Today’s article concludes the series covering my recent trip to the
Athabasca oil sands around Fort McMurray, Alberta. This is an annual
trip hosted by the Canadian government for energy journalists to raise
overall awareness on issues involving the oil sands.
Expenses for the
trip were paid for by the Canadian government.
Previous articles in this series include:
http://www.energytrendsinsider.com/2013/11/11/oil-sands-and-the-environment-part-i/
http://www.energytrendsinsider.com/2013/11/22/oil-sands-and-the-environment-part-ii/
http://www.energytrendsinsider.com/2013/12/02/how-albertas-oil-sands-are-produced/
http://www.energytrendsinsider.com/2013/12/09/the-cost-of-production-and-energy-return-of-oil-sands/
In today’s final article I want to discuss the logistics involved in
getting the oil sands to market. There is a narrative widely promoted by
some environmental groups that they can successfully stall oil sands
development by shutting off new routes to market.
On my trip to the oil sands, the logistical issues of getting the
bitumen to market were a major topic of discussion. The issue has
received especially widespread attention in recent years as a result of
the high-profile battle over the Keystone XL pipeline extension, which
many view — incorrectly as I will show — as essential in enabling future
oil sands growth.
Keystone XL Review
To review, the Keystone Pipeline is owned by TransCanada (TSE: TRP,
NYSE: TRP). The pipeline already has the capacity to move 590,000
barrels per day (bpd) of crude oil from the Athabasca oil sands to hubs
and refineries in the US. The first phase of the pipeline began
operating in 2010 and connects Alberta to refineries in Illinois. In
2011, the second phase of Keystone connected Steele City, Nebraska to
the major oil hub in Cushing, Oklahoma.
There are two proposed expansions of the Keystone Pipeline that are
collectively called Keystone XL (“XL” stands for export limited). The
southern leg of the pipeline has been built and is due to begin regular operations
next month. This Keystone-Cushing extension will have an initial
capacity to transport 700,000 barrels of oil per day from the Cushing
hub to Gulf Coast refineries. Because it didn’t cross an international
border, the southern leg of the pipeline did not require federal
approval.
The northern leg, however, would cross the US-Canadian border.
Therefore the State Department is required to determine that the project
is in the national interest in order to grant a permit. This proposed
1,180-mile addition would extend from Hardisty, Alberta to Steele City,
Nebraska, and would transport up to 830,000 bpd of crude from the oil
sands in Alberta and the Bakken oil fields in North Dakota to refineries
on the US Gulf Coast.
The Keystone XL pipeline project has probably been the most discussed
pipeline project in US history since the Trans-Alaska pipeline of the
mid-1970s. Opponents of the Keystone pipeline generally hold the view
that the Keystone XL is the key to the expansion of Alberta’s oil sands,
and that stopping the pipeline will substantially slow the rate of oil
sands development. Such views demonstrate a general lack of
understanding about how logistics projects are executed.
The Current Pipeline Situation
Most people are entirely unaware of the extent to which pipelines
already crisscross North America, but it’s akin to an invisible
interstate highway system. (There are actually 2.5 million miles of oil and gas pipeline in the US versus 47,000 miles in the US Interstate Highway System).
Below is a partial map of just the largest pipelines that crisscross
North America. There are pipelines crossing through national parks and
above the nation’s aquifers, and there are pipelines crossing the US
border to the north and south.
Major North American Oil, Gas, and Product Pipelines. Source: Theodora
Yet I constantly encounter arguments that preventing the Keystone XL
pipeline will prevent heavy oil from Canada from making its way to
market. The widely-held perception is that Keystone XL is the lifeline
upon which the future of the oil sands depends. Many are surprised to
learn that the Keystone XL would not be the first, or the 10th, or even
the 50th oil or gas pipeline crossing the US-Canadian border. According
to the Canadian Embassy in Washington, D.C., there are 74 operating oil
and gas pipelines that cross the border between the US and Canada.
Keystone XL would be the 75th.
Keystone XL Alternatives
Even if Keystone XL opponents are aware that many pipelines already
cross the border, they often insist that this one is special, and that
this one holds the key to the expansion of oil sands production. Stop
Keystone XL, they insist, and oil sands development will stall.
They might even offer up that there is another pipeline proposal
called the Enbridge Gateway (also called the Northern Gateway) that
would provide an outlet for oil sands bitumen to the Pacific Ocean, but
they will insist that there is so much opposition in British Columbia
and from First Nations groups that this pipeline is unlikely to be
built. They are probably right about that. And that sums up the
knowledge of probably 95 percent of the people opposing the Keystone XL
pipeline.
But there is so much they don’t know.
For example, there were many pipeline proposals being floated before
Keystone XL was conceived that would have exported Alberta bitumen. But
the Keystone XL got a lot of commitments from industry because it made
the most sense to ship the heavy oil to US Gulf Coast refineries that
were configured to refine heavy oil. This would have backed out heavy
Venezuelan crude, essentially trading it for a more reliable and
friendlier Canadian supply. So shippers lined up behind the project that
made the most sense to them — Keystone XL — and competing pipeline
proposals were shelved. Now that Keystone XL is facing formidable
opposition, TransCanada’s competitors are dusting off old proposals, and
coming up with new ones.
