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The Keystone XL pipeline

The Keystone Pipeline System

Traditionally a natural gas shipper, TransCanada has made a massive commitment to oil through its Keystone pipeline system. The main partner originally involved in the project was the U.S. company ConocoPhillips, but in August 2009 TransCanada purchased ConocoPhillips’ 50% share and is now the sole owner of the Keystone Pipeline System.

The Keystone Pipeline System consists of:

• the “Keystone Pipeline”: from Hardisty to Steele City to Wood River and Patoka (Phase 1);

• the “Keystone – Cushing Ex-tension”: from Steele City to Cushing (Phase 2);

• the proposed Keystone XL pipeline expansion, split earlier this year into two segments:

(i) from Cushing to Houston and Port Arthur (Phase 3);

(ii) from Hardisty to Steele City (Phase 4). (See map below)

The first phase of the Keystone System became operational in the summer of 2010. With a nominal capacity of 435,000 barrels per day

(bpd), the 2,981 km long pipeline connects Hardisty, Alberta to U.S. refineries in Illinois (Wood River and Patoka), running through North and South Dakota, Nebraska and Missouri. One of the main highlights of the first phase construction was the conversion of a segment of the Canadian Mainline natural gas pipeline to crude oil pipeline.

The second phase was routed from Steele City, Nebraska to Cushing, Oklahoma. The Keystone-Cushing pipeline is 480 km long and became operational in February 2011. Cushing is a giant oil hub that stores more than 55 million barrels of crude. Being also a pricing point for the West Texas Intermediate (WTI) crude grade, the oversupply at Cushing was blamed to contributing to the low WTI price in comparison to the Brent index. TransCanada already ships 100,000 bpd to the Cushing storage facility, volume that gets there from the Alberta oil sands and from the Bakken Shale in North

As Europeans, and East Europeans in particular, we have become accustomed to associate any discussion of pipeline politics with Russian-European oil and gas relations, Central Asia or the Caspian Basin. This text, however, is about an oil infrastructure proposal in the United States: the Keystone XL pipeline, a 2008 extension proposal by TransCanada Corporation due to carry synthetic crude oil and diluted bitumen from the Athabasca Oil Sands in northeastern Alberta to the refineries along the Gulf Coast of Texas. The project, which would be part of the larger Keystone Pipeline System, is currently the subject of a heated debate over the pipeline’s environmental impact versus its benefits for America’s economy and energy security. The article summarizes some of the main arguments for and against Keystone XL and offers an insight into the related domestic discussion and political process that led to President Obama’s decision to freeze this project in January 2012.

by Teodora Simionel, Romania Energy Center (ROEC)

Source: www.transcanada.com

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Dakota via the first segment of the Keystone system.

But it is the Keystone Gulf Coast Expansion Project, also known as the Keystone XL pipeline that produced the greatest controversy. Initially a single project, Keystone XL refers to what is now known as the third and forth phases (780 km and respectively 1,897 km long), after it was split into two segments earlier this year, following the rejection of the presidential permit required for its construction. The total 2,677-km long, 912 mm wide crude oil pipeline would start in Alberta, Canada, but would have a different entry point in the U.S., at Morgan, Montana. Along the way, domestic oil is planned to be added to the pipeline, which would then extend southeast through Saskatchewan, Montana, South Dakota and Nebraska. It would incorporate a portion of the Keystone Pipeline (Phase 2) through Nebraska and Kansas to serve markets at Cushing, Oklahoma, before continuing through Oklahoma to a delivery point near existing terminals in Nederland, Texas, to serve the Port Arthur marketplace. The pipeline will add 510,000 bpd, increasing the Keystone’s system total capacity up to 1.1 million barrels per day (Mbpd). The cost of the Keystone XL expansion was estimated at USD 7 billion and the company expected to complete the project by 2012-2013. By building the Keystone XL pipeline, the Canadians aim to bring more of the crude found in the Western Canadian Sedimentary Basin (WCSB) to the refineries in the Gulf Coast. As of 2008, established crude oil reserves in the WCSB are estimated at 179 billion barrels (Canadian Association of Petroleum Producers). The primary source of WCSB crude oil supply – over 97 percent – consists of Canada’s vast oil sands reserves located in northern Alberta. The project’s key delivery area, the US Gulf Coast, represents

the largest and most complex refining district in the US, with 56 refineries adding up to approximately 8.4 Mbpd of total refining capacity.1

Key points of the debate around Keystone XL

The core of the debate over TransCanada’s project revolves around the advantages of a secure supply from Canada, the number of jobs the pipeline will create – proponents talk about over 20,000 – and the environmental risks it could bring. With unemployment stuck around 9 percent, the United States would benefit from a project with no cost for the government and which promises to help bring down this number. However, the number of jobs is highly contested. The 20,000 jobs that would be created immediately include 13,000 for constructing the pipeline and 7,000 to manufacture steel pipes and other equipment, TransCanada said in a press release. In a Washington Post interview with TransCanada’s chief executive, the company clarified the numbers. According to their methodology, each “job” represents one “job year” or one job lasting for one year. This means that if a single person works on the two-year project for the whole duration, it counts as two “jobs”. This brings the number closer to 10,000. Another point discussed is the fact that most of the jobs aren’t permanent and, according to State Department’s estimations, only 10 to 15 percent of them can be filled with workers from communities in the pipeline’s path.

