Interest in Alberta Tar Sands Oil Wanes, But Keystone XL Pipeline Could Still Pay Off

The notorious Keystone XL tar sands oil pipeline is back in the news, now that the Donald Trump Administration has pledged to ensure the project moves forward. At first glance it may seem odd that Keystone's owner, TransCanada, is still pushing to get the job done. Several major oil companies are beginning to pull back on Canada's tar sands fields due to oil price slumps. And if that trend accelerates, TransCanada could find itself with a brand new pipeline and no oil to put in it.

However, there are some key reasons why tar sands oil production could survive despite the challenges it faces, and that's where TransCanada is placing its bet.

Keystone XL and Canadian tar sands oil

For those of you new to the topic, the Keystone XL pipeline surged into the media spotlight during the Barack Obama administration.

The pipeline is designed to bring tar sands oil from Canada through the midsection of the U.S. and on to refineries on the Gulf Coast.

Tar sands oil is a particularly controversial element in the fossil fuel category. Often described as a "carbon bomb" due to its heavy greenhouse gas emissions, tar sands development also bears a heavy load of local environmental impacts.

Here's an explainer from the U.S. Department of the Interior:

"Tar sands (also referred to as oil sands) are a combination of clay, sand, water, and bitumen, a heavy black viscous oil. Tar sands can be mined and processed to extract the oil-rich bitumen, which is then refined into oil. The bitumen in tar sands cannot be pumped from the ground in its natural state; instead tar sand deposits are mined, usually using strip mining or open pit techniques, or the oil is extracted by underground heating with additional upgrading."

The U.S. Department of Energy offers this rundown of the benefits of tar sands development for the U.S.:

"The United States is also endowed with approximately 50 billion barrels of tar sands resources, with the largest deposits in Utah. If these resources can be commercially developed, while protecting the environment, they could contribute up to three million barrels per day to domestic energy supply."

However, the agency also offers up some significant risks:

"Transforming unconventional resources into useable fuels consumes water and energy, impacts surface and subsurface environments, and produces emissions, effluents, and solid wastes that must be captured, managed, and disposed of."

If you caught that thing about U.S. tar sands development, you may be wondering why opponents of the Keystone XL pipeline targeted the Obama administration over the particular pipeline and not over tar sands development in the U.S.

The explanation is relatively simple: With the exception of one recently started tar sands field in eastern Utah, the U.S. has yet to tap into its tar sands resources.

In addition, oil pipelines typically do not require federal approval, so pipeline construction in the U.S. is usually treated as a local issue. The result is that opposition doesn't break into the national media spotlight. One notable exception is a section of the Dakota Access pipeline, where protests came to a head during the last months of Obama's term in office. That project is also moving forward under the Trump administration, and some analysts predict that it will eventually carry oil from Canadian tar sands fields.

The Keystone XL pipeline is different. It crosses the border between Canada and the U.S. As an international project, it requires review and approval by the U.S. Department of State.

That made the Keystone XL pipeline a prime target for protests in the U.S. during the Obama administration. Activists were able to contrast the administration's progress on reducing carbon pollution with its role in the Keystone approval process.

Ultimately, public pressure proved successful, and the Obama administration refused approval of the project.

New hope for Keystone XL

That was then. On Jan. 24, President Trump took action to remove the Obama-era obstacles from both the Dakota Access and the Keystone XL projects.

The Keystone project is still in the planning stages, so there is still a way to go before the shovels hit the ground.

However, things appear to be moving along smoothly. Last Friday, Bloomberg cited David MacNaughton, Canada's ambassador to Washington:

"Discussions on TransCanada’s crude-oil route are going 'extremely well' with U.S. federal authorities, Ambassador David MacNaughton said Friday in an interview at his office," as reported by Andrew Mayeda and Josh Wingrove of Bloomberg.

"'I don’t see any big hurdles in the way of Keystone from the administration’s point of view,' he said, referring to the government of President Donald Trump."

. . . Or not

Those of you familiar with the Keystone route will recognize that the project still faces at least one significant obstacle.

The state of Nebraska figured prominently in opposition to the pipeline during the Obama administration, and that hasn't changed.

