Obama and Keystone

The Keystone XL pipeline project permit application has been delayed for multiple years.  Despite making changes to reroute the pipeline around the most environmentally sensitive watershed areas and receiving affected State’s approval, the Administration required a new-expanded environmental review, and implemented a new presidential permit process that delayed the permit decision well past the 2012 elections.  The added ‘Supplemental Impact Environmental Statement’ (SIES), which should address all of the significant environmental issues, change of project scope to mitigate major environmental risks, and the new focus on ‘national interest’ impacts, took most of 2012 and all of 2013 to complete.  The draft SIES was recently issued and the formal review and Public comment process should begin soon.  Timing of the pending Obama Administration decision on whether to approve or not approve the Keystone XL pipeline project is now expected to be mid-2014 at the earliest.  This decision could, however, be once again delayed until after the November 2014 elections.  When will the Obama Administration possibly make a final decision on the Keystone XL project?

History of the Keystone XL Pipeline Permitting Process – The original Keystone XL pipeline project permit was submitted back in 2008.  The Obama Administration delayed and eventually rejected the TransCanada Keystone XL pipeline cross-border project phase early 2012.  To supposedly make the permit review process more efficient the Administration issued an Executive Order 13604 that added more complexity to the past permit process.  Prior to issuing this new-modified permit process, pipeline reviews were the responsibility of 10 major Federal Agencies; primarily the DOT, DOE, DHS, BLM and the EPA.  Executive Order 13604 directed the Secretary of State to address ‘national interests’ in addition to normal environmental/safety/economic issues.  The presidential permit process must now cover many additional factors including energy security, cultural, and foreign policy.  To make this determination now requires engaging the DOD, DOJ, DOI and DOC in addition to the 10 Federal Agencies that had primarily responsible for pipeline project permit reviews before 2012.

Immediately following the Obama Administration’s denial of the original 2008 Keystone XL cross-border pipeline permit at the beginning of 2012, TransCanada modified their project scope and reapplied for a new pipeline construction permit.  TransCanada made changes to the pipeline routing as needed to avoid the most environmentally sensitive areas identified with the original project; primarily bypassing the Nebraska Ogallala Aquifer-watershed area.  These changes were approved by the Nebraska Governor January 2013.  Following Nebraska’s approval, the Obama Administration initially decided to delay any Keystone XL decision until at least the second quarter 2013.  Primary reasons for this delay was requiring the development of a new SIES to address all of the environmental issues apparently not covered in the original Environmental Impact Report, and evaluating ‘national interest’ impacts of the project.  Slow development of the SIES led to the Keystone XL permit decision being deferred into 2014.

The draft Keystone XL SIES was recently issued.  The SIES must next go through the Public and State/Federal Agency review process, which will take many months to complete beginning with the initial 45-day Public comment period, followed by addressing Public/Agencies’ significant comments/new issues, and making needed changes to the final report/analysis.  The Administration should then have all the information necessary to make a final permit approval decision.  To complete this process will likely take until at least mid-2014. 

Major Keystone XL Pipeline Issues of Concern – The major issues surrounding the decision to approve or not approve the Keystone XL project are apparently environmental, climate change, economic, energy security, and foreign policy:

Environmental Impacts – Oil spills are normally considered the largest risk of transporting crude.  Pipeline systems are most often used to minimize this risk since pipelines are the most reliable, safest and most efficient mode of transportation.  Over 80% of all the crude and petroleum oils (>20 million barrels per day; MBD) are routinely transported by pipeline within the U.S. year-round.  The original (2008) Keystone pipeline routing crossed large sections of the Nebraska Sandhills and Ogallala Aquifer areas that were determined to be at highest risk to a possible future pipeline leak or failure.  To avoid these and other potential environmental risks the pipeline routing was changed and shortened.  As a result of modifying the routing, the Sandhills region was bypassed, the number of waterways crossed was reduced by over 80% and the pipeline length reduced by almost 40%.  Re. Project Evaluation Factsheet.

Climate Change – Increased carbon dioxide equivalent (CO2e) emissions is the primary concern with Canadian Oil Sands crude increased production-consumption.  Determining the net change in full lifecycle CO2e emissions is a fairly complex analysis.  Canadian Oil Sands or bitumen crude oils are very heavy-essentially solid, which requires strip mining for initial recovery-production.  To convert the heavy bitumen into pipeline pumpable oil for Refining feedstocks requires conversion into lighter crude oils called syncrudes or synbit & dilbit.  Synbit & dilbit are commonly classified as ‘unconventional’ crudes since this type of crude oil production & refining is more energy intensive and costly compared to lighter ‘conventional’ crudes.  My recent detailed analysis (Re. Climate Change Impacts table) shows the substituting synbit/dilbit Canadian Oil Sands crude for average U.S. crudes could increase total U.S. annual CO2e emissions by up to 5-10 million metric tons (MMT).  This represents less than a 0.2% increase in recent total U.S. CO2e emissions.

