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With U.S. Awash in Oil, Nat'l Interest Argument for Keystone Weakens

U.S. oil production is suddenly booming. Question now is, will Obama say yes to the Canadian tar sands being part of this fossil fuel revival?

May 21, 2013
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President Barack Obama speaks at the site of the southern leg of the Keystone XL

U.S. oil production is suddenly growing so fast that some analysts are questioning how much the country really needs the Canadian tar sands oil that would move through the proposed Keystone XL pipeline.

This month, the U.S. Energy Information Administration (EIA) said it expects domestic crude oil production to surge 20 percent by the end of 2014 from its level at the start of this year. That means an additional 1.4 million barrels of U.S.-produced oil will be available each day—about twice as much as the Keystone would bring in from Canada.

Although the United States will still need foreign oil for years to come, declining demand and increasing supply are cutting into imports surprisingly fast. The Energy Information Administration, which is the Energy Department's data reporting and forecasting arm, expects the nation to import just 30 percent of its oil needs next year, the lowest since the mid-1980s. Under one particularly optimistic EIA scenario, the U.S. could even achieve the grail of zero net imports in the 2030s.

"A country that 150 years ago served as the cradle of the oil industry, but which for decades seemed to face an irreversible production decline, now finds itself, all of a sudden, at the center of an oil boom," said Maria van der Howeven, director of the International Energy Agency, in a statement introducing that group's latest study of world oil markets. The IEA represents dozens of countries, including the United States and Canada.

The question now is, will Canada's oil sands co-star on the stage of this spectacular North American fossil fuel revival? Or will it become an understudy that never sees the spotlight?

The answer depends largely on the State Department's decision, expected later this year, whether to approve the Keystone XL permit—a decision based on "the national interest."

Given the American petroleum boom, it is now harder to make the case that the oil the line would carry is vitally needed to quench the nation's thirst for fuel.

Instead, analysts say that in this era of plenty the Keystone’s main function isn't meeting U.S. needs, but getting oil from the land-locked province of Alberta to overseas markets via U.S. refineries on the Texas coast. Two pipeline projects from Alberta to the Canadian coast face such stiff opposition that some analysts say they're unlikely to be built.

Meanwhile, the project's opponents argue that the nation can now afford to put environmental priorities, including global warming, before the oft-cited need to bolster U.S. oil supplies. If oil must be burned—a necessary evil, perhaps—they say it would be best to avoid the tar sands oil, which is significantly dirtier to produce and refine.

"The facts on the ground have changed," said Anthony Swift of the Natural Resources Defense Council, "The case for Keystone and the tar sands was never particularly strong. It has never been weaker than today."  

"With this outlook, why would the United States need the controversial Keystone XL pipeline?" asked Earle Gray, the former editor of Oilweek magazine and author of several books about Canadian oil, in the Toronto Star.

"We do not really need the oil," said an editorial entitled "Pipeline to Nowhere" by Jerald L. Schnoor, editor in chief of Environmental Science & Technology, published this month by the American Chemical Society. Schnoor said the real key to securing energy independence is to use less oil.

Others are not so quick to dismiss the Keystone project.

Stephen R. Kelly, a professor at Duke University who studies energy security and U.S. trade with Canada, said that "we are still going to need to import several million barrels a day of oil from somewhere for the next 20 years."

"My bottom line," Kelly said, "is that we should approve Keystone, but it should be the last pipeline from Canada that we should ever approve."

Christopher Knittel, a professor of energy economics at the Massachusetts Institute of Technology, told a House committee last week that he favored Keystone on economic grounds even though “the national security benefits are likely to be small.”

"One of the most compelling arguments for building the Keystone XL pipeline is that it will increase the profits of oil producers," he said, dismissing the proposed project’s effects on global warming or consumer prices as trivial.

Canadian officials continue to press hard for the Keystone.

At an appearance before the Council on Foreign Relations in New York last week, Prime Minister Stephen Harper cast the benefits of the pipeline in terms of reducing American imports from elsewhere, such as Venezuela, whose shipments to the United States have declined as Canada’s have increased in recent years.

"Now this is an enormous benefit to the United States," he said.

In the U.S. House of Representatives, which is to vote this week on legislation forcing the Keystone’s approval without further review, the pipeline’s advocates continue to argue the energy-security case.

"Oil imports are needed to fill the gap between consumption and domestic production," said the report of the Energy and Commerce Committee when it approved the legislation. "Unfortunately, many nations that serve as a source of these imports continue to display substantial instability and anti-American hostility, such as Nigeria, Venezuela, and Russia."

State Department Analysis Is 'Deeply Flawed'

Critics of the Keystone pipeline say the State Department should consider the new data about U.S. oil production as it prepares the final version of its Keystone environmental impact statement, which was published as a draft in March. More than a million individuals commented on the 3,500-page document, and interested parties such as TransCanada, the government of Alberta, and major environmental organizations also submitted detailed comments.

