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The Keystone Quandary

by | published November 11th, 2011

The U.S. State Department yesterday announced it would spend more than a year studying the route for the proposed Keystone XL oil pipeline, which means a delay in what some have considered a vital access to sourcing from Alberta's vast oil sands.

Where the current plan actually puts the pipeline has become the single most contentious issue.

Environmentalists are already hailing the decision to postpone the pipeline, which would cut through Nebraska's Sand Hills, considered an ecologically sensitive area. And there is a corollary concern over maintaining the quality of drinking water throughout the region.

The prevailing argument these days is the volume available from the oil sands would sufficiently ease American reliance on crude from volatile regions of the world.

Yet that position avails nothing if that volume cannot make it into the lower 48.

The State Department has jurisdiction over Keystone because the pipeline would cross an international border into the U.S., pushing that volume from Canada some 1,700 miles to the Gulf of Mexico.

As the U.S. also faces a temporary shortfall in domestic production – resulting from the decline in greenfield development and the uncertainty over Bakken and other basin ramp-ups – the delay in making a final decision on the Keystone XL will only add to the volatility of oil pricing.

The Rising Importance of Heavier Oil

Globally, more reliance is being put on heavier oil as a rising component of the raw material base because it is a larger part of the crude coming available.

But this crude cannot be refined without extensive refurbishments to refineries. Its viscosity (resistance to flow), weight, and other properties make it unacceptable for the production of retail oil products such as gasoline, diesel, and low sulfur heating oil.

U.S. refineries along the proposed Keystone XL route have already spent billions on upgrades to handle the heavier oil. What's more, they’re already processing heavier crude being cut from places like Mexico and Venezuela.

While many see the Williston basin in North Dakota and Montana as a new, American source for such a grade of oil, such areas have their own production and transport problems.

Politics aside (and there is much of that surrounding the State Department decision, or lack of a decision, as we move into an election cycle), the delay puts the crude oil balance in question.

Absorbing the Impact

The primary concern moving forward is what the delay does to refinery usage and crude availability.

Major processors have already indicated this will create problems in planning for adequate crude oil consignments in the medium-term, when overall oil pricing is expected to be spiking anyway.

The primary immediate impact is on TransCanada Corp. (NYSE:TRP), the company responsible for building the pipeline, and Enbridge Inc. (NYSE:ENB), the U.S. division of the trans-border company with the primary responsibility of moving supply across the border.

TRP had previously said, rather categorically, that any revision in the pipeline route would be tantamount to cancelling the project.

TRP CEO Russ Girling said yesterday afternoon that he still believed the original route would be approved.

But the overall impact of the delay may well be felt before the State Department even votes the project up or down.

This is all about perceptions of the future crude sourcing balance.

Refineries are understandably concerned over what this does to refinery margins. This is the difference between the cost of refining and sale prices; the main source of processing profit.

Main end users of the products coming from the refineries are in a limbo over what costs will do to their bottom lines.

However, two things seem rather clear as we trudge through all of this.

First, the longer the indecision continues, the greater the pressure on Canadian unconventional oil production.

And second, this is likely to increase the overall price of crude.

Sincerely,

Kent

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  1. Robert Paglee, Sr.
    November 11th, 2011 at 14:35 | #1

    Next year it may finally come down to a voter shootout between the unions and the environmentalists.

    Unions corrupt our political system by supporting the election of class-warriors (e.g., such as Obama), but who want to see more jobs created so they can solicit more dues-paying members.

    Environmentalists are job-destroyers through their religious consecration to Gaia, the goddess of BANANAOAF — Build Absolutely Nothing Anywhere Near Anybody Or Anything Forever.

    Maybe they deserve each other, but I will place my bet next year with the unions on this issue. At least they represent people-oriented workers, helping to build things that grow our economy, and they do not include many comfortable-armchair jockeys — coupon-clipping, thing-oriented, Gaia-worshipping, eco-religious fanatics

  2. November 11th, 2011 at 14:39 | #2

    I’ve been invested in and am accumulating IVAN for the very reason your Keystone Quandary sets out. I’m interested in your opinion of this company and their technology.

  3. Tim Ryan
    November 11th, 2011 at 14:48 | #3

    Pretty obvious this is a political decision designed to avoid the presidental election.It’s sad when politicians make decision that will benefit themslves, as opposed to making a decision for the people. Like it or not, America needs a stable oil supply, and jobs. Heavy crude is not the evil it is made out to be. An old saying “you snooze you loose”.Sit back and watch as China will rush in and scoop up the oil that should have gone to America. They are alredy buying all the companies they can.

