It’s nine years and counting since the Keystone pipeline was first proposed and TransCanada is still waiting for Presidential approval to build the line. An environmental assessment report from the US State Department that landed last week would seem to move TransCanada’s hopes forward, but the pipeline’s ultimate fate is still very much in limbo.

The State Department concluded that the Keystone XL project won’t lead to greater production from the oil sands and, by extension, more carbon emissions. Many see this overall assessment, which is more or less a restatement of earlier findings, as highly questionable. Indeed, just ask the oil industry itself how important new pipeline connections are to not only increasing production, but also the very commercial viability of the oil sands resource.

The report does envision scenarios in which oil sands development is curbed by a combination of lower oil prices and a lack of pipeline capacity. Ultimately, though, the State Department finds that an increase in the amount of oil moved by rail will allow new oil sands production to come on-stream whether or not new pipelines are built. The upshot, at least for the State Department, is that oil sands production will march ahead with or without Keystone. Environmental advocates, suffice to say, disagree.

In any event, there won’t be any cross border pipeline construction until President Obama gives the okay. And no one knows when that will be or what he’ll ultimately decide.

The President has proven to be a wily politician, particularly on the carbon front. Environmentalists were happy when he directed the Environmental Protection Agency to sanction tough new emissions standards for power generation that will effectively preclude any new coal-fired plants from being built. But he did so only after the advent of cheap shale gas had already rendered coal uneconomic, meaning many coal-fired plants would have been shuttered regardless of new rules from the EPA.

In a similar vein, the President has boldly attached a carbon standard to his approval of Keystone, but that only happened after a gush of domestic oil production made more volume from Alberta’s oil sands redundant to the US market. Indeed, the US is so awash in oil that, even as Obama ponders his decision on Keystone, the American Petroleum Institute is working hard to remove restrictions on exporting crude that date back to 1975. The lobbying effort would only seem to bolster the credibility of claims by US environmentalists that the Canadian oil shipped through Keystone won’t be burned by American motorists but instead shipped abroad for another country’s benefit.

Regardless of the pipeline’s ultimate fate, the Keystone saga highlights the enormity of the challenge that’s ahead of oil sands producers. While Keystone’s 830,000 barrels-a-day of throughput is significant, it’s still only a fraction of the additional pipeline capacity that will be needed for producers to fulfill their expansion plans. The industry is targeting 5 million barrels a day of production within the next 20 years, an amount that it, as well as Prime Minister Stephen Harper, sees as inevitable.

Inevitability, though, is clearly in the eye of the beholder. To achieve daily production of 5 million barrels will require not just Keystone, but multiple versions of the pipeline.

According to the Canadian Association of Petroleum Producers, reaching 5 million barrels a day will require a greenlight for Enbridge’s Northern Gateway Project and TransCanada’s Energy East line, a doubling of Kinder Morgan’s existing Trans Mountain Pipeline, as well as an expansion of the Alberta Clipper line — all in addition to Keystone. Even with those projects going ahead, the industry would still be shy about a million barrels a day of shipping capacity, a shortfall that CN, CP, and other railways would be expected to step in and cover.

Obama’s decision on Keystone, though, is up first. Contrary to the opinion of the US State Department, approving Keystone XL is indeed a necessary condition to increasing oil sands production. What happens if it doesn’t get built? Canada’s oilpatch doesn’t like to think about that scenario, but it’s one that investors need to be considering.

  • rigpigpetey

    So tell me Jeff, why is Hillary coming to town?
    Obama wily,………? Too much distance between minds here Jeff.

  • Carl

    It really is remarkable that the State Department is comfortable with its conclusion that approving Keystone won’t lead to more oil sands production. It’s like saying legalizing marijuana won’t lead to more people using it more often. How much do they pay the people who come up with these silly pronouncements or did they just hire a bunch of interns for the job and told them to be sure to say the politically motivated nothingness that this conclusion really is?

    Rail can’t possibly transport 5-6 times more oil than what is currently happening, particularly after the two recent disasters and the anger over lack of responsibility and buck-passing by rail authorities. What other transport alternatives are there? Without pipelines, markets and cost-effectiveness disappear and so does production. The opposite of the State Department’s conclusion is the reality.

    I’m actually against oil sands expansion and would far rather see all governments support renewables instead, but when the State Department takes such a moronic attitude on a serious issue it just looks like obfuscation.

  • Steve

    It will be interesting to see what decision is made. The States seems to be relying on the myth of energy independence based upon ‘increases’ in unconventional sources of oil/gas (i.e. hydraulic fracturing of shale oil/gas). There is much debate, however, in the future production of these shale plays, with the main ones (Eagle Ford, Bakken) already showing significant production decreases; in fact, production has only been able to be kept steady through an exponential increase in wells drilled.
    I’m hopeful that the global economic contraction that is occurring will put a kibosh on the plans to expand the oilsands, for the sake of our children and grandchildren whose world is being poisoned and raped for a few more years of fossil fuel-based ‘growth’. We’re continuing to steal from the future with no forethought to the consequences whatsoever.