Environmentalists were especially critical of the market analysis at the heart of the draft. It concluded that there is so much global demand for Canadian oil sands crude, and so many ways to get the fuel to world markets, that oil sands production will keep on growing whether or not Keystone is approved. Using that reasoning, the State Department claimed that building the pipeline would have no significant impact on greenhouse gas emissions. One way or another, Canada’s fuel would get out, and so would the carbon dioxide, it said.

Ian Goodman, an economist hired by environmental groups to review the environmental impact statement, said that its use of older data, along with other errors, rendered it "deeply flawed and not a sound basis for decision-making."

Goodman's report examined emerging crude oil markets, factors driving tar sands expansion, availability and costs of pipeline and rail transportation, and tar sands breakeven costs. It found that the State Department analysis overstated the inexorable expansion of Canada’s oil sands production, exaggerated the likelihood that the crude would be shipped by rail if the pipeline’s permit were refused, and wrongly concluded that the pipeline would have little or no effect on the future of the oil sands.

"In reality, this large expansion is no longer so inevitable or even likely," the report said.

Goodman, who has been an energy consultant for more than three decades, said the latest data bolsters his critique, which was submitted to the State Department in April during the public comment period.

"The shifts under way are stunning in their magnitude and rapidity," he said in an email. "With each passing day, the State Department environmental impact statement is looking even more simplistic and off-base."

Goodman argues that Canadian producers, whose costs are relatively high, are facing so much new competition from American oil that to remain viable they must have the cheapest possible route to refineries in the Gulf and from there to the world market. The Keystone is vital to their plans, he said. The more competition grows from domestic U.S. crude, the more crucial Keystone becomes to enabling expansion in the tar sands, he says.

"Building KXL will help to shore up the deteriorating profitability and prospects for tar sands expansion, so that more projects go ahead despite an otherwise increasingly challenging context," Goodman's analysis concluded. "Not building KXL will accelerate the shifts away from tar sands expansion by discouraging near-term project development and giving more time to emerging market realities (and other factors) to constrain future tar sands expansion."

The latest forecast from the International Energy Agency also discusses the strains the oil sands industry faces as it tries to get its crude to the world market.  

"The impact of logistical bottlenecks on prices may already have played a role in Total and Suncor's decision to cancel their Voyageur oil sands upgrader in Canada, and have no doubt triggered reviews of many other capital expenditure projects," the international agency reported. "Deep discounts for bottlenecked Canadian grades are an obvious downside for Alberta project economics at current oil prices."

Estimates of U.S. Oil Reserves Also Rise

The U.S. government's striking new estimate of domestic oil production is just one of the new developments that undermines the appeal of Canada’s crude oil.

The United States Geological Survey in April doubled its official estimate of recoverable oil reserves from the Bakken field and related deposits in North Dakota, South Dakota and Montana, suggesting that the region’s oil boom won’t fall off as quickly as previously assumed.

"The finding could have major implications for future oil and gas industrial activity in the region, particularly for pipeline companies," wrote Nathanial Gronewold, Houston bureau chief for Environment & Energy Publishing.

Advocates of domestic oil production say more untapped oil is available on public lands. Responding to the USGS's new estimates, Thomas Pyle, president of the pro-drilling Institute for Energy Research said: "America’s true energy supply is undoubtedly even more robust, providing further certainty that domestic resources can meet America’s energy needs for years to come."

That bullish tone ran through the EIA's latest short-term energy outlook, released on May 7. It said it had revised upward its production forecast by 120,000 barrels a day this year and by 310,000 barrels a day next year compared to the estimate it had made just a month earlier.

"Production will rise from an average of 7.1 million barrels a day in the first quarter of 2013 to 8.5 million barrels a day in the fourth quarter of 2014," it said. All that growth would come before the Keystone could be completed, which TransCanada now says won’t be until late 2015.

Another sign of the market’s upheaval is the possibility that refineries along the Gulf Coast might consider switching from Canadian heavy sour crude to the light, sweet U.S. grades.

In its market analysis, the State Department assumed that refineries wouldn't willingly make that switch and would continue importing heavy sour crude like Canada's. The Gulf refineries have invested in plants that are tailored for that type of oil. 

But the EIA, in its May 1 issue of "This Week in Petroleum," said swollen supplies of domestic oil could hold down prices so much that it would be attractive for refineries to switch. They could adjust the mix of fuels they produce, or spend some of their profits to switch over to the lighter U.S. crude.

Oil Change International, an advocacy group that campaigns for shifting from oil to clean energy, argues that the State Department’s theory is already proving wrong because the leading Gulf coast refiner, Valero, is looking for opportunities to increase its use of light crude. Valero buys oil sands crude and is a big backer of the Keystone.

"The world has changed dramatically with all this light sweet oil," Valero’s chief executive, William Klesse, told a group of analysts at a conference last week. "If you were going to build a grassroots refinery today," he said, "you would build a light-sweet refinery."

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