PipelineThe Keystone XL Project has been a political hot potato for the Obama Administration.  Approving the project will benefit the economy and energy security, but risks not addressing carbon emission issues.  Blocking the project passes up on an opportunity help the chronically slow U.S. economic recovery and ignores energy security concerns, but could possibly help mitigate climate change.  The question becomes, which decision has the greatest benefits compared to the costs and will most benefit the U.S. overall?

Brief Keystone XL Pipeline History – The original Keystone ‘phase-one’ pipeline project was approved by the U.S. in 2008, constructed and started up in 2010.  This first Keystone pipeline helped eliminate a past Canada-U.S. logistic constrain and allowed increasing Canadian syncrude deliveries up to 590 thousand barrels per day (KBD) into the U.S. Midwest.  In 2008 a second-phase or extended-branch pipeline project, the ‘Keystone XL’, was proposed to expand the total pipeline system capacity up to 1,100 KBD.  The Keystone XL was blocked by the Obama Administration largely due to environmental concerns for the Ogallala Aquifer region.  The pipeline owners developed a plan to bypass the sensitive aquifer regions and addressed other potential environmental issues.  This modified pipeline plan received final state approval from Nebraska in January 2013.  

Following Nebraska’s approval, the Obama Administration has apparently decided to delay any Keystone XL action until the second quarter 2013.  

U.S. Energy Security Impacts – The Keystone XL project is advocated to create thousands of jobs and be the source of $ Billions per year of economic benefits to many communities within the U.S. and Canada.  Besides substantial economic benefits, the Keystone XL could also significantly benefit U.S. energy security.  Energy security is commonly defined as the level of disruption risk to required oil imports.  Due to Iran’s nuclear ambitions and chronic threat to shutdown the Strait of Hormuz, OPEC Persian Gulf imports are currently at the greatest risk of disruption since these oil supplies must be transported through the threatened Strait.  Refer to the following table.

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EIA MER data sources Tables 3.3a and 3.1 .  Note: Petroleum oil ‘supplied’ is redefined as ‘consumed’, and the table excludes refining volume gains and inventory changes. 

The good news: total OPEC oil imports are down as a percent of total U.S. petroleum consumption since 2009.  The bad news: highest risk Persian Gulf imports have increased by 30% since 2009.  As a result, U.S. energy security has declined towards historic lows over the past four years.  This 12% level of high risk Persian Gulf imports is twice the volume of oil lost during the 1973 Arab OPEC oil embargo.  Even though the U.S. has installed an emergency SPR to help mitigate a future oil embargo/disruption, the West and East Coasts will still be most impacted if Iran carries out their Strait of Hormuz shutdown threat. 

The most secure sources of U.S. oil imports come from within North America.  North American oil import logistics are the most economic (efficient cross-border pipelines or shortest marine routes) and safest (least subject to weather related disruptions or potential terrorist attacks).  The 2010 startup of the Keystone phase one pipeline allowed significantly increasing Canadian syncrude imports into the U.S.  Refer to the following table.

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Additional EIA MER data source Table 3.3c 

The not so good news: total non-OPEC oil imports declined as a percent of total U.S. consumption since 2009.  Depletion of Mexican oil production has been a major contributor to reduced non-OPEC imports.  The good news: the Keystone phase one pipeline enabled Canadian imports to increase by 20% since 2009.  Without the Keystone phase one pipeline the U.S. would have been required to obtain additional oil imports from outside North America, which would have caused significantly greater decline in current U.S. energy security.

Climate Change Impacts – The Keystone XL has faced opposition similar to environmental concerns routinely raised for all new petroleum oil projects over the years.  Historic concerns typically include air, water and land usage-impacts.  ‘Climate change’ impact issues have been added to the list of Keystone XL pipeline project concerns.  Although Keystone XL pipeline local environmental issues were fully addressed according to the Nebraska Authorities, remaining project concerns are now focused on the carbon emissions of Canadian unconventional syncrude vs. conventional crude alternatives.  Various studies indicate North America carbon emissions from syncrude production could increase many fold by allowing the Keystone XL project.  However, most of these claimed emission increases are often confusing and questionable.  To verify the accuracy of the claimed increased carbon emissions an independent detailed analysis was completed.  This analysis compared the full ‘lifecycle’ of gasoline motor fuels produced from average U.S. crudes vs. Canadian syncrude.  Refer to the following table.

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Data and analysis based on original GREET model Author’s Peer Review 

The above data and analysis shows that crude oil recovery and refining fossil fuels consumption could increase quite substantially by 300% and 30% respectively.  Based on the full ‘well-to-wheel’  (WTW) energy balances, unconventional Canadian syncrude should only increase the North America WTW fossil fuel consumption by almost 7% over current average WTW balances. 