Regarding the environmental concerns, many critics of the Keystone XL pipeline fear it will have a negative impact on the underground freshwater resources in

1 Application to the South Dakota Public Utilities Commission for a Permit for the Keystone XL Pipeline Under the Energy Conver-sion and Transmission Facility Act, August 2009, pp. 23 – 24.

both Canada and the United States, and on global climate. Bill McKibben, the author of The End of Nature, the first book on global warming for a common audience, and co-founder of the 350.org advocacy group, led the protests in Washington D.C. against the pipeline last year. According to McKibben, the Keystone XL pipeline was “the environmental litmus test of the year”. His network, which rallies more than 30 environmental and liberal groups, including the National Resources Defense Council and Greenpeace, tries to convince the public and the American government of the risks that oil sands development and the construction of the Keystone XL would entail.

One of the sensitive regions that could be damaged by the extraction of tar sands crude is the Canadian boreal forest, which is increasingly affected by large-scale industrial activities, such as forestry, road building, mining, and oil and gas extraction. According to the Pew Environment Group, “Canada’s boreal forest contains 25 percent of the world’s wetlands and more surface water than any other continental-scale landscape. It provides a vital bulwark against the global loss of biodiversity, irreplaceable food and cultural benefits to rural communities, and slows the impacts of global warming. These ecosystem services have an estimated USD 700 billion annual value”.

Another issue of concern is the possibility of oil spills that would harm the wildlife and water supplies along the pipelines route. The initial route of the Keystone pipeline passes through the Sandhills region, a 50,764 square km sand dune formation covered by grassland. The surface is highly susceptible to wind erosion if the grassland is disturbed.2 The region’s porous soil acts like a 2 Paul W. Parfomak et al., Keystone XL Pipeline Project: Key Issues, Congressional Research Service, March 13 2012.

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giant sponge that quickly absorbs precipitation, allowing very little to run off. The Sandhills are home to the Ogallala Aquifer, where the majority of the water resources supplying the Midwest are located.

The greenhouse gas emissions levels were also brought into question. Exploiting the oil sands (also called tar sands because of the viscous oil, or bitumen, extracted) is an energy-intensive process. The gasoline refined from bitumen is said to have 15% more emissions than gasoline produced from conventional oil.3 The authoritative voice of climate scientist James Hansen, head of the NASA Goddard Institute for Space Studies, paints a very grim picture of how the Earth’s climate will change if oil from tar sands continues to be produced. Hansen warns on the serious consequences that the development of high carbon content tar sands could have for the climate in near future (heavy drought and desertification in the Midwest, Texas and California, rising food prices), and on the long term (rising global temperature, rising sea levels, and extinction of “twenty to 50 percent of the planet’s species”).

The decision-making process

TransCanada Keystone Pipeline LP filed an application for a Presidential Permit with the Department of State to build and operate the Keystone XL Project. Since the pipeline crosses international borders, TransCanada needed to obtain the Permit for the portion of the pipeline that goes from Canada to the U.S. The border crossing segment is 1.93 km long and will extend down from the U.S. border, in Philips County, Montana, to the first pipeline isolation valve, located where the first pump station in 3 Michael Levi, Separating fact from Fiction on Keystone XL, Council on Foreign Relations, September 1, 2011.

the U.S. would be in place.According to the U.S. procedure,

specifically the Executive Order 13337, the State Department (DOS) reviews the applications for Presidential Permits. As a part of the review process, the Department also prepared an Environmental Impact Statement (EIS) consistent with the National Environment Policy Act (NEPA).

The final EIS was released on August 26, 2011 and stated that the pipeline from Canada to Texas would have “no significant impacts” on most resources along its proposed corridor if the company follows through on environmental protection measures. After nearly three years of evaluating the Keystone XL, the State Department appeared ready to approve the project by the end of 2011.

The government, however, also said that the pipeline would present “significant adverse effects to certain cultural resources”, referring probably to the possible damage that the project could bring to archeological sites, and a potential for oil spills despite protection measures, especially in environmental sensitive areas such as the Sandhills area in Nebraska.

The DOS decision was then followed by consultation sessions with eight federal agencies (Department of Defense, Justice, Interior, Commerce, Transportation, Energy, Homeland Security, and Environmental Protection Agency) and public meetings in the six states along the pipeline route. Their evaluation took into account issues that extend beyond the environmental impact, such as energy security, foreign policy, economic and other relevant matters.