  4. November 11th, 2011 at 15:12 | #4

    Kent you have missed another very important point, the oil sands of Canada is going to be developed. the political pressure that has now been placed on Canada and producers is going to make the need for alternative markets the primary focus of Canada. The consquences of this will be to eliminate the discounted price that heretofore America bought Oil, China has stated it will take all Canada can ship, China has also bought into joint ventures and Oil companies in canada and will be a big competitor for energy. This decision by Obama is to say the least very shortsighted and damaging to America.

  5. Ronald Sarson
    November 11th, 2011 at 15:25 | #5

    This decision by our Manchurian Candidate may be one of the worst he’s made, and that’s saying a lot. Being responsible for shipping oil to China that we could use to grow the economy and keep the prices of gasoline and heating oils within reason is treasonous. If it isn’t already too late to return to a sane government in 2012, our beloved country is certainly doomed. It definitely will not be easy because the takers probably outnumber the givers.

  6. Robert Berke
    November 11th, 2011 at 15:28 | #6

    Do you think that this delay may badly impact Cheniere?

  7. Robert Berke
    November 11th, 2011 at 15:51 | #7

    Domestic production has nothing to do with the price paid by consumers. The US is already producing more domestic oil than it has in more than 30 years. Do you think that has reduced prices at the gas pump? We have a major glut in natural gas, now selling for the lowest price in more than a generation. Have you seen your utility bills come down? Ever? Also, you can bet that a good deal of oil shipped via the Keystone to the gulf is destined for other shores. That certainly is the case with our glut of natural gas. Not for nothing is Cheniere and other companies building LNG plants for export.

    I have no beef with building Keystone, as long as it doesn’t endanger mid-west water supplies, but let’s not pretend it’s a gift to humanity from the oil companies. @Ronald Sarson

  8. ken cattermole
    November 11th, 2011 at 16:07 | #8

    the u.s.a. will loose again not building the pipe line jobs alone are great and getting away from the arab supply would be better than any thing but your president needs his job maybe he can retire and sell newspapers on the corner he would need subsidised housing of corse we will just ship the oil to china and get some more of their junk back obama doesnt seem to get it anytime but what lawyers do best of luck on this

  9. Robert Hart
    November 11th, 2011 at 16:10 | #9

    American talking heads may heap scorn on the European governments and their inability to solve complex problems, but American politicians are equally inept. They are more concerned with saving their seats, than saving their country’s economy. The deadlock in America justifies people occupying parks. Unfortunately they are doing so now for the wrong reason. Wait until the U.S. is held hostage by another Oil Dictator and oil prices are sent skyrocketing. Our Canadian heavy oil will be on its way to China. Talk about a beggar your neighbor policy!

  10. Chuck S
    November 11th, 2011 at 16:59 | #10

    A pipeline is also being built from Canada to the ocean, so China and other countries can get the oil. I’m sure there are no delays in that one.

    The problem is that Obama is anti-US energy – he opposes offshore and Bakken oil as well as coal power plants, etc, etc.

  11. Tony V
    November 11th, 2011 at 17:33 | #11

    At a time when people need jobs, this president has essentially declared war on American workers. This cowardly decision just prolong this economic nightmare.

  12. BON
    November 11th, 2011 at 17:58 | #12

    This is sad. As a Canadian and Albertan, I see 1 option only. Build the Gateway to the Pacific and sell to China and India. The US is no longer a predictable or reliable ally. Obama has been a disappointment. Hopefully it will come to its senses. In the meantime, there are lots of jobs north of the border. We would love to share with our cousins but for some reason they would rather deal with unethical and unsavory regimes elsewhere in the world!!!

  13. Don George
    November 11th, 2011 at 18:55 | #13

    I’m from Alberta Canada, home to the resource described as “dirty oil” by some. I, and tens of thousands of others in this province benefit directly and indirectly from the resource we have up here.

    I acknowledge concerns that Nebraskans and others have about this pipeline destroying their water supply.

    For me it’s quite simple given the delays and opposition to this pipeline. I’m encouraging our local firms and government to build the refineries here, and truck the finished product to the market that wants to pay for it. In the end, it’s more jobs for Albertans. Someone will buy Alberta’s oil, since we’re a safe friendly supply.

  14. Bernard Durey
    November 11th, 2011 at 20:02 | #14

    Thanks for some of your information. One of the questions I had asked some time ago was there a difference in the crude coming from North Dakota and Montana and the Canadian crude. Recent articles has called the crude coming from North Dakota and Montana,light sweet crude while the crude fromthe tarsands area of Canada is heavier,etc.It is also nice to know there may be a delay in the Keystone XL. Some people are for rerouting it close or along side the Keystone that is already in place. The Ogallala Aquifer covers eight states with 67% of it under the state of Nebraska. Nebraska has 93 counties and it covers parts or all of about 80 or 81 counties already. In a book titled The Ogallal by John Opoe or something like that. I will have to double check on the author,etc. but he had stated in one chapter that he thought the Ogallala Aquifer would move south southeast every so many years and it would move maybe two or three feet. If that be the case it could possibly move underneath the Keystone and if the Keystone XL is placed it may do the same. With that being said. How much crude do they think they have in those two sources and when would it be depleted? If they cross the state of Nebraska and the Ogallala moves south southeast would or could they be required to tear it out later? Just food for thought because we don’t know for sure yet. But it seems like transportation of crude today in those two areas is a big problem and maybe not as economical as some would like while trying to truck it to nearby refineries and tearing up the roads,etc.

