Keystone Cops

As mentioned in a prior posting, I recently traveled to Canada as part of a delegation convened by the Chicago Council on Global Affairs to consider energy trade issues of importance to Canada and the U.S. – especially in the Midwest.

The second stop on our journey, after a day and a half in Manitoba to gain a deeper appreciation of Manitoba Hydro, was northern Alberta, which has become the epicenter of one of the largest energy opportunities and simultaneously one of the most controversial environmental issues facing those of us in the cleantech sector.

Of course, I’m writing about the Athabasca oil sands, one of the largest reserves of commercially-recoverable oil (using currently-available practices) on the planet. 

The main attraction of the Alberta leg of our trip was a visit to the operations of Suncor Energy (TSX: SU), one of the largest producers operating in the Athabasca, about 20 miles north of the boom-town of Fort McMurray.

Several indisputable facts are important to lay out concerning the oil sands in Alberta before addressing the issues at hand.

  • The Athabasca oil sands resource is massive:  an estimated 1.7 trillion barrels theoretical maximum, or about 170 billion barrels assuming a 10% recovery rate.  The only larger set of proven oil reserves in the world is in Saudi Arabia.  Significant portions of these reserves are economically-recoverable at oil prices of $75/bbl or even lower.
  • Current production levels from the Alberta oil sands are about 1.5 million barrels per day, mainly using surface mining techniques.  Surface mining imposes significant environmental scars upon the landscape for many years.  Most future production growth will be from parts of the resource that are deeper underground and thus not amenable to surface mining approaches, and will be accessed by in-situ recovery methods such as steam-assisted gravity drainage (SAGD) that impose far less environmental impact.
  • Because the resource is inferior in innate quality to so-called “sweet crudes” of West Texas that have become the oil industry benchmark, significant energetic inputs are required to “upgrade” recovered oil sands into a grade of oil that can flow easily through pipelines and be processed by refineries into transportation fuels.  As a result of all the extra pre-refining efforts, the carbon footprint of using fuels from oil sands is higher than from other sources around the world.  According to a report by IHS CERA, producing a gallon of gasoline or diesel from oil sands unleashes about 40-70% more greenhouse gases than for the average fuel burned in the U.S.
  • The U.S. consumes over twenty percent of annual world oil production, yet has only a couple percent of the world’s proven reserves.  Consequently, the U.S. needs to import about 40 percent of its day-to-day oil requirements.  Canada is the largest source of U.S. oil imports, mainly oil sands production from Alberta.  Without the Alberta oil sands, the U.S. would surely need to import much more oil from Saudi Arabia and other Middle Eastern countries.
  • World oil demand is on the order of 85 million barrels per day, and lacking an widely-scaled substitute for oil to supply ever-increasing transportation demands, almost every observer of the energy markets expects that number to only increase.  This is due to the rise of the developing world into 20th and 21st Century standards of living. 
  • Nowhere is this more true than China.  Given rapid economic expansion on its huge population and industrial base, China is the largest driver of future growth in global oil demand.  Sometime in the next 20 years, China will likely overtake the U.S. in world oil consumption.  Yet, like the U.S., China has only a tiny share of the world’s oil endowment.  As a result, China is mobilizing around the world to acquire rights to oil resources – and is especially active in investing in Alberta oil sands projects.
  • Between potential Chinese and American demands, private investment in the oil sands is exploding.  About $10 billion per year is pouring into the Athabasca oil sands, with an aim to boost production to 3.5 million barrels per year by 2020. 
  • Two major pipeline construction projects are proposed to correspond to the increased planned production in Alberta:  to refineries in the U.S. via an expansion of the Keystone Pipeline System called Keystone XL being proposed by TransCanada (TSX: TRP), and to the British Columbia coast via the Northern Gateway Pipeline under development by Enbridge (NYSE: ENB),  for shipment by tankers plying the Pacific Ocean to refineries in Asia and America.

And herein lies the rub:  the Keystone XL project has quickly become one of the most contentious environmental battlegrounds in recent memory.  The issue has become a national cause.  Over the past few weeks, protesters have camped out in front of the White House demanding that the U.S. to deny construction of Keystone XL.  The New York Times has come out squarely against Keystone XL.

Environmental advocates hope to stop Keystone XL for three primary reasons:

  1. Climate change.  James Hansen of NASA, one of the pre-eminent voices leading the charge for addressing the threat of climate change, has said that it’s “game over for our planet” if the Keystone XL pipeline is developed.  A good part of this claim arises from the fatter carbon footprint associated with oil sands relative to other sources of oil:  that using oil sands for our transportation fuels will imperil the climate more rapidly.  Directionally, this is correct.  However, while oil sands may have a 40-70% larger carbon footprint on a “wells-to-pump” basis, on the more relevant “wells-to-wheels” basis, oil sands is “only” 5-15% worse.  Far and away, most of the greenhouse gases associated with petroleum use are associated with actually burning the fuel in our vehicles, not in producing and refining it.  In other words, improving auto efficiencies by 20% is more important to climate change than the choice of oil sands vs. other crudes.
  2. Environmental degradation.  No question, mining oil sands is ugly and damaging, as documented by such observers at Andrew Nikiforuk.  But, the boreal forests of northern Alberta, while beautiful, are massive in their extent and mining operations operations are taking only an infinitesimal fraction of it.  Reclamation techniques being developed by Canmet (Canada’s national energy R&D institute) and employed by operators like Suncor are cause for cautious optimism that the land can be remediated back to a healthy ecosystem, albeit with a several-decade time horizon.  And, in-situ SAGD operations will likely comprise a significant share of the incremental production from the Athabasca, imposing much less negative impact on the local environment.  Finally, we should note that there are lots of no-less-ugly and no-less-damaging operations in strip mining for coal in the Powder River Basin and mountaintop removal in Appalachia — both of which are happening right here in the U.S. of A., and both of which entail a fuel that is higher-carbon than oil and can more easily be displaced by many other more-environmentally friendly substitutes.  
  3. Risk of oil spills.  Between the Exxon Valdez spill in Alaska, the BP Deepwater Horizon fiasco in the Gulf of Mexico, and this year’s Yellowstone River leak, oil companies don’t have anywhere near a perfect record at ensuring oil doesn’t end up in pristine places where it shouldn’t be.  Governor Dave Heinemen of Nebraska, a Republican whose party is more than occasionally associated with the “drill, baby, drill” mantra, has come out in opposition to Keystone XL for fear that any leaks will taint the Ogallala Aquifer.  However, it should be noted that oil pipelines already cross the aquifer — and these older lines are probably more subject to failure than any newer ones that might be built.