The following graphic summarizes a number of the pipeline projects
that are currently being planned or built in the US and Canada.
Major US and Canadian Oil Pipeline Proposals. Source: Alberta Department of Energy
As should be obvious, there are a lot more routes planned besides the
Northern Gateway from Edmonton to Kitimat, British Columbia. I want to
talk about two of these proposals, which became much more important to
the Canadian government once Keystone XL project delays began, and it
became uncertain as to whether the project would get US approval. One of
the pipeline projects would carry bitumen east from Alberta, and the
other would carry it west.
TransCanada’s Energy East pipeline would be a 4,500-kilometer
pipeline that would carry 1.1-million barrels of crude oil per day from
Alberta and Saskatchewan to refineries in Eastern Canada. The Energy
East pipeline project involves converting an existing natural gas
pipeline to an oil transportation pipeline, constructing new pipelines
in Alberta, Saskatchewan, Manitoba, Eastern Ontario, Quebec and New
Brunswick to link up with the converted pipeline, and then constructing
the associated facilities, pump stations and tank terminals required to
move crude oil from Alberta to Quebec and New Brunswick, including
marine facilities that enable access to other markets by ship.
This project alone would be nearly 50 percent larger than Keystone
XL, and would still give Alberta’s bitumen access to Gulf Coast
refineries by allowing the oil to be loaded on ships on Canada’s East
Coast and transported by water (at a price competitive with the Keystone
XL route). The pipeline is expected to be in service to Quebec by 2017
and to New Brunswick by 2018. A recent open season for the project
received over 900,000 bpd in shipping commitments for 20 years.
Kinder Morgan’s Trans Mountain pipeline is the only pipeline
currently running from Alberta’s oil sands to Canada’s Pacific coast.
Kinder Morgan Energy Partners LP (NYSE: KMP) has filed an application
with Canadian regulators that would greatly increase the current
capacity of the 300,000 bpd Trans Mountain pipeline. The expansion of
the current pipeline would be along the existing right-of-way, greatly
simplifying the environmental permitting for the project. The project
would nearly triple the existing pipeline capacity to 890,000 bpd, and
would terminate in Burnaby, British Columbia. To date 710,000 bpd in
shipping commitments have already been obtained. The pipeline is
scheduled to begin construction in 2016 with incremental product online
in 2017. This project would greatly increase the access of Alberta’s oil
sands producers to the lucrative and growing markets of Asia.
Obviously neither pipeline requires US approval, both pipelines face
far fewer obstacles than the Northern Gateway pipeline, and they give
Alberta’s oil access to both coasts. Mark my words, while there will be
opposition, new oil transport capacity from the oils sands will continue
to be built. After all, if you put yourself in the shoes of the
Canadian government, they certainly don’t want fickle US politics to
threaten one of Canada’s highest priorities: development of the
country’s 183 billion barrels of bitumen reserves.
And Then There’s Rail
Then of course there is the rail option. As I have pointed out many
times, railroads essentially built a Keystone XL on rails in about 3
years to transport oil from the Bakken oil fields in North Dakota. Why?
Because there was insufficient pipeline capacity to get growing oil
supplies from the Bakken to world markets where the crude commanded
premium prices. It wasn’t that there was anything special about Bakken
crude that allowed it be transported by rail. It’s just that the price
differentials were high, the railroads saw an opportunity (Warren
Buffett’s BNSF railroad is the dominant player), and oil producers were
more than willing to pay the price to get their crude to distant
markets.
Rail in Western Canada Mirrors Rail in the Bakken. Source: Alberta Government
The same thing is beginning to happen with Alberta bitumen. This
crude is significantly discounted from global markets, and as a result
there is a lot of incentive for shippers to get the oil to market.
Whether oil-by-rail continues to ramp up at the same pace as in the
Bakken — which has been the case thus far — will be a simple function of
whether the price differentials remain high and the pipeline options
insufficient.
Recently, 175,000 bpd of Western Canada’s crude was being exported by
rail, out of the current maximum operational capacity of 224,000 bpd.
And many new rail loading terminals are on the drawing board:
Pending Crude Oil Rail Loading Terminals. Source: Alberta Government
These rail projects on the drawing board would push the rail capacity
up to over 900,000 bpd. Along with the announced pipeline projects, the
total capacity would cover expected oil sands production increases
until the next decade — even without Keystone XL. In fact, it is safe to
say that not all of the projects will be built because that would
create too much capacity to the ultimate cost of pipeline companies and
rail operators.
Conclusions
One thing is certain, though. The future of the oil sands doesn’t
hinge on whether Keystone XL is approved. Environmental organizations
that argue otherwise are fooling themselves and their supporters. I
suspect some of them are even aware of this, but Keystone XL opposition
has become a good fundraising issue.
As I have argued many times in the past, the real way to slow down
oil sands development is to implement programs that reduce demand, not
attempt to restrict the supply. As long as the demand is there, the oil
will find a way to market. Don’t say I didn’t tell you so.
http://www.energytrendsinsider.com/2013/12/16/how-bitumen-gets-to-market/
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