Pipe Dreams – Keystone XL debate continues to rage into 2015

It is amazing how sometimes random events can serve to highlight areas of public controversy.

In terms of fossil fuel production and distribution the past year has seen more than its share of headline-generating developments.

From more distant regions we note that the Ukraine-Russia dispute has served to place new pressures on natural gas distribution in the European market and the sudden eruption of violence and political uncertainties within oil-producing regions such as Venezuela, Iran, and Nigeria has raised questions regarding the reliability of petroleum production and exports from those regions. Closer to home, we note that Saskatchewan’s burgeoning petroleum industry has suddenly been hit by two particular news items including the serious drop in crude and gasoline prices plus the recent Presidential veto of the Keystone XL pipeline. It is the last item that has been foremost in terms of media attention in the first quarter of 2015.

International developments over the past decade or more have served to highlight the importance of generating reliable North American supplies and that consideration, plus long-standing attention from the vast environmental community has brought sharpness to the polarizing debates surrounding one of the most important projects now dominating North American energy media headlines, the proposed Keystone XL pipeline which is designed to move Canadian petroleum through the central U.S. and eventually down to major refining and shipping facilities located on the American Gulf Coast.

The Keystone-XL pipeline project should be of vital interest to the entire Canadian west in general and to Saskatchewan’s growing petroleum industry in particular where intense exploration and development efforts relating to both ‘natural’ petroleum deposits and those associated with tar sands developments are ongoing.  In fact, petroleum production – both present and future – has become a vitally important base upon which governments look to build future economic growth.

Alberta, of course, is already well known for conventional, as well as oil sands development and production while Saskatchewan looks toward increasing natural gas and petroleum extraction as major sources of present and future economic growth.  As it happens, it is Alberta’s enormous “tar sands” oil recovery programs which lie close to the heart of the Keystone-XL debate.

Keystone XL is actually only one part of the “Keystone Pipeline System” with three phases carrying crude oil from Alberta already in operation as of spring 2015.  Phase 1 carries crude from Hardisty, Alberta through Regina, Saskatchewan to Steele City, Nebraska and then on to refineries in Illinois.  Phase 2 operates between Steele City and Cushing, Oklahoma and Phase 3A continues on to Nederland, Texas.  Phase 3B which extends the pipeline to Houston is currently under construction.

The Keystone XL pipeline – Phase 4 of the total system – will be an entirely new pipeline from Hardisty directly to Steele City which is located in southernmost Nebraska – and it is Phase 4 that has aroused an almost unprecedented political, regulatory, and environmental storm reaching all the way through the U.S. and Canadian political systems right up to the Oval Office of the United States President Barak Obama.

The fact that controversies surrounding Keystone XL are making well-publicized pro and con headlines on an almost daily basis can be attributed, at least in part, to the influence of great personal wealth on either side of the issue.

To a large extent, forces opposed to the construction of Keystone XL are funded by billionaire Tom Steyer, founder and former Chairman of Farallon Capital Management.  In a 2014 interview, Steyer declared that he was dedicating himself to tackling energy and climate issues and in order to work toward those goals he founded and funded “NextGen Climate” which identifies itself strongly with promoting climate change awareness, as well as supporting clean air and water issues.

Meanwhile, noted libertarian and free market activists Charles and David Koch – also themselves billionaires – are equally vigorous in support of Keystone XL.  The Koch Brothers, respectively chairman and executive vice president of  Koch Industries, have consistently promoted Keystone XL on the basis of the huge potential economic and job-creation benefits which could accrue upon its construction and successful completion.

Political influence has played an important part in the overall debates regarding the project.  Generally, those on the political Left and therefore carrying substantial influence within Democratic Party circles right up to the President have fervently opposed the project on environmental grounds.  One of their arguments is that completion of Keystone XL would enable further expansion of tar sands petroleum recoveries in Northern Alberta which they regard as environmentally harmful while another is that approval of Keystone XL could endanger the entire Ogallala Aquifer.  Ogallala underlies the central core of the U.S. and hosts one of the largest reserves of fresh water in the world which provides drinking water for more than two million people.