Last month, TransCanada filed for a permit to build the Nebraska leg of the pipeline along a route previously approved by state regulators in 2013.

The New York Times reports:

Another sticky wicket could be the use of U.S. steel to fabricate the pipes.

Opponents of the pipeline argue that the project would only provide a few dozen permanent jobs in the U.S. Supporters counter that thousands of temporary jobs would be involved, including jobs for U.S. steel workers fabricating pipes.

Previously, Trump supported that argument by pledging that his administration would require the use of U.S. steel in infrastructure projects, including the Keystone XL and Dakota Access pipelines.

But last week the Trump administration said Keystone would be exempt from the U.S. steel requirement.

The outlook for Alberta tar sands oil

That brings us to the 800-pound gorilla in the room: Why is TransCanada still pushing the Keystone XL project?

Aside from public opposition related to environmental issues, the economics for Keystone are challenging because the tar sands sector is floundering.

Several years ago, oil prices were much higher and the financials looked good for tar sands oil, but much has changed since then.

Shell, ExxonMobil, Chevron and Statoil are among the companies that have changed their plans for Canadian tar sands development in recent years.

It would seem that the future looks gloomy, but there is some indication that Canada's carbon bomb will not be defused any time soon.

At least one major company -- a subsidiary of Koch Industries -- has expressed interest in a new tar sands lease. That's significant because Koch Industries is already among the largest tar sands lease holders in Canada.

Koch could be taking a page from the shale gas book. Several years ago when gas prices were in the doldrums, ExxonMobil began snapping up shale gas fields. That was a bit of a risk, but it could pay off as the global energy picture transitions out of coal and into gas and other alternatives.

Another factor is the baked-in costs of starting up a tar sands oil operation. Tar sands production typically involves a steam-assisted process that is difficult if not impossible to restart after it has been shut down. That's why some companies are locked into continuing production even they lose money on every barrel.

If oil prices continue to fall, some analysts predict a financial disaster for tar sands oil due to its high expense. But others are inclined to think oil prices will bounce back in the near future, and that increase could be dramatic. That would push the financials back in favor of tar sands oil.

U.S. refineries and tar sands oil

Last month, Forbes presented an optimistic outlook for tar sands oil under the title "Keystone Pipeline Is A Risky Bet On Higher Oil Prices."

The author, petroleum geologist Art Berman, makes it clear that there is some risk to betting on a rise in oil prices. However, he also makes a good case for continued interest in tar sands oil production.

One key to that line of thinking is how dependent U.S. refineries are on tar sands oil. This is a point that has not come into sharp focus in the debate over Keystone XL:

"U.S. tight oil plays produce ultra-light oil ["tight" oil refers to oil from shale or sand formations]. Almost all of it is too light for refinery specifications. That means that it must be blended with heavy oil in order to be refined and that is why there is demand for Canadian heavy oil," Berman wrote.

In other words, as long as the U.S. continues to produce a copious amount of ultra-light oil, tar sands oil will continue to flow into the U.S.

Under that scenario, Keystone XL will be relevant for many years. That means "several decades," Berman said.

In a recent development supporting that outlook, plans are in the works for a new 730-mile pipeline that will bring fresh supplies of ultra-light oil from oil fields in western Texas to Gulf Coast refineries.

Berman also brings up the interesting point that U.S. supplies of light oil play a crucial role in tar sands development:

"Similarly, Canadian viscous, heavy oil must be diluted with ultra-light oil to move through pipelines. Because of that, Canada is the biggest importer of U.S. light oil."

When Berman (and other analysts) look at the factors influencing oil price trends, they predict that oil prices will rise "dramatically" in the near future, with this result:

"That should lead to the next oil boom and the Keystone XL Pipeline will be there to provide heavy oil to U.S. tight oil plays," he wrote in Forbes.

And of course the project has a much better chance of success with a strong advocate for Keystone XL occupying the Oval Office.

Whether or not that happens will depend on the ability of groups like Bold Nebraska to take their case to court, to state legislators, and to the public.

Photo (cropped): Keystone pumping station in Nebraska by shannonpatrick17 via flickr.com, creative commons license.