Pipelines: US advances change rules of the game

Canada has long billed its oil and natural gas resources as a solution to its southern neighbour’s ravenous demand for energy. But the discovery of a way to extract natural gas from tightly packed shale rock has meant the US no longer needs to import as much natural gas.

And an environmentalist movement against the high carbon nature of Canada’s oil industry has raised questions about whether there will be big exports to the US as planned.

The protests have centred on the proposed Keystone XL – a 2,673km pipeline extension that would start in Alberta and run south-east through Saskatchewan, Montana, South Dakota and Nebraska. It would incorporate a portion of the Keystone Pipeline that runs through Nebraska and Kansas to serve Oklahoma and, eventually, Port Arthur in Texas.

The pipeline would be the third that imports fuel from Canada’s vast oil sands deposits, also known as tar sands. TransCanada, the pipeline operator, is waiting for the US State Department’s decision by the end of the year whether to let it build the Keystone extension.

Roger Ihne, in the energy and resources practice at Deloitte Consulting, says: “Being in the industry, it’s easy for me to see what drives the project. The oil will be produced and consumed somewhere in the world. It is more economic and environmentally friendly to pipe it to the US than ship it to China or elsewhere.”

Keystone campaign: actress Daryl Hannah at White House sit-in

Environmentalists are not only objecting to the higher carbon content of oil sands fuel, but also that the first Keystone pipeline has had a series of spills in its first year of operation. Russ Girling, president of TransCanada, says that nearly all the oil releases over the past 12 months “have been minor – averaging just five to 10 gallons of oil”.

Mark Lewis, a partner at the law firm Bracewell & Giuliani, believes the arguments against the Keystone XL are red herrings. “Since 1972, we’ve been talking about energy security,” he says. “It seems a little silly to turn away this resource from the north.”

Nonetheless, there is talk of building a pipeline to the coast to ship out what oil sands fuel the US does not buy. The export project makes sense to Tony Reinsch, senior director in the upstream and gas group at PFC Energy, the consultancy, regardless of what President Obama decides on Keystone XL.

“The US and Canada won’t absorb all the oil sands [production] in North America,” Mr Reinsch says.

Canada has 170bn barrels of oil sands reserves. The extension was being put forward as an exclusively oil sands development, yet it had other selling points, he says. “While the Keystone XL pipeline will move oil sands product to the Gulf Coast, it will also carry crude from the Bakken shale formation in North Dakota, where production is poised to grow from 400,000 to 700,000 barrels a day to 1.2m.’’

He says that neither the industry and environmentalists have paid much attention to this point, presenting the likely passage of the Keystone XL as a debate between jobs and the environment.

Yet the US needs to move its crude out of central states as shale oil production rises.

Mr Reinsch says: “Right now, access to alternative markets is constrained, noting the differential between West Texas and Brent crude because of the glut of regional crudes in Cushing, Oklahoma.

“There is strong industry focus on increasing pipeline access to the Gulf Coast refineries. You don’t want to be constraining US oil production with inadequate pipeline capacity.”

On top of that, he says, the pipeline will provide jobs. “Pipelines are one of the few labour-intensive segments of the oil sector,” Mr Reinsch says. “It’s shovel-ready.”

The industry’s position is that the project has undergone years of environmental reviews and would be constructed to the highest standards.

Regardless of whether the US approves the Keystone XL, he says, Canada was likely to go ahead with at least one of the two proposals being considered for an alternative pipeline to move oil sands production to the west coast for export to Asia.

Canada is also rich in natural gas, and a project to export that fuel is under way.

Janine McArdle, Apache’s senior vice-president of gas monetisation and president of Kitimat LNG, a project to liquefy and export natural gas from Canada, says the company is in discussions with several north Asian buyers, including China, Japan and South Korea.

The project, which is owned by Apache, EOG Resources Canada and Encana, already has its environmental approvals and Apache expects to make its final investment decision in the first quarter of 2012.

Initial capacity will be 700,000 thousand cubic feet a day, but there is room to double that to improve the economies of scale, though that would require amending some of the permits.

Apache is looking to supply natural gas in contracts running 15 years or longer, with the selling point that it has a “long life and a safe, reliable source of supply”, Ms McArdle says. The company’s view is that Canada must look beyond the US.

“Historically, their big export market was the US,” Ms McArdle says. “But shale changed that. We have, in the US been pushing back on imports. It is important for Canada to find another outlet for its resources.”

FT