... Concluding the Keystone XL Pipeline Controversy - North American Energy Pipelines

Concluding the Keystone XL Pipeline Controversy

A Civil Engineering Researcher Compares, Contrasts Impacts of Delayed Project

Keystone XLBy Geoffrey A. Abraham

TransCanada’s Keystone pipeline system is considered one of the most extensively planned oil pipeline projects in North America. It was designed to be the major transport carrier of Canadian syncrude oil to U.S. refining centers in the Midwest and Gulf Coast region. The controversial Phase 4, more commonly referred to as Keystone XL, was to provide a second crude carrier line with an additional 830,000 barrels per day (bpd) from Hardisty, Alberta, to Steele City, Kan. Since the XL pipeline crosses the U.S.-Canadian border, it required a Presidential Permit from the U.S. Department of State, which so far has not been forthcoming.

Economic Drivers
Canadian tar sand deposits comprise 99 percent of the 170 billion barrel oil reserves of Alberta, which places Alberta third in the world ranking of oil reserves. According to the International Energy Agency (IEA), tar sand production is forecasted to double to 3.9 million bpd by 2018. A bottleneck in transporting tar sand oil to the U.S. market has been exaggerating the price discounts of the Canadian tar sand oil (bitumen and syncrude) against other North American crudes by up to $25 per barrel.

TransCanada and its initial partner ConcoPhillips, which exited the project in 2009, and other participants like Valero, viewed the Keystone system as a tremendous long-term business opportunity for connecting the cheap and almost unlimited heavy oil resources of Alberta with the premier world market of refineries located in the U.S. Midwest and Gulf Coast. This is further evident in the manner that the entire Keystone pipeline system was designed to integrate into the established network of U.S. oil pipelines. There can be little doubt that the inability of the tar sand producers to move syncrude/bitumen to market has intensified industry lobbying for government approval of XL.

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TransCanada was also forward looking enough to run the XL lines through the Williston Basin’s Bakken shale to pick up its lighter crude oil, which not only provides additional pipeline carrier stock, but is useful as a diluent (and friction reducer) for the heavier syncrude and “dilbit” (diluted bitumen) that are the primary tar sand products. TransCanada now describes amounts of 250,000 bpd of Bakken oil to be carried by the Keystone XL pipeline. The routing of XL through Montana provided an added political boost from that region.

The cost of Keystone Phases 1-2 has nearly doubled from $2.8 billion to $5.2 billion in 2007, and had to be passed along via increased pipeline tariff fees, according to “Pipeline Fees Revolt Widens,” an April 2013 article in The Globe and Mail. Some of its clients like Suncor Energy, a large Canadian tar sand oil producer, and CVR, an independent U.S. refiner, sued TransCanada for the major increases in their pipeline tolls, according to The Oil Daily. CVR claimed that the pipeline fees were increased by 146 percent for Canadian portion and 92 percent for the U.S. portion.

The competitiveness of the Keystone pipeline system is being further challenged by Enbridge, which already runs tar sand crude oil via its Alberta Clipper pipeline into the U.S. Great Lakes region. Enbridge is further studying plans to build a new $6 billion, 730-mile pipeline system, the Northern Gateway project, to connect tar sand oil to export terminals along the Canadian Pacific Coast, but has also faced strong environmental opposition. There are growing fears of a potential excess in pipeline capacity from the western Canada tar sand district to the United States and other export markets if the Keystone XL pipeline goes ahead.

Economic Effects
TransCanada has promoted the Keystone XL largely on the benefits of its economic impact, including the creation of more than 9,000 new construction jobs. This is in addition to another 7,000 support jobs, from manufacturing of steel pipe and pumping equipment, according the company’s estimates. The large price tag of $7 billion is also projected to provide work for more than 50 main suppliers in more than 18 U.S. states. However, the majority of the jobs during construction will be comprised of truck drivers, construction workers, equipment operators and welders. Like other construction projects, these jobs will be of a temporary nature and terminate when the project is completed. During the height of the Keystone XL controversy in 2010, the U.S. unemployment rate peaked at nearly 21 percent, but has since improved to less than 8 percent, thereby diminishing the project’s attraction.

The opponents of the project have argued that many of the economic benefits claimed are either transitory, unrealistic or misleading. The U.S. State Department claims that the total number of temporary construction jobs on the project would only amount to 5,000 to 6,000. In addition, opponents of the pipeline fear the likelihood of significant oil spills would divert public money away from more urgent needs in government cleanup operations. The claim for thousands of direct and indirect (including manufacturing) jobs is also facing strong challenges, according to the Natural Resources Defense Council (NRDC), which has stated that the Perryman Group, a Texas lobbying group hired by TransCanada, made many false and misleading assumptions in calculating the number of jobs to be created. For instance, the NRDC points out that the lobbyists claimed new jobs for the portion of the pipeline in Oklahoma and Kansas, which has already been built.

