The Keystone XL symbol

May 13, 2013
If the campaign to kill the Keystone XL pipeline northern segment ultimately succeeds, low-gravity oil from Canada will reach markets anyway. Resistance to the project to boost movement of synthetic crude oil and blended bitumen from Alberta to the Gulf Coast is entirely symbolic.

If the campaign to kill the Keystone XL pipeline northern segment ultimately succeeds, low-gravity oil from Canada will reach markets anyway. Resistance to the project to boost movement of synthetic crude oil and blended bitumen from Alberta to the Gulf Coast is entirely symbolic. It appeals only to obstructionists yearning to suppress the use of oil.

So far, obstructionists have prevailed. An administration loath to irritate them still hasn't approved the Keystone XL border crossing. TransCanada, the project's sponsor, has delayed its expected in-service date. For opponents, delay is the next best thing to cancellation.

Yet heavy oil already moves south from Alberta, and more is coming. New supply of heavy oil that can't move south will move west or east or both. Contrary to obstructionist myth, blocking Keystone XL won't slay the demon "tar sands."

Routes to the US

Crude oil pipelines cross the US-Canada border at four points in Montana, two points in North Dakota, and one point each in Washington, Michigan, New York, and Vermont. Some crossing locations accommodate more than one pipeline. While not all the pipelines directly serve refining centers able to upgrade bitumen, not all production from the oil sands is bitumen. Upgraders in Alberta yield synthetic crude oil, which less-sophisticated refineries can run. And once oil enters the US, it usually can find ways to move to where it's needed.

Increasingly, blended bitumen is moving by rail or a combination of rail and barge to high-conversion refineries on the US Gulf Coast. This is the market targeted by Keystone XL. For now, the motivation to transport oil by railroad, which is more costly than pipelines, is price dislocation. Heavy oil passing through the pipeline hub at Cushing, Okla., is subject to a value discount against West Texas Intermediate crude, which lately has been discounted against Brent crude because of supply growth and transportation constraint. On the Gulf Coast, the heavy oil price can exceed WTI. By providing access to the more-favorable pricing regime, rail transport more than overcomes its cost disadvantage to pipelines. Oil sands producers are enthusiastically learning to use it.

As rail grows as a transport option, two other major pipeline operators in Canada have announced projects that would increase capacities to transport heavy oil. Kinder Morgan plans to expand its Trans Mountain crude-products pipeline between Edmonton, Alta., and Vancouver, BC, and Anacortes, Wash. And Enbridge proposes a pipeline between Edmonton and Kitimat, BC. Both projects would give oil sands producers access to high-conversion refineries on the US West Coast and in Asia.

TransCanada, meanwhile, is considering a project to move crude oil from western Canada to refineries in eastern provinces through a converted gas pipeline extended by construction. The long-distance system could, in some combination, link the oil sands with Atlantic waterborne trade and, by carrying conventional crude, increase room in southbound systems for heavy oil. In the US, projects under way and proposed will further relieve pressure on Cushing, increase overall capacity and system flexibility, and serve new destinations on the Gulf Coast.

Political opposition

Some of these projects face political opposition as intense as the campaign against Keystone XL. Enbridge's Edmonton-Kitimat project, called Northern Gateway, has been delayed by coordinated activism, much of it funded by groups in the US, and provincial politics. And a state low-carbon fuel standard might limit California's appetite for heavy oil from Canada, which otherwise could be strong. Other markets exist, however. Oil-sands products will find routes to them.

Obstructionists might succeed in killing Keystone XL, most likely by delaying the project until other options win commercial advantage. Yet heavy oil still will flow in growing amounts from Canada to the US and probably elsewhere, with minuscule effect on carbon loading of the atmosphere and no effect on global average temperature. Keystone XL then would be just a project that didn't happen—a triumph for a certain kind of environmentalist but for the environment, meaningless.