Benefits of Blocking the Keystone XL Pipeline: Facts or Myths?

The Obama Administration’s continuous delay or possibly blocking of the Keystone XL (KXL) pipeline project is advocated to significantly: 1) curtail Canadian oil sands production, 2) reduce U.S. Refining carbon emissions, 3) prevent increased U.S. petroleum market prices, 4) increase U.S. energy security, 5) reduce crude oil transportation environmental risks, and 6) substantially reduce future world carbon emissions.  If all these factors are reasonably accurate the President should probably not approve the KXL pipeline project.  However, if these factors are not reasonably accurate, the President should stop the delays and approve the KXL pipeline.  After reviewing actual crude oil production, supply chains, and markets’ performance data in recent years, can these claimed benefits of blocking the KXL project be reasonably accurate?

1. Curtail Canadian Oil Sands Production â€" Blocking the KXL pipeline could possibly keep oil sand reserves from being fully developed, and mitigate future adverse environmental impacts.  The KXL pipeline is designed to transport 0.8 million barrels per day (MBD) crude oil imports into the U.S. mid-continent, and the original project permit application was submitted in 2008.   Despite eventually satisfying the primary responsible State and Federal Agencies’ requirements, the EPA took exception to the last environmental impact study (USDS EIS report 2011).  The EPA’s most recent evaluation has delayed the final permit decision until at least 2014.  Chronic delaying of the permit could become a significant step towards eventually curtailing future Canadian oil sands production. 

Despite the Administration’s multi-year delay in approving or rejecting the KXL project, Canada’s conventional (primary) and unconventional (in situ/mining) crude oil production continues to increase.  Reference: Alberta Oil Sands Production by Extraction Method, page 8.  Alberta’s total crude oil production has increased from 1.5 MBD up to 2.1 MBD, 2010-2013.  Unconventional ‘mining’/‘in situ’ oil sands crude production currently make up 48%/41% respectively of total 2012 production.  In situ oil sands production, which is recovered by heating & recovering the (deeper) oil sands crude (without open-pit mining), is growing at a faster rate than the heavier oil sands that are surface-mined.  

Actual results: oil sands production has increased by about 40% over the past 3 years and is projected to substantially increase in the future; without the KXL pipeline.

2. Reduce U.S. Refining Carbon Emissions â€" Canadian oil sands or ‘bitumen crude oil’ has a much lower ^OAPI gravity then average U.S. Refining crude oil feedstocks.  Lower ^OAPI gravity crude oils generally require greater processing severity (higher energy/carbon intensity) than higher ^OAPI gravity crudes; for refining into lighter petroleum finished products.  In 2008 the average gravity of all crude oils processed by U.S. Refining was 30^O API.  Due to a combination of Refinery shutdowns and changes in the mix of crude oils processed by U.S. Refineries, average crude feedstock gravities slightly increased to 31^O API in 2012.  Processing higher gravity crudes directionally reduces refining energy consumption and carbon emissions.

From 2008 to 2012 the combination of increased U.S. domestic crude oil production, reduced total imports, shutdown of four major U.S. refineries, and without the KXL pipeline project, apparently had no impact on the average gravity of U.S. crude oil imports, which remained constant at 27^O API.  Also, during this same period U.S. Canadian crude oil imports increased from 2.5 to 3.0 MBD primarily from oil sand crudes (synbit and dilbit).  These increased Canadian oil sand crudes actually displaced low gravity crudes from countries such as Venezuela and Angola (both OPEC countries).

What these market data indicate is that increasing Canadian oil sands imports by 0.5 MBD 2008-12 (60% of the KXL design capacity) has had no significant impact on average U.S. Refining crude oil feedstocks gravities or the associated processing carbon emissions.