Critics have learned that the steel pipe, the largest material supply in the project, will not be produced in the United States, but from two low-cost overseas steel producers, Welspun Corp., an Indian company, and Evraz, a Russian company. U.S. steel workers, beset by high milling costs, will probably not partake in the supply except for specialty items.

Much of the economic growth from the XL is likely to be in the refining sector along the Gulf Coast, which is already the world leader in the processing of heavy crude oil. The Canadian Energy Research Institute (CERI), lobbying in favor of XL, predicts that the pipeline will add $172 billion to U.S. GDP by 2035 and create an additional 1.8 million person-years of employment in the United States.

Additionally, Keystone XL will further develop and expand the U.S. competitive advantage over other refining centers globally, according to reports.

A large number of large U.S. oil companies are involved in Canadian tar sand extraction. CERI also estimates that growing production from Canada’s tar sands will increase U.S. economic output by $45 billion per year until 2035, where one out of every three jobs created by the expansion of oil sands production will be in the United States.

Another key argument made in favor of Keystone XL is that it will create the market circumstances for lower gasoline prices in the United States. Many petroleum experts have countered that the major cause for the steep rise in domestic gasoline prices was the general price rise in crude oil along with a general shortage of refining capacity. Project supporters continue to argue that increased volumes of the discounted Canadian heavy oil products to domestic U.S. oil refineries would ultimately be passed on to consumers at the pump.

Some opponents contend that this logic is flawed, since the Keystone XL will also eliminate the oversupply and high discounting of the Canadian heavy oil that is currently provided to the Midwest refineries, a reported in the March 2012 article in Bloomberg Businessweek, “Why the Keystone Pipeline Won’t Ease Pain at the Pump.” President Barack Obama went on record to say, “Producing more oil at home isn’t enough by itself to bring gas prices down,” because “the price of oil will still be set by the global market.”

Energy Security
Supporters of Keystone XL contend that it will provide additional energy security to the United States, which consumes 15 million barrels of oil each day. About 60 percent of that oil (8-9 million barrels) must be imported from “high risk” countries such as Saudi Arabia, Venezuela, Nigeria and Mexico. “Despite growing domestic oil production, both the U.S. Energy Information Administration and the IEA have forecast that the U.S. will continue to import 3.5 to 7.5 million barrels per day into the year 2035, to meet American demand,” according to the project website (www.keystone-xl.com).

Keystone XL currently has contracts in place to ship 555,000 bpd from Canada, or more than 200 million barrels a year, according to Energy Tomorrow, a project of the American Petroleum Institute (API). The pipeline will have the capacity to transport up to 830,000 bpd of heavy crude oil from Canada to refineries on the Gulf Coast, where it can displace a like amount of imported heavy and light crudes. Last year, the United States imported 331,697,000 barrels of oil worth more than $33 billion from Venezuela, but the State Department claims that this pipeline would likely displace most Venezuelan oil imports. This view is backed up by a December 2010 U.S. Department of Energy study that stated: “Increased Canadian oil imports will help reduce U.S. imports of foreign oil from sources outside of North America.”

Adversaries argue that the Keystone XL is primarily intended as an export pipeline. In 2007, when the Keystone XL pipeline was first proposed, many Gulf Coast refineries saw U.S. oil demand continuing to grow while U.S. oil production continued to decline. Many refineries invested billions of dollars in expansions for heavy and sour crudes. Also, it is now more profitable for them to sell refined oil products, diesel, gasoline and pet-coke to Europe, South America and Asia, according to March 2013 briefing by Oil Change International, an energy industry research and advocacy firm. Since then, the United States has significantly expanded its production of more normal quality crudes via new technologies like hydraulic fracturing in shale formations.

One of the factors missing from this debate is the rapid and still growing increase in domestic U.S. oil production from the oil shale regions across the continental United States and especially in the Williston Basin region of the Northern Plains. This high quality and non-discounted crudes that are a result of new oilfield technologies of horizontal drilling and stimulation techniques that have rapidly developed over the past five years. Many oil experts believe that the United States may eventually become nearly self-sufficient, in crude oil production. If this proves true, Canadian tar sand syncrudes may come into direct competition with U.S. oil production. Upon the completion of XL, the Keystone pipeline system will provide for the direct importation of large volumes of Canadian syncrudes with the potential for large price discounts versus normal quality U.S. crudes. This may lead to a situation comparable to ‘dumping’ into the U.S. market and trade friction with Canada.