Another major factor that will impact changes in World CO2e emissions are the alternatives to the Keystone XL pipeline.  Since 2010, U.S. Canadian crude oil imports have increased by 560 thousand barrels per day (KBD); compared to the capacity of the Keystone XL of 830 KBD.  These increased Canadian imports have been supplied via existing and the Keystone Phase 1 pipeline that was completed in 2010, and increase transport by rail.  This 560 KBD increase in Canadian imports since 2010 represents 2/3rds the capacity of the current Keystone XL pipeline project under presidential permit review.  These increased Canadian imports are largely synbit/dilbit crudes and could have increased CO2e emissions by similar levels since 2010.  However, due to a combination of displacing heavy Venezuelan syncrude imports (similar to Canadian synbit/dilbit) and expansion of lighter U.S. tight/shale oil (Bakken crude oil production) has actually resulted in minimal change in the average gravity of U.S. refined crude.  Associated Refining CO2e emissions increases are also relatively insignificant.  The primary reason why U.S. Refining average feedstock gravities and associated CO2e emissions have not changed significantly despite increased Canadian heavy crude imports is due to the designs and processing constraints of existing domestic Refineries.  Refineries normally require replacing existing/design crude oil feedstocks with similar gravity blended feedstocks (heavy synbit/dilbit + lighter Bakken crude oil for example).

If the Obama Administration does not approve the Keystone XL pipeline, the Canadians will reroute their Oil Sands crude to one or both coasts for export into to world markets; most likely Asia.  Since U.S. Refineries are among the most efficient in the world (least energy/ CO2e emission intensive) and marine transport of the Oil Sands crude will add significantly to the fossil fuels consumption to deliver the synbit/dilbit crudes to distant continents, the overall lifecycle CO2e emissions will actually be significantly higher (many MMT/year) for exports outside North America.

Economic Impacts – The latest pipeline project cost is estimated at $5.4 Billion.  The project is projected to create 15,000+ construction labor and materials fabrication jobs and add substantially to State and Federal (tax) revenues; in addition to major contributions to the U.S. GDP overall after startup.  Removing a major constraint to Canadian crude imports will also benefit all Consumers and most domestic Commercial/Industrial Companies by keeping U.S. domestic crude oil and petroleum products’ costs significantly below higher average world market prices.  Refer to WTI-Brent spread data section.

Energy Security – Overall U.S. Energy Security or risk of crude oil imports’ supply disruption has improved somewhat in recent years.  This has been due to a combination of large increases of domestic crude oil production and a decrease in petroleum consumption immediately following the 2007-09 economic recession.  Re. recent EIA dataMy previous analysis shows the recent rapid increase in domestic crude oil production is due overwhelmingly to Free Market factors and the decrease in petroleum consumption from a combination of slowing of the economy and increased energy efficiency upgrades.  Unfortunately, as the U.S. slowly recovers from the 2007-09 economic recession EIA MER 2013 data indicates that petroleum consumption has begun to increase again; exceeding recent year efficiency improvements.

Another recent analysis shows that U.S. Energy Security has not improved significantly over the years.  This is primarily due to effectively no change in the level of highest risk OPEC Persian Gulf crude oil imports that must pass through the Strait of Hormuz.  Despite the recent Obama Administration’s nuclear negotiations, the risk of a future confrontation and Iran shutting down the Strait of Hormuz still exists.  Such an event puts about 2 MBD of current U.S. crude oil imports at risk to supply disruption.  This represents a real risk of losing over 10% of total U.S. crude and petroleum oil supplies should Iran shutdown the Strait of Hormuz in the future.  To put such an event’s impact in perspective, during the 1973 Arab OPEC oil embargo that created a historic energy shortage and crisis, the U.S. only lost 6% of total crude and petroleum oil supplies.

The Keystone XL pipeline provides an opportunity to substantially increase U.S. Energy Security.  Increasing Canadian imports by up to 830 KBD (new pipeline capacity) could displace a similar amount of OPEC Persian Gulf imports (such as Saudi Arabia heavy crudes) that are at greatest risk to disruption.

Foreign Policy – Canada is the U.S.’s largest and most important Trade Partner and Ally.  Not only are these North America economics strongly connected, but major Energy Sectors including Power Grids and Petroleum infrastructures-supplies are also highly integrated.  Canada and the U.S. have strongly supported and defended each other both locally and internationally.  Completing the Keystone XL pipeline is clearly in the best interest of overall economies and consistent with the long term relationship-support between both Countries.

Consequences of Blocking the Keystone XL Pipeline Project – Delaying and possibly not approving the Keystone XL can and will negatively impact U.S. Energy Security and the economy, have insignificant impact on world CO2e emissions, and possibly damage the important relationship with Canada.  As previously described without the Keystone XL the negative impacts will continue to exit and could increase.

