DOE study finds Keystone XL not needed
Posted February 2, 2011
On the eve of the Canadian Prime Minister’s visit to the White House this Friday, the Department of State made an analysis of the Keystone XL tar sands pipeline public. The analysis, commissioned by the Department of Energy and done by consulting firm Ensys Energy, looked at multiple scenarios to evaluate what the effect of building the Keystone XL and other tar sands pipelines, notably those to Canada’s west coast, would be on crude oil supply, price, and refinery operations. The analysis also included a greenhouse gas assessment done by DOE.
Here are the most salient points:
- Keystone XL is not needed well into the foreseeable future: As we expected, the analysis found that there was tar sands pipeline overcapacity up to the early 2020s and possibly until 2030. It also found that there were other pathways to the Gulf for companies interested in moving tar sands crude from the Midwest to the Gulf coast. This is a point that we have been repeatedly making. Why rush a decision to build a giant pipeline that will be with us, supplying oil from the controversial tar sands in Canada’s Boreal forest, for the next 50 years? Aren’t there other alternatives for our fuels that we can, and must, find in this time period? This will be a major consideration as the Administration moves to the National Interest Determination process after the Environmental Impact Statement is completed. It is hard to make a case for this pipeline, especially given all the trade-offs in potential damage to one of our largest aquifers, the Ogallala, a point repeatedly made by Nebraskan public officials from both sides of the aisle.
- Sending large quantities of tar sands oil to Asia is an uncertain outcome: As we also expected, the analysis found that building pipelines to the northern British Columbia coast was uncertain because of opposition to these pipelines by First Nations – the native people living on the coast and along the pipeline routes – and by environmentalists. More likely were smaller pipeline proposals for going South to Vancouver. These would increase pipeline capacity to Vancouver by 400,000 barrels of oil per day (for perspective, we use nearly 20 million barrels per day in the U.S.). The “Asia threat” has been a card the Canadians like to play when the U.S. moves forward to control high carbon fuels and reduce our oil use. It is hard to imagine these small amounts being worthy of the uproar this positioning has caused.
- Keystone XL would cause oil prices, and therefore gas prices, to rise in the Midwest: Right now, Canadian tar sands has one major market, the Midwest. In the analysis, this is called “shut-in”, which is not a bad way to describe what is happening. Because it cannot go elsewhere, and there are growing quantities of tar sands oil that can only be refined by specially outfitted refineries, this creates a price differential (lower price) for tar sands crude. Moving it to the Gulf is converting a big fish in a small pond to a small fish in a big pond. The differential disappears and the price goes up, profiting the Canadian oil companies at the expense of the American gas consumer. There are often good reasons environmentally to raise the price of gas, but putting more money in the pockets of the oil companies is certainly not (unless you are an oil company).
- Expansion of tar sands pipelines does cause expansion in production of tar sands: As we expected, because of pipeline overcapacity, it is hard to find upstream impact until the 2020s. Based on the Canadian Association of Petroleum Producers’ (CAPP) projections used in this analysis (which stay static in this analysis), you would only expect to see an impact after 2025, once pipeline capacity is filled. But there it is, in the Ensys analysis, after 2025, when you see production break with its historical projections and start to trend down. Of course, this is in a no expansion scenario (in other words, no new pipelines are built other than those already under construction). While this may seem an unlikely result according to the modelers (I like the Ensys description for this – “a future in which a widespread movement prevents essentially any expansion beyond existing line capacity”), it makes the case that production is indeed tied to the building of pipelines.
- The greenhouse gas impact of not building Keystone XL is the equivalent of the emissions reductions of two California Low Carbon Fuel Standards: While the Ensys analysis puts the emissions impact into the global transportation emissions context, which can make anything look pretty small, the difference between building Keystone XL and no expansion in 2030 is 26 million tons of carbon dioxide. That, according to our CA LCFS expert Simon Mui, is the equivalent of the emissions reductions from two of California’s leading transportation greenhouse gas program. In other words, it is still a lot of carbon dioxide.
There are some other helpful aspects of the analysis – it shows that Keystone XL has little impact on refinery supply and margins, thus making it more difficult for proponents to argue that it is essential for supplying U.S. refineries with oil. And it shows, in a low demand scenario, that Gulf refineries would likely export product rather than keep it in the U.S. (undercutting the argument that this oil is vital to our energy security).
But I would be remiss if I didn’t highlight both the shortcomings and findings not so helpful that are likely to be brandished by proponents:
- The analysis assumes no change in emissions reduction requirements for the next 25 years: While we are facing some uphill battles on passage of federal greenhouse gas reduction legislation, states are moving forward to require reductions. I am hard pressed to imagine a world in which in the next twenty years, we make no progress in putting in place restrictions on greenhouse gases. I understand for modelers, it is helpful to keep things static, but it bears little resemblance to what is much more likely to happen (and why economic models are so often criticized). As the analysis points out, greenhouse gas restrictions, such as California’s AB 32 law, can have big effects on the future of tar sands markets. Who knows, given China’s race to be the global “green energy” leader, maybe China will be the country to say no thank you to this high carbon fuel!
- The analysis assumes that Vancouver is a viable port for tar sands transport to Asia: While the report rightfully points out uncertainties in building pipelines to Kitimat on British Columbia’s northern coast, it assumes building pipelines to Vancouver are a likely outcome. The problem there is that the port is shallow and can’t take the big tankers that could most economically carry oil westward. Further, B.C has long been concerned about pipeline and tanker spills near their coastline, not an unreasonable position given the proximity to Alaska and the Exxon Valdez debacle.
- The analysis holds industry estimates of production constant: While the analysis considers numerous scenarios for building or not building various pipelines and under two oil use projections (an AEO outlook and an EPA low demand case), it holds Canadian production constant using the Canadian Association of Petroleum Producers (CAPP) projections through 2025. In other words, there is no consideration of changes in policy or investment, resource input constraints, or other possible occurances (such as that “widespread movement” mentioned earlier) that might make meeting those CAPP goals more difficult. In fact, for the last few years, CAPP's projections of even one year out – which should be the most accurate – have turned out to be overestimates that are lowered in the following year's report.
- The conclusions of the analysis sound more dramatic than they are: Simply reading the conclusions would lead one to think that the Asia “threat” is bigger than it is (see my earlier comments about 400,000 barrels a day) – is this amount of oil enough to propel the Administration to drop its clean energy goals in a race to the bottom? And the conclusion that Canadian crude coupled with lower demand will displace our dependence on Middle Eastern oil was met with the remark that this is a “fairy tale” by one economist.
At the end of the day, the Administration will have to look critically at all of these issues and more. It will not be a decision made on Friday at a meeting with a Prime Minister anxious and intent on selling Canadian oil and pipeline company interests in expansion of the tar sands. It will be a decision that will be informed by this study, by the revised Environmental Impact Statement, by the input from Members of Congress and other concerned players, and – increasingly – by the growing chorus of voices along the pipeline route afraid for their land and water and in the refinery communities in the Gulf already struggling for cleaner air.
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