In 2012 total U.S. carbon emissions from the consumption and production of petroleum was about 2600 million metric tons per year (MMT/yr.).  Based on 2012 total petroleum oil consumption (18,640 KBD), the Keystone XL pipeline capacity (510 KBD) and estimated unconventional oil WTW increased carbon emissions (7%), total increase in U.S. carbon emissions could be up to 5 MMT/yr.  Based on total U.S. 2012 carbon emissions of 5,260 MMT/yr. this represents an increase of 0.1%; a relatively small amount.

Canada Has Alternatives – Canada is the U.S.’s largest and most important trade partner.  In addition, Canada has been a dedicated and trusted ally locally and internationally.  Besides strong trade and shared values, the two countries’ electric power grids are also highly integrated, which has helped maximized power system efficiencies and maintain reliabilities over the years.

If the Obama Administration does not approve the Keystone XL project the Canadian’s will be forced to seriously consider options.  Canada’s next most feasible alternative to the Keystone XL is to pipe the syncrude to the West Coast and export to China.  If this optional disposition of Canadian syncrude were to move forward, world carbon emissions would actually increase slightly compared to the current U.S. Keystone XL project.  Besides the added emissions from transporting the syncrude by marine between continents, Asian refineries are notoriously inefficient and highly polluting compared to U.S. refineries.  The net result of not approving the Keystone XL would be actually increasing world total carbon emissions by exporting to China.

Other Keystone XL Benefits and Associated Impacts – Besides the added jobs, taxes and pipeline construction benefits the project will further increase oil supplies into the midcontinent.  This could further help reduce U.S. average crude oil prices compared to world markets.  Refer to the following graph.

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EIA ‘Spot Price’ data  

Brent and WTI are benchmark crudes for Europe and U.S. markets.  Historically the WTI-Brent spread (cost difference) has averaged about a +$2 per barrel (WTI > Brent costs).  Due to a combination of increased domestic crude oil production and increased Canadian imports this spread has declined dramatically to historic lows since the Keystone phase one pipeline startup in June 2010.  The average WTI-Brent spread has dropped to a ‘negative’ $17 per barrel in 2012.  Canadian import increases accounted for about 25% of total increased midcontinent oil supply in recent years.  This increased oil supply has contributed to the reduced WTI-Brent spreads.  Of the total reduction in average WTI prices Canadian imports are estimated to have contributed to about $5 per barrel of the total recent cost reduction.  Assuming this relationship remains proportional, the Keystone XL could benefit U.S. consumers by about $1.0 Billion per year in reduced petroleum costs in future years.

Another benefit of the Keystone XL would be to further reduce the need for U.S. imports from unstable, potentially hostile foreign governments.  The Keystone XL would reduce the need for highest risk OPEC crude oil imports barrel per barrel.  Besides the direct Persian Gulf energy security benefits, the Keystone XL could further reduce the level of OPEC oil revenues (from the U.S.) that could potentially be providing support to various anti-U.S. and terrorist organizations around the world. 

Recent Administration Energy Policy Actions – Following the Deep Water Horizon disaster and preceding the Administration ‘all-the-above’ energy policy announced last year, a major energy policy action was taken that supported new offshore crude oil development in South America.  In 2011 the Administration issued Brazil $2 Billion in financing support to help them develop their offshore oil reserves.  A large part of the justification was to support a possible future source of increased U.S. oil imports.  The issue of carbon emissions and climate change was not considered important at that time.

The Administration’s 2012 ‘all-the-above’ energy policy claims to support the development of all forms of energy including U.S. domestic oil & gas fossil fuels.  Besides claiming credit for 1.5 million barrel per day petroleum oil production increases 2009-2012, the Administration appeared to support responsible and additional future development.  The focus on climate change only apparently became a growing priority after the 2012 election.

It’s Time for the Administration to Make a Final Decision – Despite other competing issues such as gun control, emigration, and the deficit, the Administration needs to put priority on making a final Keystone XL project decision.  If the Administration blocks the project all of the significant benefits to the U.S. economy, energy security, etc. will be lost, and the level of reduced carbon emissions will probably be insignificant.  Blocking the Keystone XL will make environmental special interests very happy since many believe that any action that reduces U.S. access to new or existing sources of fossil fuels is a positive outcome.  Blocking the Keystone XL will also make China extremely pleased.

If the Administration supports the Keystone XL project the U.S. economy, energy security, consumers and possibly national security will benefit considerably.  The impact on carbon emissions will be relatively small.  Such an action would be supportive of our largest and most important trade partner, Canada.  Reducing U.S. reliance on Persian Gulf oil imports will not make the Iranians very happy since their Strait of Hormuz shutdown threat will lose significant leverage over U.S. foreign policy as future regional imports decline.  Many environmental special interests will obviously be displeased and will likely follow-up through legal channels.

Which decision do you believe will best benefit the U.S. residents and the economy overall?