Real Reasons For Keystone Pipeline Permit Denial May Remain Unknown

April 2012, Vol. 239 No. 4

Carol Freedenthal, Midstream Editor

Definition: Scapegoat, someone who is punished for the errors of others.

The environment is the scapegoat being used to deny the permitting needed for the final phases of the Keystone XL Pipeline, allowing nearly a million barrels per day (b/d) of additional crude to cross over from Canada into the United States.

The administration has used environmental reasons to deny permitting the crossing of the remaining pipeline from Canada to the U.S. for moving oil additional oil from Canada’s coal tar sands region in Alberta to the Gulf Coast for refining and marketing. Canada is ready to develop nearly a million barrels more a day of crude oil for U.S. supply. Since the pipeline must cross the Canada/U.S. border to bring the supply south, a presidential permit is required.

The Keystone pipeline system was proposed by TransCanada in February 2005 for a synthetic crude oil made from Canadian coal tar sands to different U.S. locations for refining and marketing. The crude oil made from the tar sands would go to refineries in Illinois, storage and distribution terminals in Oklahoma and finally, to refineries along the Gulf Coast.

Phase 1 of the total project was a 2,147-mile pipeline from Hardisty, Alberta to the Wood River and Patoka refineries in Illinois. Phase 1 went into operation in June 2010. Phase 2 was a 291-mile pipeline from Steele City, NE to the oil storage facilities in Cushing, OK. It went online in February 2010. The Phase 3, known as the Cushing Market Link, would go 435 miles to a delivery point near Port Arthur, TX for refining and marketing. It would include a 47-mile pipeline to move crude oil to the Houston area for refining. This phase is critical and is needed to relieve oil congestion in Cushing.

Phase 4 is what is known as the Keystone XL pipeline. Starting in the same part of Canada as Phase 1, it would contain 327 miles of pipeline in Canada and enter the U.S. at Morgan, MO. It would pick up domestic oil in Baker, MO and travel through South Dakota and Nebraska to the existing Keystone pipeline in Steele City, NE. This is the phase generating the controversy because of bringing more crude oil into the U.S. – the initial volume and new volume would be close to 1 million b/d. Secondly, it has gotten environmental resistance because its routing crosses the Ogallala Aquifer in Nebraska.

Phase 4 requires the president’s approval as it crosses the border between the two countries. Presidential approval was denied again early in 2012. TransCanada has agreed to move forward with Phase 3 – Cushing to Texas – because permitting is on a state basis and the need to open up Cushing is so pressing. The original Keystone Pipeline was a U.S. investment of $5.2 billion and the Keystone XL is estimated at US$7 billion. It was expected that the pipeline would be completed by 2013.

The president has denied the permit for now, basically citing environmental concerns. That just may be the scapegoat of the time! The pipeline offers tremendous advantages to the U.S. just when the crude oil supply is threatened and gasoline prices are moving upward. Getting almost 1 million b/d more of supply from a secure, friendly neighbor is an offer that would seem to be hard to turn down. The pipeline would also help the U.S. economy by being a “shovel-ready” project to hire thousands of workers and move non-government funds into the economy. Still, the administration is doing everything it can to delay the permitting for the final pipeline from Canada to the U.S.

Using environmentalism as the scapegoat is a good way to delay taking action. Environmentalists of all “colors” and “stripes” are up in arms about the proposed use of the Canadian coal tar sands for crude production. Everywhere from the open pits in Canada where the tar sands are “mined” to the pipelines to transport the synthetic crude to the refineries for making commercial products and the use of these products as fuels for transportation, heating and every other use, the environmentalist can find some danger to the ecology and voice serious concern. Some go as far as to make the claim that using the tar sands for energy products could be the end of the earth.

A lot is pure exaggeration – but there is always a question if something is done, something can go wrong. Much of the opposition from the environmentalists is just the strong backlash against using fossil fuels. While all that has been spent looking for a new, economically available, environmentally friendly substitute for oil, gas and coal from the ground, some still dream of finding the fuel “tomorrow” to take the place of the dirty natural fuels coming from mother earth.

The use of the Canadian fuel brings out even more environmental claims. The climate-change worriers are concerned the tar sands fuel is even more damaging than plain crude oil sources. Some are worried about shipping the synthetic crude as they claim it is a bigger hazard than normal crude because of coming from heavier, dirtier crude than normal. They fail to note that there is no difference from heavy crude coming from Venezuela or Mexico. Anything they can claim to say why it is bad – they will.

No question the environmentalists can make substantial claims – exaggerated or untrue is immaterial. But why use these as a scapegoat for the real concerns of allowing additional Canadian oil? Because there may be reasons that are too political – too partisan to put on the table. The real reasons are socio-economic – they could benefit or harm certain parties. Sadly, some of these parties are not too friendly to the U.S. so helping them could generate some bad feeling.

Before going into details, a look at the crude oil supply picture is important. The U.S. had a total input to refineries of crude oil in 2011 of almost 15 MMB/d; the projection for 2012 is just about the same. Imports accounted for 8.9 MMb/d in 2011 and are expected to be about the same in 2012, according to the Energy Information Administration Short Term Outlook. So bringing in around 700,000 b/d from a friendly neighbor would change the amount bought from other sources, some not too friendly to the U.S., by about 8% or 10% if Canada gets its exports up to 1 million b/d.

Now who were the five largest exporters to the U.S. in 2011? By rank they were Canada, Saudi Arabia, Mexico, Venezuela, and Nigeria. Canada then did about 2,200 b/d and Nigeria 800 b/d order of magnitude to get an idea of the import sizes. Interestingly, Venezuela is in the 800-900 b/d range – just about the amount the proposed Keystone XL would add. Of the top five, Venezuela has to be the least friendly to deal with and is constantly threatening to cut off exports to the U.S. But – so far – they have not. The incomes from the crude and finished products are too good.

So if new Canadian oil was to come into the U.S., could this mean the end to Venezuelan imports? There are two problems with the Venezuela imports. The sheer size of the annual purchase of crude – about $26 billion annually and the income from products sold through Venezuelan service stations is too much to lose. Further, the quality of the oil coming to the U.S. is so impure that it needs U.S. refiners to handle. A loss of market or refining capacity to Venezuela would be serious.

This is just one case that could be more important than climate change and the environment. Are there other special-interest groups that would benefit or be harmed by Canadian oil going south? The full list is unknown but there is talk of Koch Industries wanting the pipeline to put more oil in its western U.S refinery. A change in imports would impact Saudi Arabia or Mexico. Who knows all the deals out there that are affected by the additional crude supply or pipeline?

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