The main concerns for opponents of XL has been the environmental risks and pollution posed by the pipeline project. The possibility of spills and leakages has been downplayed by TransCanada, which claims it to be one of the most technologically advanced systems, and therefore, one of the safest pipelines to be ever built.

TransCanada initially projected that the Keystone Pipeline would have a spillage incident once every seven years. However, in its first year since its June 2010 completion, Keystone Phase 1 leaked 12 times. All the accidents but one were very minor, leaking less than 50 barrels per incident, but still keeping the environmentalists skeptical of the company’s safety claims.

Oil carrier pipelines are considered to be the safest and most efficient method for transporting hydrocarbon fluids. The United States has more than 2.6 million miles of oil and natural gas pipelines that deliver more than 99 percent of their petroleum products safely, according the Keystone XL website. Rail tanker cars are considered the only viable alternative to oil pipelines, but rail transport is considered safer by only a few critics and is more expensive and far less efficient.

“To move the volume of even a modest pipeline, it would take a constant line of tanker trucks, about 750 per day, loading up and moving out every two minutes, 24 hours a day, seven days a week,” according to the U.S. Pipeline and Hazardous Materials Safety Administration (PHMSA). “The railroad-equivalent of this single pipeline would be a train of 75 2,000-barrel tank rail cars every day.”

Another key environmental factor is the issue of greenhouse gas (GHG) emissions. Environmentalists say that increased exploitation of the tar sand extraction will release huge amounts of carbon into the Earth’s atmosphere. Tar sands are one of the dirtiest and most carbon intensive fuels to be exploited where its processing is said to release at least 181 million metric tons of carbon dioxide equivalent each year, according to an April 16 article from the Environment News Service. In this upgrading process to turn the bitumen into a marketable heavy crude oil, the bitumen upgraders produce a residue of 10 million metric tons annually of petroleum coke, according to an October 2012 article form Scientific American.

New processing techniques to reduce the GHG from cracking the bitumen and leaving behind petroleum coke are under evaluation by Shell Oil and other petroleum companies, where they add hydrogen to cracked bitumen, leave less carbon behind. Shell has also embarked on a program called “Quest,” by which the company adds carbon capture and storage technology to capture the emissions from its upgraders.

Speaking for the environmentalists, Anthony Swift of the NRDC says canceling the pipeline buys more time: “One of the first steps to addressing climate change is to stop making things worse,” he says. “Keystone XL clearly would make things worse. More tar sands would be produced more quickly.” However, the State Department’s original and latest environmental impact statements claim that the Keystone XL will have “no substantive change in global greenhouse gas emissions” because the tar sand oil will still be produced, burned, and transported with or without the XL pipeline.

GHG emissions hit a new record this past year, increasing 3 percent to 34.7 billion metric tons of carbon dioxide and other GHGs. This is not to be entirely blamed on the exploitation of the tar sands, but is a sign of the world’s growing addiction to fossil fuels.

One of the strongest arguments against the XL, with wide support among those living in the Plains States, is the possibility of contamination of the Ogallala Aquifer, which provides drinking water and irrigation for residents and farmers in its 175,000-square mile area. The XL pipeline will also cut across a 92 mile section over the Nebraska Sandhills region, which due to the high permeability of its sand and gravel layers, could rapidly spread oil pollution in the event of any oil spill. As a result, the State Department proposed to remedy to this sensitive issue by requesting an alternative route for Keystone XL around the aquifer, to which TransCanada agreed.

Analysis and Conclusions
In the above discussion of the Keystone XL debate based on my role as neutral researcher with no predisposed positions on any of the arguments, no overriding reason(s) for not recommending the approval for construction could be readily identified. The various topics were compared in a systematic and pro and con framework. To summarize the debate, the significance or validity of the various arguments were compared and ranked as set out in Table 1.

Those topics that were deemed to be more argumentative and containing little or no substance received the lowest score of 1, while those arguments deemed to be of highest validity or significance were ranked at 10. In the Table 4 rankings, the validity of the debate topics ranged from 1 to 8. A separate rating, again scaled between 1 and 10, was made for the projected future impact of these same debate topics. Table 4 attempts to reconcile the information reviewed above on Keystone XL for both the validity and probable impact for each of the major arguments.

