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Setback for Keystone XL impacts Alberta’s oil sands development
Canada’s Foreign Affairs Minister Stephane Dion believes it is possible for his country to “move on” from Keystone XL and “make a fresh start” by both rehabilitating its international image as a responsible energy producer and demonstrating to export markets that it can combat climate change even as it produces oil.
He said the Canadian government must introduce a sufficiently rigorous environmental assessment of oil sands projects and pipelines “and then our product and goods will be welcome everywhere.”
But Dion was alone among government and petroleum industry leaders in voicing such rosy optimism, while others heaped doubt on the outlook for Alberta’s oil sands, the mainstay of national crude production.
Jeff Rubin, former chief economist at CIBC World Markets and now an academic, said that in rejecting Keystone XL President Barack Obama demonstrated there is no longer an economic context for the pipeline or for other transportation systems such as railways to handle “massive expansion of production in the Alberta oil sands.”
He said the current price of US$30 a barrel for Western Canadian Select, the benchmark for the bulk of oil sands output, gives the oil sands the dubious distinction of being the lowest-priced oil in the world with one of the highest cost structures.
Rubin wrote in the Globe and Mail that the explosive growth of production in Bakken, Eagle Ford and Permian basin shale formations has removed the need for additional oil sands imports into the U.S., regardless of the retooling of Gulf Coast refineries to process heavy crudes.
Radical turnaround Instead, the radical turnaround in U.S. oil production has spurred the industry’s lobbying to remove 40-year export bans.
“Even if Alberta’s land-locked fuel could get to tidewater, it’s no more needed in foreign markets than it is in the U.S.,” he said.
Rubin said the drive to stabilize atmospheric carbon at 450 parts per million (the World Meteorological Organization estimated global carbon dioxide levels topped 400 ppm earlier this year) and avoid the worst consequences of climate change is the “real environmental challenge confronting the future of the oil sands.”
“Will there be room in a de-carbonizing global economy for high-cost oil and the high oil prices that allow supply sources like the oil sands to be economically viable?” he asked. “If we consider what the world will look like, the answer is a resounding ‘No’.”
Rubin’s theory is based partly on the International Energy Agency estimates that a 450 ppm carbon level will require world oil consumption to drop over the next two decades to 80 million barrels per day from 93 million bpd.
He said the campaign to reduce the combustion of fossil fuels is within sight, starting with the United Nations Climate Change summit in Paris, starting on Nov. 28.
A sense of urgency to do “something, anything” to confront carbon emissions is overwhelming governments of all political stripes and petroleum producers.
Support for carbon taxes Hal Kvisle, chief executive officer of TransCanada for the first 10 years of this century when he played a lead role in launching Keystone XL, is now in the forefront of those calling for Canada to apply drastic measures.
He told the Globe and Mail there is no choice but to impose “hefty carbon taxes to solve the greenhouse gas (challenge) on the consumer end. And a very hefty tax could ... significantly reduce CO2 emissions.”
“I think business is quite happy to see a carbon tax because it will help everybody in society understand that we all have a role to play in this,” Kvisle said, projecting that higher prices for products such as gasoline will lower consumption.
Although he did not put a number on the tax, Ben van Beurden, chief executive officer of Royal Dutch Shell, was not so hesitant, suggesting US$60-$80 per metric ton (compared with the C$15 the Alberta government charges its major GHG producers).
Simon Dyer, Alberta director of the Pembina Institute, an environmental think-tank, echoed Kvisle’s view that energy companies that once opposed carbon taxes now see the idea as necessary for infrastructure projects.
Dyer said that if Canada is to build one more major pipeline out of the oil sands it must prove that it is meeting GHG goals.
Casual dismissal a concern What is troubling those who still live in hopes of growing shipments to the U.S. is Obama’s casual dismissal of 60 years bilateral cooperation to deliver Canadian crude across the border, adding to the 31 pipeline connections already in place.
“I can’t see the (Keystone XL decision) having any real impact on the industry,” said Randy Ollenberger, an analyst at BMO Capital Markets. “If it was approved, it would have had a positive reaction, but it not being approved doesn’t mean anything.”
The consulting firm of Wood Mackenzie estimates that combined incremental oil sands capacity of 485,000 barrels per day has already been delayed.
However, the Canadian Association of Petroleum Producers is confident that Canadian oil will “find new paths to markets and continue to create jobs and wealth for Canadians.”
More rail? That puts the pressure on railway and terminal companies to accelerate the buildup of 700,000 bpd in Alberta and expand an option that is currently in the doldrums, forcing Canadian National and Canadian Pacific railways to lower carrying costs to retain their share of the market.
Altex Energy is one of the terminal operators that sees hope for rail.
“You can build it in chunks if needed,” said Altex Chief Executive Officer John Zahary. “For supporting the industry in Canada, we do need to build more infrastructure to tidewater. I think rail can play a role.”
What gets quietly ignored in this argument is that rail bypasses the requirement for presidential permits to link Canada and the U.S. by pipeline.
Rail also generates greater greenhouse gas emissions than pipelines, offsetting the U.S. State Department’s major reason for scuttling Keystone XL.
Setback to bitumen? The unknown, but no longer the unheeded element of oil sands expansion is the clear belief among environmentalists that they have delivered a setback, if not a crippling blow to the bitumen sector.
“I think with each passing year the ludicrousness of digging up oil (in Alberta) and trying to ship it out becomes clearer,” said Bill McKibben, one of the leading figures in the anti-Keystone fight.
“Back when we started (the campaign to block Keystone) in 2011 everyone, and I mean everyone, said it was a completely hopeless fight.”
As industry players rethink their position on carbon taxes, transportation and production growth, they must weigh the extent to which Canadian environmentalists and First Nations have been emboldened to wage their own battle to reverse the course of oil sands development.
And whatever threads of hope companies might have been clinging to have been further shredded by Canada’s new Environment Minister Catherine McKenna who has delivered a blunt warning that existing oil sands pipeline proposals will face tougher environmental assessments.
In laying out the preliminary elements of her government’s climate change strategy, including a price on carbon, she echoed Obama in rating “climate change as one of the greatest threats of our time.”
Although vague about the details, McKenna said pipeline assessments will be “based on science” and Canadians will be assured of participating in regulatory hearings, while the applicants will face higher approval standards.
- GARY PARK
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