  15. Ed Nichol
    November 11th, 2011 at 20:12 | #15

    Take a look at the Gateway port and you will get flashback to exxon..so don’t count on the China connection any time soon.

  16. Ed Nichol
    November 11th, 2011 at 20:21 | #16

    Also, try to understand how large the effort to shift to natural gas is. It must be done fast without real govt input, which means, high oil prices. Oh, we are your neighbors, but we are still a foreign country and we take Canadian dollars first.

  17. eric taylor
    November 11th, 2011 at 21:21 | #17

    I understand that there is some legitimate concern for the environment,but the need for energy independence is a higher concern, and so I am sure the issue will eventually be resolved! I am personally more interested in natural gas and alternative solar energy(there is a solar plant in Spain that focuses computer
    programmed mirrors on a large vacuumed pipe down a field to cook steam powered electricity, at a whopping 60 to 70% efficiency!). If we ship natural gas to Europe do you think the price differentials to our advantage will hold up?

  18. gary morgan
    November 11th, 2011 at 22:03 | #18

    What reason do we have to think that this oil will stay in the US? Multinational companies have no allegiance, and will put it on the world market. So, they trash our country, and take the product out of the US to sell, just like they do in the other third world nations.

  19. November 11th, 2011 at 22:20 | #19

    The Vail of oil tyranny has been lifted people there are many other options to diversify our energy dependance and not contaminate our ground water and soils for future generations, 1)raw algae has been successfully grown and processed along existing oil refiners with less modification costs than heavy oil production, this algae grows faster then you can burn it and is ready for direct use in all diesel engines . 2) solar thermal as stated above,3) natural gas to be used as a weening fuel source until we secure full sustainable production material,4)the best of all is the one plant that can replace oil production, carbon negative building material, and all esential fatty acids and protien compounds for human consumption,and plastic and textile material,but alas special interest groups have made this plant a schedule one drug to be bannished to the gates of hell along with any other heathens that might suggest we as humans and people do affect our enviroment and our surroundings!!!

  20. November 12th, 2011 at 11:51 | #20

    Come on folks. TransCanada could use the existing rite of way for the new line and if the management was not so stuborn they would have done it already. I might guess there are over 20 existing crude pipelines already crossing the Ogallala now, so what is the issue? The issue is can the President be re-elected without the green vote? The Brits moved to the right and voted out the Labor party. The Canuckle heads moved right with Harper in firm control and the

  21. November 12th, 2011 at 12:02 | #21

    the same thing will happen here in the USA. The Socialist state is bankrupt in Europe and if we do not get rid of the Socialists running the US we will be bankrupt as well. Our trade deficit is over $43 billion this month or will be over 1 trillion in two years the way we are going. Add that to our 15 trillion of bonds now outstanding and we will not be able to pay the interest on our debt if interest rates move up even 2%. We must get this country working again while we still have credit to expand or it is all over as we know it.

    The Tea Party is right. Govt must stop spending but we must also get back to work. Keystone would be a small step.

  22. Jeff Pluim
    November 12th, 2011 at 12:29 | #22

    I am from Alberta,(for those geographically challenged Americans, that is where the oilsands are). What Americans don’t realize is that Alberta will sell its oil production to someone, whether it be the Americans or the Chinese. This hold-up of the Keystone project just gave another huge boost in the move to build a pipeline from Alberta to Kitimat, British Columbia, on the Pacific coast. I guarantee you that if that pipeline to Kitimat gets built before the Keystone project gets started, Americans will not be seeing any oil from the Alberta oilsands for many, many years, because the Chinese will be buying up all the oil Alberta can supply.
    This is a huge error on part of the American government. They will be giving up their largest potential supply of oil from a close neighbor, to the Chinese.

  23. Bernard Durey
    November 12th, 2011 at 13:32 | #23

    In my previous comment I had mentioned a title of a book and an author and also a sentence or two from that book. They are as follows: Ogallala-Water for a Dry Land by John Opie. The sentence or two is found in the introduction part of the book on page 3. It is as follows: The Place and Its Problem – The second paragraph,sentences five and six read as follows: One misconception about the Ogallala aquifer(and about most groundwater)is that it stands in cavernous lakes or flows in thundering underground rivers. In reality,it trickles slowly,southeasterly,through sandy gravel beds,500 to 1,000 feet a year,2 to 3 feet a day. These vast water-saturated gravel beds,50 to 300 feet below the surface,are 150 to 300 feet thick.