3. Prevent U.S. Petroleum Market Price Increases â€" One of the arguments against the KXL pipeline is that it would merely provide a means to ultimately export the Canadian oil sand crudes via the U.S. Gulf Coast and that increased exports could increase U.S. petroleum fuels market prices.  This argument is largely based on the assumption that the imported Canadian oil sand crudes would be processed in Gulf Coast Refineries and the petroleum products would then be exported.  Additionally, increased exports would possibly manipulate U.S. market supply-demand balances and cause increased prices.  While these scenarios are feasible in theory, but only if substantial excess U.S. Refining capacity was available to process and export the oil sands petroleum products, and, if Oil Companies were trying to illegally manipulate the markets.

U.S. total petroleum products supplied (or consumed) peaked just prior to the 2007-09 economic recession.  Since 2007 petroleum consumption has declined by 1.9 MBD.  During this period 0.4 MBD of U.S. Refining capacity has shutdown permanently; reducing the excess or idled U.S. Refining capacity to about 1.5 MBD.  This idling of roughly 10% of total U.S. Refining capacity unfortunately reduces the profitability of many operating Refineries.  To restore utilization rates and minimum required Refinery profitability levels many Companies have begun exporting increased petroleum product volumes.  During 2008-2012, total U.S. petroleum exports increased by 1.2 MBD.    

In 2012 the total U.S. Refining utilization rate remains below average (and reasonably profitable) levels found in the late 1990’s and early 2000’s; 93% ideal average vs. 89% utilization today.  Since U.S. petroleum consumption is not expected to increase in the future, Refiners currently have additional economic motivation to further increase capacity utilization rates via further increased exports. 

Based on recent market behavior some individuals could interrupt these actions as proof that the KXL project will only increase exports or Refiners are possibly manipulating the markets.  These interpretations would be reasonable if you ignore the alternative faced by many Refiners if they are unable to increase utilization rates and restore reasonable profitability levels; shutdown the unprofitable refineries.  Since 2005, 12 U.S. Refineries have shutdown permanently, with a loss of 10,000+ high paying manufacturing jobs.  Whether the KXL pipeline is built or not, many Refiners have the option of processing domestically produced or imported crudes and increase their utilization/profitability by further increasing exports.  If Refiner’s were somehow prevented from restoring reasonable utilization rates and profitability’s, the U.S. Refining/Manufacturing sector’s capacity and employment levels will continue to decline very significantly in the future.

One last note, Refiners’ have been accused of market manipulation many times since the 1970’s and no investigation has validated any of these past charges.  No new similar market manipulation charges or investigations have been made in recent years. 

4. Increased U.S. Energy Security â€" Energy security is normally defined as the level of ‘supply disruption’ risk of oil imports.  In recent years U.S. energy security has increased significantly due to increased domestic crude oil production, reduced consumption, and reduced OPEC imports.  One of the major contributing factors to increased energy security has been increased Canadian imports.  If the KXL pipeline is not approved this could eventually create a major logistics bottleneck to further increasing this most secure source of required U.S. crude oil imports.  Canada’s most feasible option to the KXL pipeline would be to build/expand the pipelines from Alberta to the West and/or East Canada coasts.  Forcing these alternative solutions to moving and marketing their projected increased oil sands production will ultimately benefit countries such as China; instead of the U.S.  U.S. energy security will be prevented from further increasing to levels that could be achieved with the KXL pipeline project.

5. Reduces Crude Oil Transportation Risks â€" Another argument against the KXL project is the claimed spill risk the pipeline could pose.  As previously discussed, Canadian crude oil imports have increased 2008-12 by 0.5 MBD without the KXL pipeline project.  An EIA summary report and backup data show that a large percentage of these increased Canadian imports have been transported by rail, and truck and barge.  Once all existing crude oil pipeline capacity is used, the alternative capacity for transporting oil sand crudes cross-border is rail, followed by truck and barge.