On the opposite side, those favouring the project point toward two significant considerations.  First, they claim direct job creation benefits which would include construction employment, permanent operational job placements, support for many retail establishments during construction and operation, as well as further employment within the Canadian oil industry and capital gains which would then be redistributed throughout the economy.

Most recently, they have also noted that the Ukraine-Russia and Iraq-Syria plus Venezuelan and Nigerian instabilities demonstrate the potential vulnerabilities associated with the importation of fossil fuels from distant – and possibly unreliable – sources.  Accordingly, they favour extensive development of North American alternatives.

There are other political issues as well.  Since the Keystone XL pipeline originates in Canada but passes through U.S. territory, the project requires approval by the U.S. Secretary of State which means relations between Canada and the U.S. are directly involved.  Also, and of prime political importance to Americans, the elections of last November resulted in the Republican Party achieving majorities in both the House and Senate, leaving President Obama in a more vulnerable position than at any time during his two administrations.

Both sides of the issue appear to have substantial data to back up their cases.  Those advocating the project can point to a specific study by the American State Department which discussed some of the economic benefits and these include the eventual creation of over 40,000 jobs which would take place during construction and operation of the pipeline.  They have also estimated that completion of the pipeline would add many billions of dollars to overall economic activity.

As noted, another argument of the pro-pipeline forces remains that construction and operation of the pipeline would allow additional oil to flow into America from Canada, thereby further reducing dependence upon unreliable foreign sources.

The anti-pipeline argument continues to focus on possible environmental harm and takes several different forms.

First, they argue that construction of the pipeline would enable Alberta tar sands oil to be produced in ever-larger quantities, thereby increasing what they regard as “dirty oil” production.

Next, they suggest that the by increasing distribution efficiency and perhaps lowering overall costs, a successful pipeline would encourage further fossil fuel usage, thereby worsening “climate change” impacts – something environmentalists have been fighting against for decades.

In addition, they also argue that actual construction of the pipeline itself could increase general environmental risks, particularly in wetland areas such as eastern Nebraska.

Matters came to at least a temporary head in early 2015 when both the U.S. House and Senate passed pro-pipeline legislation after the last legal challenges to the project had been set aside by the courts. However, in early March, President Obama interposed his veto, thereby once again bringing the project to a halt.  His objections appeared to be primarily environmental, but he also noted that he believed some of the new job claims were exaggerated.  His reasoning was clearly expressed in the following Presidential quote immediately following his veto action:”The reason that a lot of environmentalists are concerned about it is the way that you get the oil out in Canada is an extraordinarily dirty way of extracting oil, and obviously there are always risks in piping a lot of oil through Nebraska farmland and other parts of the country.”

He did add that his veto was not permanent and further studies should take place.

Ironically, this entire controversy surrounding a project which would enable further production and distribution is taking place at a time when there is already evidence of significant over-production of petroleum within North America.  In fact, the excess of supply over demand has grown to the point where numerous oil tanker vessels are being hired, not to transport petroleum to distant markets, but rather as the most cost-effective means of above-ground storage of excess supplies.

Another evidence of a growing over-supply problem has been a significant decline in petroleum pricing.  As an example, the price of crude oil on the international commodity market has declined from over US$90 per barrel as recently as October 2014 to below US$50 per barrel by early March 2015.

Within Saskatchewan, quite ironically yet another problem has developed and that is the discovery during this era of presumed over-production of yet another promising area of oil exploration called the “Torquay”, located in the southeast part of the province and geologically associated with the giant Bakken oil discovery.  Early estimates of total resources indicate possible recovery of over 4,000,000,000 barrels of oil.  However, some industry sources suggest activity might be constrained by both low current petroleum prices as well as a growing difficulty in moving final product to markets – a situation which directly applies to the proposed Keystone XL Pipeline.     

Whatever the eventual outcome of the Keystone XL project, there is little doubt that the Saskatchewan petroleum industry, like that of other provinces and states, now finds itself at a critical juncture with distribution, production, demand, and pricing all in a state of considerable flux.

It will be most interesting to watch developments within this vital industry going forward, but one thing is certain.  The entire debate surrounding Keystone-XL has served to significantly raise the level of public knowledge regarding the entire subject of North American fossil fuels developments.

 

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