standards, regulatory requirements, and environmental concerns.

“We are faced with yet another delay on our permitting process, which is now well into its fourth year. Now, we are talking about another 12 to 18 months, so that will be a six-year regulatory process,” he says.

“I thought that Canada had taken the award for the worst regulatory process in attempting to get our Mackenzie pipeline approved, from Northern Canada down into the lower provinces, but I think if this one goes on much longer, we may set a new record,” McMaster says.

In spite of his jest, McMaster is very serious when it comes to the Keystone’s current status. He points out that, assuming this becomes a five-year regulatory process, few take into account that it will take another couple of years to build the pipeline. Sum total, the project will take close to seven years from when it was conceived to when it will actually ship crude oil. The U.S., he stresses, needed that oil seven years ago when the company started the process.

“The Keystone phase one was completed about four years from when we started the regulatory process, to the end of construction, so it went through two years in regulatory approvals in the U.S. and Canada, including the same presidential permit that we are seeking on the Keystone XL,” he says.

This is in addition to a two year construction period. The project now transports Canadian crude down into the Chicago refining areas, and has been in operation for a little over a year. This leg of the pipeline has already safely shipped over 100 million bbl. down to the Wood River area, and has not caused any major problems.

“It’s very simple. The market spoke and said they wanted this pipeline..” – Sean McMaster, executive vice president corporate, general counsel, TransCanada Corp.

Also, the Keystone XL is about a $13 billion infrastructure project with ultimate capacity of about 1.3 million bbl. that will hold much potential for take-away producers in the Bakken shale play.

“From an industry perspective, the pipeline is beneficial because it will also allow for transportation of Bakken crude oil. Currently, that oil is suffering from price depression because there is a bottleneck in getting it out of Montana and North Dakota. Production is currently being shipped by truck and rail cars, which are not as safe as a pipeline,” says McMaster.

“It’s very simple. The market spoke and said they wanted this pipeline. We have 83% of that capacity signed up for contracts with an average term of 18 years. So the fact that the government has stepped in the way and prevented this thing from being built is a real shame, because the American people need this oil and refineries have spent significant sums of money altering the refineries so that they can process this heavy crude,” he says.

McMaster notes that this is a shovel-ready project that doesn’t need any government funding and will put tens of thousands of workers on the job. That is a hefty argument considering the tepid state of the U.S. economy. Unfortunately, the approval process for the Keystone XL has taken much longer than McMaster anticipated.

“We originally had a timeline from the department of state this summer, and after a draft environmental impact statement and then a supplemental impact statement, they issued a final impact statement that said that the route that we chose, in consultation with them, was the best route for the Keystone XL. It also stated that it minimized the risks to everyone along the way, and that it was the safest and least risky route. Now, we are going to have to undergo another environmental impact study, which will change that final decision,” he says.

Canada is currently the leading supplier of crude oil to the U.S., which imports twice as much from Canada as it does from any other country.

“This would be a major benefit to the U.S. If you are buying the oil from us, you are not sending that money to the various other OPEC nations, where they don’t think the same way as we do. If you keep that money in North America, you could use the tax revenues and the increases in income to build roads and schools and put people to work,” urges McMaster.

Also, he notes, Canada also is one of the only nations that the U.S. is currently importing oil from that has the ability to increase production in a significant way, as oil-sands production growth is expected to increase steadily for quite some time.

The initial phase of the Keystone project transports Canadian crude down into the Chicago refining areas. Source: TransCanada Corp.

In addition, the Keystone pipeline, according to independent studies, will offer significant economic benefits, will increase the personal income of Americans by $6.5 billion and will allow more than $20 billion of new spending in the economy.

“This project will create 20,000 jobs during the two year construction phase. We’ve negotiated deals with all of the major unions, so labor in the U.S. is very supportive of this project. From a tax perspective, this pipeline runs through areas that need incremental sources of revenue, and we would bring that through the many municipal state and federal taxes that we bring to the table, and also, over the life of the pipeline, another $5.2 billion in tax revenue,” says McMaster.

And the environmental concerns have been wildly inflated due to hype and incorrect figures, according to McMaster. Oil-sands production equates to about 1% of the world’s greenhouse gas emissions. Since 1990, that number has decreased by 33%. When put in perspective, he says, the emissions of the oil sands is quite small compared to coal-fired power emissions. Meanwhile, all the energy produced in Alberta and British Columbia, and especially in the westernmost provinces in Canada, is already subject to carbon tax. So the company pays its dues for greenhouse gas emissions.

“There has been a lot of talk about how the oil-sands production is a lot dirtier than other production in the U.S., and we believe that the proper way to compare this is from a well to wheels basis, or the whole life cycle of the resource. When you do that, Canadian crude does really not contribute much more emissions than other sources. In fact, a comparison of the top four types of crude that the Canadian oil sands would be replacing, down in the refineries on the Gulf Coast, shows that oil sands is only between 5% and 15% more greenhouse gas intensive,” he says.

“I’m afraid that this is a political issue, with arguments of political rhetoric, rather than those of logic,” he concludes.

Whether the pipeline moves forward will largely depend on the timeframe, as further delays will encourage producers to look for take-away options elsewhere. For the time being, TransCanada and others will have to wait to see how the U.S. government decides. One issue remains clear. The pipeline still has a long way to go before a destination and successful conclusion can be reached.