While I am sympathetic to these concerns at a conceptual level, I frankly think they’re a bit overblown.  Accordingly, I don’t think that stopping or even delaying Keystone XL will yield much environmental benefit. 

As noted above, the Alberta oil sands are vast and economic to produce — and continued robust demand in the world oil markets, especially from China, will drive these resources to be developed promptly.  If the resources are developed promptly, then all of the climate change and environmental degradation that protesters hope to avoid by blocking Keystone XL will happen anyway. 

OK, granted, if Keystone XL isn’t built, there wouldn’t be any additional oil spills in the Midwestern Great Plains of the U.S. (beyond what already might occur from the existing oil pipeline network).  However, the size of Northern Gateway would probably be expanded to scoop up the volumes that would have gone south to the U.S. via Keystone XL — and there would be at least an equivalent if not greater risk of spills along the Northern Gateway pipeline route across the Canadian Rockies or in the Pacific Ocean or along the pristine B.C. coastline.

In other words, if the opposition succeeds and the U.S. doesn’t allow Keystone XL to happen, it probably won’t end up helping the environment anyway.

Instead, all it would do is piss off our friendly neighbor:  note that Alberta has enacted the only binding carbon emission reduction program in North America, and standing in Canadian shoes for a moment, it would be more than a little annoying to be scolded by Americans for climate malfeasance when the U.S. hasn’t done jack-squat on the issue.

In addition, denying Keystone XL would only cause the U.S. to import more oil from other less-friendly and farther-flung places — perhaps at higher net out-of-pocket costs to American consumers to boot.  Although I suspect the estimated impacts are overblown, there would also be the foregone economic development benefits to the U.S. associated with constructing and operating the Keystone XL pipeline if it’s installed.

So, notwithstanding the good intentions of those who are against Keystone XL, I respectfully can’t agree with their position.  As I recently wrote to my good friend Stefanie Spear, publisher of EcoWatch Ohio, even if I don’t like the facts, I can’t dismiss them.

I can’t see any way around concluding this:  since it’s probably about a wash from an environmental standpoint, the U.S. should allow Keystone XL, so that we can at least obtain the economic and geopolitical benefits that trading with our preferred partner Canada (instead of, say, Venezuela or Saudi Arabia or Nigeria) affords.

Based on recent statements by Secretary of Energy Chu and insider rumors about the leanings of the State Department (which is the lead agency in reviewing the Keystone XL proposal), I suspect the Obama Administration will grant approvals for Keystone XL, because they sense the calculus of these tradeoffs.  A final decision is due by the end of 2011.

The problem is not Keystone XL.  Our problem is actually quite simple, although completely different:  we — especially the profligate U.S., but the whole world as well — need to stop using anywhere as much oil as we do. 

Only when we reduce the consumption of oil in a meaningful way will we meaningfully reduce emissions from oil burning, environmental degradation associated with oil recovery, and risk of oil spills in transportation.  

Arresting the development of a new oil pipeline is merely re-arranging the deck chairs on the Titanic.

We need to kick our “addiction to oil”, as acknowledged by President Bush way back in January 2006, not worry about where the oil is coming from.  Only when we start weaning ourselves off oil will projects like these not happen — because they won’t provide good financial returns as demand for the stuff falls. 

Getting off oil in a big way very quickly would only happen if there were  large/rapid shifts in non-petroleum (electric, natural gas or biofuel) vehicle penetration, massive expansion of public transportation, and/or major reconfiguration of 21st Century  live/work/shop/play patterns.

I would rather the protesters turn their energy towards rerouting the pipeline around the Ogallala — perhaps the most well-grounded concern.  

Otherwise, I would like to see more outrage directed towards the more useful aim of actions to reduce oil demand for transportation — higher fuel taxes, carbon emission reduction requirements, public transportation, smart growth zoning, R&D programs for biofuels and batteries.  And, towards reducing coal demand for power generation too.

Without major declines in world oil demand, stopping Keystone XL really won’t matter much from an environmental standpoint, no matter how much James Hansen and others wail.  The protesters can win at best a symbolic victory.

 

1 reply
  1. David Bryan
    David Bryan says:

    Increasing our use of tar sands is another step in the wrong direction. The political process in the U.S. is causing us to take many small steps in the wrong direction. Perhaps we should stop this process before it is too late to recover an environment that supports life as we know it.

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