During the public process, the Nebraska legislature opposed the pipeline’s route and called for a special session to discuss alternative directions for the project, in order to bypass the Ogallala Aquifer. They have also allotted up to USD 2 million to conduct an environmental impact study on the new route that would bypass the vulnerable Sandhills region.

After the 90 day review period for the National Interest Determination, the Agencies had to either concur or to oppose the Department of State’s decision. Unanimous concurrence was not achieved, so a final decision had to be made by the president. In October 2011, the Obama Administration attempted to delay the

Keystone Pump Station Hartford

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verdict until after this year’s elections. In a statement, the White House said it needed more time to assess all the environmental concerns that were raised during the consultation period. The decision drew intense criticism from the Republicans in the U.S. government, who pushed for a 60 day deadline for a decision to be made.

Finally, on January 18, 2012, president Obama rejected TransCanada’s original request for a presidential permit, stating that the 60 day deadline for the decision “prevented a full assessment of the pipeline’s impact” once Nebraska completed a rerouting of the pipeline around the sensitive Sandhills habitat. The decision sparked an explosive election-year fight with the Republican Party and turned the Keystone XL project into a campaign issue for President Obama. The environmentalists’ main complain is the impact that the exploitation and transportation of heavy crude oil from Canadian tar sands would have on climate. Activists are calling into question the President’s pledge from the 2008 campaign to free the United States from “the tyranny of oil”, mainly by encouraging clean-energy production and lowering oil demand.

Despite the administration’s decision to reject the permit for the Keystone XL project, TransCanada announced on February 28, 2012, that it will begin the construction of phase three (the section running from Cushing, Oklahoma, to refineries on the Gulf Coast). This segment of the original project, named the Gulf Coast Project, will have an estimated cost of USD 2.3 billion and is planned to address the bottleneck of oil in Cushing that resulted largely from increased U.S. production. According to the company, the pipeline will be completed in mid-to-late 2013. Soon after the company’s announcement, speaking at a meeting in Cushing, Oklahoma, President Obama endorsed the construction of

the 780 kilometers long Gulf Coast pipeline, as an important part of the “all-of-the-above energy strategy”that he has been advancing in the past three years. Meanwhile, the groups that oppose the construction of the whole Keystone XL project claimed the President sought to limit the political fallout from the decision by emphasizing that while Keystone has been rejected, he supports policies to boost supplies of oil and gas and other American energy sources. A statement released by Friends of the Earth raised concerns about increased greenhouse gas emissions from oil sands production. They argued that the president goes against his promise of clean energy, “toward the same outdated, dirty energy sources that (…) fuel catastrophic climate change”.4

Alternative outlets for Canadian crude

Right after the rejection of the presidential permit, TransCanada said that it will apply “in the near future” for a new permit that would allow the Keystone XL pipeline to cross from Alberta, Canada, into the United States and it did, on May 4, 2012. Since the Nebraska route is currently under revision by local authorities, the company estimates construction to begin in the first half of 2013 and be completed in 2014-2015. Given the fact that the new application will trigger a completely new review process, the delay will probably prompt Canada to consider selling its oil to Asian markets, such as China. Canada, the largest oil supplier to the United States, doesn’t presently export oil to China, but Stephen Harper, the Canadian prime minister, is pushing to increase trade ties with Beijing.

A way to export tar-sands crude 4 State Impact, http://stateimpact.npr.org/texas/2012/03/22/obama-promotes-keystone-xl-pipeline-in-oklahoma/

to Asia would be by pushing forward the building of the Northern Gateway Pipeline, a project that sparked Petro China’s interest in 2005. Then, the constructing company Enbridge (which, by the way, is TransCanada’s major competitor) signed a deal with PetroChina to cooperate on the project to ship extra-heavy crude across the Rocky Mountains to the Pacific Coast. In 2007, the Chinese company withdrew from the USD 4 billion pipeline because of delays in starting the project.

Enbridge also has a 5,363 km pipeline system of Canadian and U.S. mainlines5, which combined deliver some 2.5 Mbpd of crude oil from Canada to the U.S. According to Andrew Lipow, a Houston based consultant, the existing pipeline “can be expandable without the need of a permit”.6 If that would happen, jobs would be created and an increased amount of Canadian crude to the U.S. offered the American refineries the needed input.

ConclusionWhat might have appeared at first

as a simple infrastructure project, like the other segments of the Keystone System, soon turned into a debate about reducing dependency on “conflict”/ “un-ethical” (read Middle Eastern) oil, and eventually became an electoral topic. Irrespective of the final outcome, the pipeline extension proposal brought to light the multiple, and oftentimes colliding interests of the various stakeholders, and is indicative of a wider clash currently ongoing worldwide between two opposing arguments: energy security and climate change.

5 Refers only to the mainline systems (Enbridge and Lakehead, of 2,306 km and 3,057 km long respectively), since the total length of Enbridge operated pipelines in the US is well in excess of the quoted number.6 CNBC, Obama Administration Rejects Key-stone Pipeline, January 18, 2012.