  24. Bernard Durey
    November 12th, 2011 at 13:39 | #24

    Also one further comment on that type of movement of water or ground water. As a youngster I grew up with no running water and we had the old outside outhouse for a bathroom. Every so often I would have to go out and dig a new hole for the outside toilet. Ironicallly I would get down five or six feet. I would go in to eat or take a break and come back out and find ground water trickling into the hole I had just dug.

  25. Bernard Durey
    November 12th, 2011 at 15:00 | #25

    While further reading your article and the decision,I pondered a few things. Everything isn’t written in stone. I think someone confronted President Obama on this issue in Colorado. I think he stated that he would be the one to make the final decision. Sois there an executive oroder coming yet or not. We have seen this with Healtcare Reform and the split between the democrats and the republicans on that issue,the courts and the added issue of there is another election coming. Now could it be that they are playing the same field here as the republican party is playing with the health care issue? I do not know. I guess wait and see.

  26. Bernard Durey
    November 12th, 2011 at 16:02 | #26

    I think also there are some potential other issues to take a look at here. In this and/orother articles you have mentioned about refineries operating at capacity. There was also the issue of refurbishing refineries so they could accept the heavier crude from Canada. North Dakota and Montana area the crude is said to be light sweet crude. Forthat type of crude there probably not much refurbishing needed. However,in the past we have seen accidents at refineries when running or operating at full capacity. So in reality do refineries even wish to operate at full capacity for safety issues,etc.?

  27. Kevin Beck
    November 13th, 2011 at 12:25 | #27

    Whenever a politician is put in the position to make a decision, he will always make the decision in the way that is against economic sense. He will also make the decision that is most ideologically pure, instead of the one that is in line with his nation’s preferences. And this is exactly what America got stuck with when Obama got elected as President.

  28. Don Merriman
    November 14th, 2011 at 13:12 | #28

    At a recent fundraiser for our local Nursing home, Baxter Black,quest speaker opened his remarks by making the following remark, “I understand that you folks who live and ranch on the route of the Keystone pipeline are concerned about this project, do you want it or not?” The answer was overwhelming, NO- It seemed like I was the only one who yelled YES I know a bit about trying to build pipe lines. As a past director of the West River Conservency sub district we proposed a pipe line from the Oahe Dame at Pierre South Dakota to Gillette Wyoming, this pipe line would have been a reliable water supply for Rapid City and provide water for a coal slury pipeline to the Golf Coast. What a kettle of worms that opened up. People with no knowledge of the quanity of water that would be needed raised hell because they feared we would empty the Lake. The railroads that would have to grant permission for the pipeline to cross their right away banded together and said they would stop this project. Of course the railroads are hauling all the coal that could have been transported cheaper by the pipeline. The same will be true if this pipe line for crude oil and the tar sands from Canada is to get off the ground. I’ve read all the comments so far, it seems that most of the comments so far are by those who hate President Obama and will do everything they can to bad mouth him. You want jobs but do everything possiable to kill jobs. In a few days I will be 89 years young, I’m a Democrat and proud of it. The Republican party has changed in recent years to a do nothing, kill every project that will enhance our economy. Loyalty to the Koch brothers who have funded recent elections for our newer Senators and Congressmen has overshadowed commen sense. All of us are going to pay through our pocket books for this nonsense. Our family lost most of our farm in 1948 and 1950 to the Bureau of Reclamation , by the use of Eminet Domain. $19.00 per acre, those protestoring will get more per ft of the right away and the pipe will be buried at leat 6 ft underground, the right away will be grassed over and landowners will be able to graze and farm right over the top of it. Our land was covered with water and the Damsite itself. I’m not that sympathetic to these cowboy types who are trying to block this project. Don Merriman Lemmon South Dakota

  29. John S
    November 14th, 2011 at 13:44 | #29

    I don’t know if this idea has been addressed but one thing Canada could do or authorise to be done is to extend existing pipelines into Central and Eastern Canada eliminating imported oil for use in that region of the country. It makes no sense to import oil when Canadian oil is available.

  30. Jack T
    November 28th, 2011 at 14:04 | #30

    @Tim Ryan
    Absolutely correct on all counts. Obama is: me first (read get re-elected, party second and what’s good for America is a distant third. Why aren’t the unions all over him?

  31. February 18th, 2012 at 06:40 | #31

    The President and his adntmistraiion have lied about the pipeline. It’s time to use those strong words and continue a campaign of disobedience to such evil behavior.

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