Nobody asked any questions about my post arguing that Keystone had become irrelevant for North Dakota. But the CEO of Suncor has given me incentive to go ahead and answer the question: Is the pipeline necessary to develop the heavy oil in Alberta?
There are a lot of arguments either way. In its Draft Supplementary Environmental Impact Statement (DSEIS), the State Department says that the oil will get to market regardless. In other words, they will come whether or not you build it. The EPA politely disagreed, claiming that State had not fully done its homework.
“We note that the discussion in the DSEIS regarding energy markets, while informative, is not based on an updated energy-economic modeling effort. The DSEIS includes a discussion ofrail logistics and the potential growth ofrail as a transport option, however we recommend that the Final EIS provide a more careful review ofthe market analysis and rail transport options. This analysis should include further investigation ofrail capacity and costs, recognizing the potential for much higher per barrel rail shipment costs than presented in the DSEIS.”
Well. I respectfully disagree. Here (from the DSEIS) is how fast the railroads have spun up their ability to move oil out of North Dakota:
Now, this was a tough feat to pull off. You had to build specialized loading and unloading facilities capable of handling dedicated 100-car trains. (These are called “unit trains,” as opposed to “manifest trains” that mix tanker cars with other cars.) But could you do in Alberta? Hell, yeah. The tracks are there and the facilities are not hard to build.
On page 50, the State officials dig into the cost data. (Is it a full model? No. But honestly, it proves the point.) Shipping heavy oil out of Alberta to the Gulf Coast of the U.S. would cost $15.50 per barrel, against $8.00 via Keystone. Consider it a $7.50 per barrel tax on the oil sands, imposed by Warren Buffet.
State argues that the comparison isn’t fair to the railroads, since it compares the price for a long-term pipeline contract with a railroad spot tariff. I don’t think that objection holds, unless the railroads become willing to offer cheaper long-term contracts. (Which they might!) So let’s stick with $7.50 for now.
But railroads have another benefit. Bitumen is nasty gunky stuff: you need to dilute it with something to be able to pump it around. You need to dilute it less to be in a rail car. That reduces costs by about $4.50 a barrel, bringing the rail tax down to $3.00.
Huh. Given the other uncertainties that companies have to deal with in the tar sands, I doubt that would make much difference on their decisions. And even that $3 could quite possibly be effectively reduced to zero, as the Bakken exporters seem to have managed. The below data is from a small company called Enerplus (see page 104). It shows the netback, or costs associated with moving their oil to market. Save for a weird spike in July, moving it by rail was much cheaper than pipeline.
(How did they move the oil for free? I have no idea. But I would guess that it is a combination of competition among railroads and an ability to charge slightly higher prices for their output than the WTI benchmark.)
In short, I do not think that failing to build Keystone will have an appreciable effect on the development of the Alberta tar sands.
But don’t take my word for it! Take Steve Williams’. He is the CEO of Suncor, the biggest Canadian oil sands player. He doesn’t think that Keystone is necessary. If Steve Williams is willing to say that in public, then he really couldn’t care less.
Interestingly, most observers interpret the State study as a reason for President Obama to approve Keystone. (See this excellent story by Ryan Lizza.) After all, it won’t make a difference to the development of the high-carbon oil sands.
Thing is, I have the opposite takeaway. To me it says that he should reject it: the pipeline has taken on iconic status among environmentalists, so why not kill the damn thing if it brings so few benefits?
It seems like I must be missing something. What?