Energy Security – existing Canadian-U.S. pipeline infrastructure will be a major barrier to increasing this most secure source of imports and require continue reliance on higher risk OPEC and Persian Gulf imports.

The Economy – all the benefits of building the pipeline on jobs creation, increased tax revenues and the GPD contributions will be lost.  In addition, further possible reduction in North America crude and petroleum oil prices will be lost, leading to increased petroleum costs significantly greater than the levels that would develop with increased Canadian imports via the Keystone XL.  The loss of ‘shovel-ready’ pipeline jobs also appears to be inconsistent with the Administration’s claimed continued support of increased infrastructure jobs.

Climate Change – the impacts on CO2e emissions are relative small, and will be directionally greater if Oil Sands crude must be bypassed around the U.S.  Without the Keystone XL the Canadians will have no major option other than to build pipelines from Alberta Oil Sands reserves-production to one or both coasts for export into world markets.  This option will result in significantly greater CO2e emissions than if the oil sands are refined and consumed within the U.S.’s higher efficiency and environmentally cleaner Refining & Transportation Sectors.

Canadian-U.S. Relations – this historic strong Trade, Energy systems integration, and important values-military Ally relationship risks being damaged significantly.  While the Obama Administration negotiates easing and possibly eliminating the current sanctions imposed previously to curtail Iran’s nuclear ambitions, these negotiations will likely result in removing current constraints imposed on Iran’s ability to produce and expand their crude oil production-exports into world markets.  Such an action appears inconsistent with the reasonable treatment of the U.S.’s largest Trade/Energy Partner and most important Ally by forcing Canada to supply the same world oil markets, and do so by bypassing their future expanded oil production around U.S. borders.

The Politics Associated with the Keystone XL Pipeline Permit Approval – The primary campaign of the Keystone XL Opponents has been obviously environmental or climate change.  Concerns include the Oil Sands production impacts on Alberta natural forests, increased full lifecycle CO2e emissions of unconventional synbit/dilbit crudes vs. lighter conventional crudes, and assumed increased CO2e emissions impact on climate change or global warming.  The overall strategy and assumption of Keystone XL Opponents is that if the pipeline was not built, this would bottleneck and prevent the development of future increased Oil Sands production.  This ‘block the pipeline and Oil Sands production’ strategy assumes that no possible alternatives to the Keystone XL pipeline exists or could be developed, which is not likely to be realistic if the Obama Administration fails to approve the project permit.

While the SIES report very extensively reviews all of the significant environmental and national interest issues (Re. executive summary) those Environmental groups that strongly oppose the Keystone XL pipeline project, period, are not likely to be persuaded by any new analysis or data that could lead to the project’s approval.  Many Environmentalists, such as the Sierra Club’s Mr. Brune, are beginning to tune-up their project opposition rhetoric such as stating if the President approves the Keystone XL it will be “the Vietnam of his presidency”.  This and other possible Administration Keystone XL project approval verbal attacks, of course, will likely be followed by more anti-pipeline demonstrations, anti-project/supporter communiqués, and very likely, follow-up legal actions to stop the project permit if approved by the Obama Administration.

When Will the Administration Make a Final Decision on the Keystone XL? – In the President’s 2014 State of the Union speech, no mention was made of the Keystone XL.  There was reference to his ‘all-the-above’ energy strategy, which he claims led to increased domestic oil production exceeding imports, and America being closer to energy independence than in the past several decades.   He stated the need for developing first class jobs in support of the need for (building) first class infrastructure.  He promised to streamline the permitting process for key projects, so we can get more construction workers on the job as fast as possible.  He also referenced the importance of supporting America’s trade partners and allies in Europe and Asia-Pacific, but made no mention of Canada. 

Based on this latest State of the Union speech, the Keystone XL pipeline project appears fairly consistent with many of the stated needed improvements (jobs, energy independence/security, improving the economy, etc.), but is apparently still not a priority for the Administration.  It was disappointing that the President made no mention of the importance and opportunities of engaging and building on the economic/energy opportunities with Canada, and, apparently putting more priority on releasing sanctions that will enable Iran to increase their oil production.  Delaying or blocking a major constraint to the most secure source of U.S. oil imports from Canada, continues to force America to rely on highest risk imports from OPEC and the Persian Gulf.

So, when will the Obama Administration make a final decision on the Keystone XL pipeline project permit?  With the total omission or lack of recognition for the pipeline’s benefits and the obvious consistency with many major talking points in the President’s 2014 State of the Union speech, your guess is as good as mine?  What do you think?  Should the President continue to delay this decision past the 2014 elections possibly for political leverage, or should he make a final decision mid-2014 when all the necessary information and review processes should be complete, as required to make this important-final decision?  At some point the Canadians will have to assume the pipeline will not be approved and more aggressively pursue their options to placing their Oil Sands crudes into world markets, where Developing Countries such as China, are apparently much more receptive to facilitating the development and purchase of these crude oil supplies.