The potential issues with using alternatives to crude oil pipelines are efficiency, safety and environmental impacts.  Pipelines use primarily electric power to most efficiently transport and distribute crude oil directly to most U.S. Refineries.  Alternative crude oil transportation modes to pipelines are generally much less efficient (greater energy/petroleum consumption) and present greater risks of accidents or spills.  The increased transfer-handling of oil sand crudes via rail and barges involve multiple loading/unloading operations.  Those Refineries without (unloading) rail terminals or barge docks must have the crude oil transferred-loaded into tanker trucks for final delivery to individual Refineries.  Besides the generally increased risks of transporting crude along rail lines, waterways and roads, the added handling-transfers between rail-barge-trucks adds to the lower energy efficiency and increased risk of a mishap that could negatively impact the environment (leaks, spills, increased carbon, etc.). 

The bottom line, crude oil pipelines are the most energy efficient, safest and least impactful on the environment compared to alternative transportation modes.  That is why about 80% of all crude and petroleum oil are routinely transported via pipelines within the continental U.S. today.

6. Substantially Reduced World Carbon Emissions â€" One of the most advocated benefits of blocking the KXL pipeline is preventing a substantial increase in (full lifecycle) carbon emissions.  The magnitude of the total carbon emission increases from oil sands crude production is very complex, easily confuses the Public, and can be endlessly debated (examples: IHS CERA Special Report vs. NRDC Report).  Arguing that Canada is directionally behaving like a third world country is not the issue.  The real question is whether total Canadian oil sands production can be substantially curtailed in the future by blocking the KXL pipeline.

As previously discussed, Canadian oil sand crudes have and continue to grow at very large rates without the KXL pipeline.  When and likely before future increased Alberta oil sands production becomes actually bottlenecked by existing pipeline and rail transportation (without the KXL pipeline), the Canadians will very likely expand and build the new crude oil pipeline capacity to one or both coasts needed to place increasing oil sands production into world markets (via marine tankers).  This alternative to the KXL pipeline will actually increase world carbon emissions.  The combination of exporting longer distances via marine to Europe or Asia and the fact that most International Refineries (particularly in Asia) are significantly less efficient/more polluting than average U.S. Refineries, will led to substantially increased carbon emissions than the originally proposed KXL pipeline project.

The bottom line, without the KXL pipeline future world carbon emissions are going to increase.  If Canada oil sands production is somehow curtailed by other factors, this world supply of crude oil will be readily replaced by increased production from other suppliers such as OPEC.  The real issue is reducing the world’s growing and apparently uncontrollable demand for petroleum fuels.

In Conclusion â€" The advocated benefits of blocking the KXL pipeline project are highly unlikely to materialize.  The Obama Administration has a difficult decision to make since those who strongly oppose the pipeline will likely not be influenced by some of the facts covered in this post or other Industrial experts-organizations such as the API.  All decisions or lack of decisions, however, have consequences.  In the case of the KXL pipeline, delaying the project permit decision beyond next year could be the same as not approving the project.  Canada will likely continue to increase oil sands production and install needed pipeline capacity to export the oil outside North America.  China will largely benefit from forcing Canada to export oil sands production around the U.S. and possible U.S. benefits will be lost.  World carbon emissions will definitely increase without the KXL pipeline.  On the other hand, approving the KXL pipeline could positively benefit Canada, the U.S. and overall World carbon emissions.

Words of advice for those who want to better understand the pros and cons of the KXL pipeline: if you hear or read the term ‘tar sands’, the source is likely to have some bias against the project.  The anti-KXL sources will also likely contain only open-pit mining photos-illustrations; required for solid bitumen crude recovery only.  As previously discussed solid bitumen crude recovery only represent 54% of current total oil sands production.  The balance (46% and rising) of Canadian oil sands is recovered from much less impactful ‘in situ’ thermal production technologies.  The open-pit illustrated articles are also not likely to include references to the fact that Canada’s environmental regulations require all surface mines eventually go through reclamation /reforestation to return the areas to natural vegetated states.

Photo Credit: Pipeline Problems/shutterstock