From the Globe and Mail – June 8, 2011
by Nathan Vanderklippe and Shawn McCarthy
Amid the controversy engulfing TransCanada Corp.’s (TRP-T42.02-0.43-1.01%)
Keystone XL pipeline, which this week suffered another potential
setback at the hands of the U.S. Environmental Protection Agency, an
uncomfortable prospect is arising for Canada’s oil patch.
If the
$7-billion (U.S.) project is not built, the energy sector faces the
prospect of being “landlocked in bitumen,” with no way to get mounting
crude production to market. Without the massive new line, whose
environmental impact has become the subject of heated debate in the
U.S., existing pipelines could be constrained in as little as four
years.
That’s in part because oil sands producers likely only have until
2015 before they run out of customers in existing markets, as refineries
in the Midwest reach their capacity for processing Canada’s heavy oil.
They would then be stuck with growing volumes of oil, waiting for other
options to materialize. Some of those alternatives would be uncertain
and could take years to achieve, such as building new pipe across
contentious areas of British Columbia.
And a backup in crude, if
it were to happen, would almost certainly lead to diminished profits.
History has shown that pipeline restraints can lower the price of a
barrel of oil by multiple dollars – a consequence that speaks to the
importance the industry has placed on getting XL built. Billions of
dollars in spending are predicated, in part, on having that new pipeline
capacity in place.
“Unless we get increased [market] access, like
with Keystone XL, we’re going to be stuck,” said Ralph Glass, an
economist and vice-president at AJM Petroleum Consultants in Calgary.
“We’re
heading into the same situation with crude oil as we did with natural
gas, in that we’re going to hit a wall at some point in time and our
production is going to be the one backed out of the system, like natural
gas has been backed out of the U.S. system. I think it will have a
dramatic impact.”
For the oil patch, the possibility that the XL
project will falter is so outside expectations that many haven’t even
considered it. Indeed, companies have already signed up for the majority
of its capacity.
“None of us are really planning for that,” Devon Canada president Chris Seasons said.
TransCanada
argues that the pipeline’s contributions to U.S. employment and oil
supply will prove too compelling for the Obama administration to turn
down.
“We do not believe there will be a ‘world without Keystone,’
” TransCanada spokesman James Millar said in an e-mailed comment. “We
cannot see a scenario where the U.S. would say no to jobs and energy
security in getting oil from a stable nation in Canada.”
Yet the
pipeline has stirred a rancorous debate in the U.S., with critics
questioning whether it would imperil key water resources and further tie
that country’s economy to hydrocarbons. More questions arose this week
when the U.S. Environmental Protection Agency sent a letter to the State
Department, which is charged with approving the project. The letter
outlined a lengthy list of concerns about XL and argued that the State
Department’s draft environmental impact statement is seriously flawed
and needs more work.
That has set the stage, some believe, for a
likely delay in the final approval decision, although the State
Department still expects to make that decision later this year.
On
that decision hangs not just a major source of future revenue for
TransCanada. In many ways, Canada’s entire oil and gas industry could be
affected. For example, Brian Ferguson, the chief executive officer of
Cenovus Energy Inc., has said Keystone XL is essential to allow future
oil sands growth. Tens of billions of dollars hang in the balance.
Building
new pipelines is so critical to Alberta’s future that the province’s
Energy Minister, Ron Liepert, thinks it needs national consideration.
“If
there was something that kept me up at night, it would be the fear that
before too long we’re going to be landlocked in bitumen,” he said.
“We’re not going to be an energy superpower if we can’t get the oil out
of Alberta.”
Mr. Liepert, who is co-hosting a meeting of federal
and provincial energy ministers in Kananaskis, Alta., in July, is urging
his counterparts to adopt an energy strategy that would make the
development of crude oil-export pipelines a matter of national
importance. He is also hoping Ottawa will strike a continental energy
pact that would commit the U.S. to providing market access to Canadian
oil in return for security of supply.
Were such a strategy to be
struck, it might alleviate “these project-by-project delays that I think
are just going to get longer and longer,” Mr. Liepert said, noting that
oil sands growth forecasts suggest several more XL-sized projects will
be needed in future years.
For Canadian producers, some other
options are available, including expanding and reconfiguring Enbridge
Inc.’s pipeline system to push oil farther east, where it can displace
some Atlantic imports.
But one of the most serious concerns lies
in getting heavy oil sands crude to refineries that can process it – an
issue likely to grow in importance in coming years. Keystone XL would
bring oil to the Gulf Coast, home to the world’s largest refining
complex. Most of today’s exports flow to the Midwest; several proposed
new pipes could bring more volume to the Gulf Coast – although it may be
a brief reprieve, since the Canadian Association of Petroleum Producers
expects existing pipelines to be full by 2017 or 2018.
Problems
are likely to arise long before then, however, especially since
Midwestern refineries are likely to reach their heavy oil limit by 2015
amid a surge in U.S. domestic light crude production, according to work
by IHS CERA.
“Therefore it is even more important that heavy crude
like the Canadian oil sands can get to a market that can process it,”
said Jackie Forrest, Calgary-based director of global oil for the
international research firm.
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