Overall, XL was judged to within the national economic interest, since it will provide many new short-term and some long-term jobs. Although it is not a solution to the high unemployment rates, this project provide some important economic benefits and stimulus to the U.S. economy. It will enhance and expand the Gulf Coast petrochemical and refining industry. Above all, it will bring a less expensive crude oil to the United States, thus reducing the national trade deficit and accelerating U.S. GDP. The overall validity of the economic impact argument received a strong rating of 70 percent, but the ultimate impact was deemed to be very limited and therefore rated at only 45 percent.

“Energy Security” as an argument was rated only 47 percent for its validity, because in today’s intertwining and free trade based world economy, “security” and “independence” carry far less significance than in past decades. There are benefits to the United States in using crude supplied from within North America, which comprises its own separate free trade zone. Building the Keystone XL enables the United States to cut its crude imports from countries in the Middle East, Africa and South America by about 40 percent, deemed by most to be less stable, but so far not less reliable, than its  close-by neighbor Canada.

Increased exploitation of the Canadian tar sand deposits is also a minor plus for the United States oil operators looking to expand their operating revenue and employment there. The question whether the Keystone XL pipeline is part of a larger export chain that will import, process and then re-export the syncrude into refined products beyond North America is a valid one. There is no reason to consider such a re-export scenario as necessarily wrong, though some Keystone XL antagonists have argued for new government controls to block the re-export of refined products. Ultimately, the refiners will always choose to sell products where conditions are most favorable, which in today’s global economy is both domestic and international. The overall future impact by Keystone XL on U.S. energy security was deemed minor and therefore received a 37 percent rating, while its validity was deemed somewhat more significant at 50 percent.

The long and involved arguments surrounding environmental impact the XL pipeline, indicated that they were important and real and accordingly received a rating of 60 percent. From an environmental stand point, there are some serious risks associated with an accidental spill from a pipeline, which is more than 1,000 miles long. The alternative of rail transportation carries with it more potential risks for incidents as borne out by the recent news of the oil tanker train accident and massive fireball at Lac-Megantec, Quebec, which killed more than 47 people on July 6. TransCanada has accordingly designed the Keystone XL pipeline with many of the most advanced safety technologies available to the industry. Strong and extensive government safety regulations have been further enhanced in order to ensure proper and safe operating procedures for oil and gas pipelines that together diminish risk for a major catastrophic incident.

Most of the environmental concerns raised by the pipeline antagonists have been met. Due to the concerns of environmentalists, farmers and ranchers, TransCanada has taken additional precautions and has made additional changes such as the re-routing of Keystone XL around the Ogallala Aquifer. The potential GHG damage to air quality cannot be fully eliminated or remedied by the XL. Canada claims that it is a leader in carbon reduction and works very hard to implement the system of carbon credits, which help to offset the issue of GHG emissions. It was rightly stated by the State Department that the Canadian tar sands will still be produced whether or not the pipeline is built or not, just as is the case with so many other oil and industrial projects that are being developed worldwide. While the environmental risks arguments are largely valid except for the potential for land damage, the potential future impact now seems more limited, excepting for air pollution, therefore the potential impact for the environment was rated at only 38 percent.

The Keystone XL pipeline will be adding capacity to the production of the tar sands. Up to 1.4 million bpd will be transported to Midwest and Gulf Coast refining systems. This will be part of an integrated system for tar sand production extraction, upgrading, transportation and then upgrading and refining that will certainly positively impact both the U.S. and Canadian economies for many decades to come. After carefully analyzing the issues surrounding the Keystone XL Pipeline, the following points may be safely concluded:
• With little doubt the Keystone pipeline system and its controversial Keystone XL leg will provide an economic boost, though limited in impact, to the world’s largest economy.
• The issue of economic security is probably exaggerated in today’s global economy and free trade market. A growing potential glut of energy and hydrocarbon sources brought on by new breakthroughs in petroleum drilling and other technologies is creating new energy sources in the United States and the world. Canadian tar sand oils are still an import into the United States from another country, although a friendly neighbor, that may in the future come into competition for market share with the growing U.S. oil shale production.
• The Keystone XL project is starting to lose its appeal as an attractive solution for both tar sand producers and U.S. refiner end-users, as the project is beset by delays, increases in costs and a growing number of alternative pipeline project competitors.
• The environmental risks are exaggerated in all respects except for GHG emissions, which will not be reduced by the cancellation of the Keystone XL.

Geoffrey A. Abraham is a senior in Civil Engineering at Texas A&M University at College Station, Texas, specializing in Construction Engineering & Management. Special thanks to Dr. Ken Reinschmidt, Frank/Marathon Ashland chair professor of Construction Engineering & Management, who supervised Abraham on his research. Contact him at Geoffreya34@tamu.edu.

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