The Keystone XL Pipeline and the Future of Tar Sands Oil

KXL Pipeline

What is the future of tar sands oil now that Trump has given the go-ahead to the long-delayed Keystone XL (KXL) pipeline?  The answer has enormous implications for the environment.

Over the past few weeks seemingly contradictory public statements have been made concerning the viability of Canadian tars sands oil. Tar sands oil seemed to be on the ropes when on March 10th, 2017 Shell Oil announced that it would sell off $7.25 billion of production assets in Canada’s oil sands. Coming on the heels of similar declarations by ExxonMobil and Conoco just a month earlier, these collective announcements suggest that investors had written off tar sands oil as unprofitable. Yet just two weeks later the Trump administration announced that it had resurrected the KXL pipeline, which, if built, would provide crucial access to the Gulf Coast refineries for the bituminous crude. Will approval of the KXL pipeline alter the downward dynamics of the tar sands oil?

The answer becomes clearer after examining the economics behind the tar sands oil. Given the $50 or so dollars that a barrel of conventionally produced oil currently attracts, oil is profitable only from already operating tar sands mines. Given the surfeit of oil from shale and other more accessible sources, few experts in the field see crude rising to the $80-100 dollars a barrel required to make profits from new tar sands mines. The write downs by the three major oil producers is tacit acknowledgement that, for the foreseeable future, crude prices will stay well below that level. Since stock prices did not fall notably following these announcements, it stands to reason that investors had already factored these write downs in their valuations.

How is this apparent vote of no-confidence in the tar sands by major oil producers to be reconciled with the eagerness with which the approval of KXL was received by the oil and gas industry? After all, the raison d’etre of the pipeline is to serve the tar sands mines.  To reconcile this seeming contradiction, it is important to recognize that the pipeline’s approval is (at this juncture) merely a symbolic victory for its supporters – there is no guarantee whatsoever that the Nebraska Public Service Commission will approve the project and, even if it does, the developer of the TransCanada has given no assurances that it will proceed with its construction. Not only is there tepid demand for the expensive tar sands oil, but the $8 billion pipeline is itself competing with three other proposed pipelines, only two of which are needed to provide sufficient capacity to ship Canadian tar sands oil to market until at least the mid 2020’s.

The tar sands oil debate is playing itself out against the backdrop of a rapidly changing regulatory and political climate.  Even before the election of Prime Minister Trudeau, a majority of Canadians were living in provinces that imposed carbon taxes, and prospects of a federally-mandated Canadian carbon tax are looming. By contrast, with the election of President Trump the United States is projecting a pro fossil fuel stance. What is clear is that for at least the next half decade the economics of tar sands oil production will remain unfavorable. Whether the Keystone XL pipeline ever enters the equation remains, for now,  a matter of conjecture.

 

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