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Is This the New Face of Energy Policy?

by | published November 5th, 2015

The recently renewed debate over the Keystone XL Pipeline and the decision by TransCanada (NYSE:TRP) to request a suspension of the U.S. Department of State (DOS) review of the controversial cross-border project point to a remarkable change in North American energy emphasis.

The Keystone XL is actually the fifth – and last – segment of a pipeline network linking Canada’s oil fields with the U.S. petrochemical complexes on the Gulf Coast.

It has been the focus of Washington politics because it crosses an international boundary, thereby requiring a review by the DOS and approval by the government.

President Obama has already indicated he is likely to reject the project even if it is determined to be environmentally acceptable. Democratic frontrunner Hilary Clinton has said the same. That would leave a Republican victory for the White House and retained control of both houses of Congress as the only way to salvage the project.

The acknowledgement that having the pipeline debated during what is certain to be a raucous year-long election battle in the states has prompted TransCanada to make its suspension request. The DOS has announced it will continue with the process anyway.

While the environmental implications of the XL are still receiving the bulk of press coverage, the quandary of the pipeline is now actually showing something else.

And this is the biggest development since the Keystone’s completion first came on the political radar…

Oil Sourced From Canada Once Made Sense

The complexion of North American continental oil sourcing has changed a great deal since the Keystone project emerged over a decade ago. Then, the assumption was that the U.S. would require heavy oil coming down from the oil sands of Alberta and Saskatchewan to stem an ever-rising reliance on imports from beyond North America.

At the time, Mexican production was declining and the U.S. domestic market had upwards of 60% of daily volume produced by stripper wells – each producing 10 barrels or less a day under very low pressure with as many as 18 barrels of water coming up for every barrel of oil.

Offshore projects, especially in the Gulf of Mexico, was providing some major finds, but these remained capital intensive and subject to long phases in lead times. As expectations moved toward more than 70% of American daily needs coming from global imports, much of that from parts of the world hardly in line with U.S. security concerns, turning north of the border made a lot of sense.

Not today.

The U.S. No Longer Needs the XL

The shale and tight oil “revolution” has transformed the U.S. domestic production outlook, while technological improvements have made more conventional wells more cost efficient. We now have significant excess reserve capacity locally.

In addition, the cross-border component, still providing cost-effective additions to refining flows, has been increasingly provided by a combination of existing pipelines, along with transit by rail and barge.

The simple reason for a pronounced change in emphasis on the XL is this: The U.S. no longer needs it. That may change in the future, but even TransCanada sees the writing on the wall.

Closely following its suspension request on XL consideration, TRP this morning announced revisions to its Energy East Pipeline Project in Canada, following series of conversations with local communities, key stakeholders, and customers.

The project intends to make additional Western Canadian volume available to refineries in Quebec, reducing environmental impact and improving benefits to the local economies along the route.

The Emphasis Is Now on the Energy East Pipeline

As with other oil production and transport companies on both sides of the border, TransCanada has been wrestling with low prices and languishing profit margins. This newest attempt may well translate into placing greater emphasis on refined oil products rather than raw material.

Moving crude by rail has also had its share of environmental and safety concerns, especially with a major tragic accident in Quebec that killed scores of people in the center of a town and sparked a national outrage.

TRG CEO Russ Girling noted in the company’s announcement today that: “Pipelines remain the safest and least GHG [greenhouse gas]-intensive way of transporting crude oil to market,” adding, “By approving and building the Energy East Pipeline we will create the capacity to displace the equivalent of 1,570 rail cars of crude oil per day to Eastern Canada.”

The emphasis here is on providing direct and efficient connections to refineries in Quebec and New Brunswick, allowing them access to a secure and less expensive Western Canadian crude oil supply.

Canada needs to bring its Western heavy oil to market; the U.S. needs to figure out less expensive ways to develop its shale and tight oil. Both are necessary for the North American “energy independence” everybody is talking about.

It just doesn’t seem the Keystone XL is figuring as much in that entire discussion as it used to.

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  1. Robert in Vancouver
    November 5th, 2015 at 19:39 | #1

    The USA does not produce enough oil to meet it’s needs. Imports are required. And most of the US shale and tight oil production depletes within 1 to 3 years, so it cannot be relied on for the long term. Canada’s oil sands are a secure resource with over 100 years of proven reserves just waiting to be produced. Build Keystone XL and start shipping Canada’s oil to the USA, and tell OPEC to F-off.

  2. Fred Beyers
    November 6th, 2015 at 07:56 | #2

    So, it seems that some delays, frequently caused by people and ideas that were dismissed by many as “nut-cases” and other uncomplimentary evaluations even to include “un-American” may prove to be wise and prudent!

    I suspect that far more often than commonly believed, delays in evaluating vast projects would have very similar outcomes!

  3. raman effect india
    November 6th, 2015 at 08:50 | #3

    Kent,
    Kindly explain again how can arabs influence oil auction/futures market sitting in Dubai! isit not set in US and UK?
    I read one report that shows all major E&P companies (devon, chesapeake, contiental etc) are burning cash. these five companies have a capex bill of $200 bln in last five years. Plus big oil xom and chevron has spent $400 capeex since 2009. Why so much capex? These companies have huge debt.
    Another interesting find -Top 15 money managers in USA (black rock, jpm, vangaurd) hold $25 trillion assets -who are these rich cusotmers? Why is it then for example, many golf resorts owners across USA (myrtle beach ,SC) selling resorts to chinese? If US wealthy rich are actually broke then who are the holders of $25 trillion assets with these top 15 money manager! You can access this 2 page report by checking for northern trust report on top 15.
    Having spent 5 years in USA I am glad I am not there because I cannot take hard decisions like firing people and outsourcing bank IT jobs to asia.

  4. F. Paul Wyman
    November 6th, 2015 at 11:02 | #4

    Dear Dr. Moors:
    I worked at Bechtel back in 1974 when we were approached by Canada Syncrude, the first consortium to successfully design and implement large scale tar sands extraction. Our job was to put all the consortium members production simulation models on a common footing and see if any of 20 odd mining schemes were financially viable for oil at an estimated 1985 $20/bbl price. We did all that (in only 6 weeks), finding a 1st place preference to draglines and 2nd place to buckwheel excavators. My asignment was to model the extraction process, using naphtha and hot steam to separate bitumen from the sand. I am aware of how thick and strong tar sands oil is compared today to todays much lighter fracked oil from my parents’ Oklahoma Panhandle homesteads. My expertise is Analytics and highly detailed production simulation modeling, but I am not a petroleum engineer. So I want to ask your option as to whether any of our U.S. refineries are now capable of refining the high-bitumen-high-sulfur-sand-laden Canadian Tar Sands bitumen which will be delivered via the XL pipeline? Or will all this tar-sand oil just be loaded onto tankers in the gulf and then be sold all around the world, particularly to China, in light of US-China budding hostilies? The oil-sands are so viscous (originally used to fill pot-holes in Edmonton) that I’m concerned about both the “tar” and the “sand” possibly gumming up the pipe-networks inside most of our domestic refineries. What do you think?

  5. EdM
    November 16th, 2015 at 22:55 | #5

    @FPaulWyman: Utah bitumen is much better quality.

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