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Can Tar Sands Development Continue Without Keystone XL?

Guest blogger Andy Stevenson is a Finance Advisor for NRDC

With prices for tar sands oil breaking below $60/barrel for the first time since 2010, the fate of the tar sands oil industry seems more tied to the approval of the Keystone XL tar sands pipeline than ever. 

International Oil Benchmarks 

Providing nearly 30 percent of all new heavy oil pipeline capacity for Western Canada over the next five years, the 800,000 barrel per day Keystone XL pipeline (75% of which will be used to transport tar sands oil) is seen as critical to narrowing the record spread between Western Canadian Select and Brent Crude and ensuring the profitability of future tar sands projects. 

Pipeline Capacity Expansion Projects

Moreover, not only is the size of the Keystone XL pipeline significant, the timing of its construction is also seen as critical given the growth of new tar sands output over the next several years. Indeed it can be said that without the capacity provided by the Keystone XL pipeline, the supply / demand imbalance that has kept tar sands oil at a steep discount to Brent Crude will likely continue until late 2016.

Pipeline Capacity for Tar Sands Oil

While critics have argued that the Keystone XL doesn’t matter and that there are alternatives available for transport, investment banks are reporting that continued pipeline delays could start to impact investor confidence in tar sands production growth expectations beyond 2015. The view that Keystone XL matters is also supported by investors, who have punished tar sands stocks relative to their peers over the past year. 

 

  

In sum, the financial community sees Keystone XL as critical to the growth rate of tar sands oil production and it is time for politicians to do the same. Indeed, when a recent Deutsche Bank report on a major tar sands player is titled “The Guest that Arrives as the Party is Ending”, it seems clear that investors view of tar sands growth without Keystone XL is far from certain.

Danielle Droitsch's picture

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John Miller's picture
John Miller on March 15, 2013

Danielle, the Brent-Canadian Syncrude spread is only one factor that affects production economics.  Another, possibly more influential market measurement is the WTI-Canadian Syncrude spread.  This relationship has been affected by overall North America crude oil supply-demand variables, which includes recent increases in U.S. 'tight-oil' production in addition to Canadian oil sands.  As a result of both these activities the WTI-Brent spreads have also decreased towards historic lows.  Re: my spread plot in a recent post.  

The original Keystone pipeline completed in 2010 already delivers 0.5-0.6 million barrels per day of Canadian synbit and dilbit crudes into the U.S. Mid-continent; largely produced from the oil sands (or what some call tar sands) Canadian reserves.  Additional syncrudes are being increasingly delivered by railroad tankers.  Re. WSJ article March 12, 2013: “U.S. Refiners Tap Canadian Oil by Rail”.  This reported increase of 0.2 million barrels per day railroad shipments (25% the maximum Keystone XL capacity) are only the beginning if the Keystone XL (expansion) project is not approved.  Yes, investors are counting on the Keystone XL since it is more economic (and lower carbon) than the current railroad alternative and is currently assumed to still be a viable option.  If the Obama Administration blocks completing the Keystone XL, these same investors will then more seriously pursue further increases of rail shipments and alternative pipeline options such as transferring the syncrude to the Canadian West Coast (for tapping Asian Markets).

Rick Engebretson's picture
Rick Engebretson on March 15, 2013

Perhaps this is still a local market and not reflective of global market forces. Much of this material from Canada and North Dakota is coming to Minnesota refineries, owned by Koch. If taking money from the left pocket and putting it in the right pocket costs taxes, you would pay yourself less and invest in new steel, too.

The Minnesota State High School Hockey Tournament advertised for iron mining jobs. IIRC, the phrase used was, "The best it's ever been."

Thunder Bay, Ontario is probably full of paper pulp capacity that can turn this tar into gasoline. Why sell wholesale in south Texas, when you can sell retail in North America?

Wilmot McCutchen's picture
Wilmot McCutchen on March 16, 2013

Since it's going to China whatever the route, pipeline or rail makes no difference to American energy security.  The unwillingness of Big Oil to clean up the mess they leave behind by their primitive and carbon-intensive bitumen extraction technology has eroded public sympathy to where it now seems better to just leave oil sands in the ground.  Alberta faces a $3B budget deficit, so it appears that trickle-down prosperity has failed again.  Niggardly R&D expenditures by rich oil companies for pollution control, and their rip-and-ship piratical business model, reinforce the perception that the custodians of national resources are failing in their public trust.   

"Remember the Alamo," was the battlecry of Sam Houston and the Texans at their decisive victory over the minions of Santa Anna at San Jacinto,  "Remember Keystone XL" may become the battlecry of US and Canadian patriots in the coming fights over bookable reserves, energy security, high gas prices, and environmental stewardship.  Like the Alamo (a Pyrrhic victory of Santa Anna over outnumbered and outgunned Texans who defied his demand to surrender and were massacred) Big Oil's insulting proposal for a dilbit pipeline intended for export, and their intended humiliation of President Obama by a display of lobbying firepower, may turn out bad for them in the end.     

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