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Energy Watch: study warns stopping Keystone XL will choke oil sands growth

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ANALYSIS: It took some fairly simple math for one Berkeley professor to claim the U.S. State Department is wrong about Keystone XL.

In late January, when Foggy Bottom released its final environmental impact assessment on what has long been the most intensely scrutinized pipeline proposal in American history, backers of the TransCanada project claimed a cautious victory through one of the report’s key conclusions. Stopping the 830,000 barrel-per-day oil artery that would connect northern Alberta with the largest refining hub in North America on the U.S. coast of the Gulf of Mexico would not stop Canada from developing the oil sands, the department said. Without Keystone XL to go south, the State Department found, oil sands producers would simply send their growing production to the east, west and even to the north for it to get to market.

Therefore, proponents inferred, Keystone XL could not possibly “significantly exacerbate” greenhouse gas emissions, which was President Barack Obama’s previously stated requirement for approval. Not so, argues Maximilian Auffhammer.

In order to meet the Canadian Association of Petroleum Producers (CAPP) forecast of total Canadian oil production (both oil sands and conventional oil) reaching 7.85 million barrels per day by 2030 (from 3.4 currently), new pipelines heading in multiple directions will be needed. That point is indisputable. What the George Pardee Associate Professor of International Sustainable Development claims in a blog post published on Monday is that the chances of all the necessary pipelines getting built are slim to nil.

“There is simply not sufficient transport capacity to realize the supply projections by Canadian Petroleum Producers out to 2030 even if all other projects are built and rail capacity grows most rapidly,” wrote Auffhammer, whose field of expertise is described in his bio as being “environmental and energy economics”.

Auffhammer looks at all the oil sands pipelines that are being planned over the next few years and calculates supply constraints that could exist should only some, or none of them, get build. If all are allowed to go ahead – including Keystone XL and Energy East from TransCanada, two Alberta Clipper expansions and Northern Gateway from Enbridge and the Trans Mountain expansion from Kinder Morgan – then Auffhammer says there would be “plenty of spare capacity until 2013 and would minimize the need for [crude-by-rail] transport” until 2030 and beyond.

“Scenario 2, which is a world sans Keystone XL, has plenty of capacity until 2024, which is when both high and low cost transport modes are filled to capacity,” wrote Auffhammer.

By that point, his analysis concludes roughly one billion barrels would have to “stay in the ground” as the industry would lack any means to bring them to market, even with crude-by-rail shipments blowing past the 500,000 bpd mark as analysts predict it will by next year. Of course, that conclusion hinges on a critical assumption that no additional projects are proposed, aside from the ones currently on the table, between now and 2024 (a decade is a pretty long time folks).

“If none of the pipelines get built within and out of Canada and one has to reply on this rail scenario alone, capacity would run out this year and roughly 10 billion barrels stay in the ground,” Auffhammer wrote.

“What is noteworthy about the last scenario, is that if no pipelines get built, rail does not provide sufficient capacity to meet projected takeaway demand in the short run. Not building Keystone XL would make the rail capacity constraint binding and therefore lead to slower extraction even in the short run.”

Now your friendly neighbourhood energy reporter is many things, but an “energy economist” he is not, so I checked the veracity of Auffhammer’s argument with two of my favourite energy economists: Andrew Leach and Peter Tertzakian.

“I think he’s right, mostly,” said Leach, an associate professor of business at the University of Alberta. “He takes the [CAPP] production forecast as given, which I think is an issue for a number of reasons. Mostly cost-inflation-related, not GHG-related.” (indeed, many who would otherwise consider themselves major oil sands supporters have questioned how realistic CAPP has been with its recent projections).

“[Auffhammer’s report contains] some misguided assumptions,” said Tertzakian, chief energy economist and managing director of ARC Financial Corp. “I don’t think Keystone XL is a limiting factor, but other factors are,” he added, drawing a parallel to Leach’s point of cost-inflation being a potentially limiting issue in the future.

No doubt there are plenty of holes that can be poked in Auffhammer’s case. He even concedes in his conclusion that “1 billion barrels sounds like a lot, but the U.S. consumes that amount in about 50 days.”

However, he ends his post with a final point that, on at least a cursory glance, appears valid: “not permitting Keystone XL ‘buys time’ for alternative transportation fuels and climate policies to develop.”

While that may not necessarily prove stopping Keystone XL will stop the oil sands in its tracks as of 2024, it provides a far more even-handed and clear-eyed argument against the project than the climate hysteria that often serves as the anti-Keystone XL average. Case in point is one comment I found in my notes from April 18, 2013: the day the U.S. State Department held its first and only public hearing on its KXL review in Nebraska. The following statement was made by a local resident who delivered it with the full authority as if he was saying the sun sets at night:

“It is either our grandchildren exist or Keystone XL does, we cannot have both.”

Jameson Berkow is BNN's western bureau chief based out of Calgary. Every weekday morning he researches the top stories affecting commodities and the oil patch, and sends his analysis to the BNN newsroom in Toronto. You can follow him on twitter @crudereporter

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