|Photograph by Larry MacDougal, Canadian Press/AP|
Here's all you need to know: Obama now has his justification to approve the Keystone XL (the parameters of which I outlined here).
Of course this report is a bit of a rorschach test. A fairly nuanced document outlining complex issues relying on various levels of estimation and prediction (ie. educated guessing) is not easily interpreted in the black/white realm of politics and special interests.
My assumption is that Obama wants to approve this thing. He laid out his parameters, ie. that him saying no wouldn't materially impact global warming, and this report does nothing to bolster the case against that notion.
This report didn't really add anything new to this particular conversation. Previous reports figured the oilsands are getting developed regardless of XL approval. This report didn't deviate from that. With the southern portion already open and Alberta oil finding it's way to Texas, this to me seemed inevitable.
I wasn't sure if the recent rash of rail incidents would have any impact on this report (they didn't really). Rather the focus was on just how much rail capacity has been added, and is planned to be added in the near term.
The bottom line: as long as oil remains above the $65-$70/bbl range the oilsands are getting developed; with or without XL.
ReactionsAs mentioned, it's a rorschach test. Here are a few expected/typical reactions from both sides of the conversation, not surprisingly, nobody seems to have updated their priors.
The Hill quotes a few policy maker and special interests reaction to the report:
Henry Waxman (D-Calif):
“While still flawed, this environmental review recognizes that the Keystone XL tar sands pipeline could have a significant effect on carbon pollution, depending on variables such as oil prices and transportation costs,” said Rep. Henry Waxman (D-Calif.).
“Keystone XL is the oil industry’s number one priority because it is critical to their plans to triple production of tar sands, the most carbon-polluting oil on the planet.”Susan Casey-Lefowitz of the Natural Resources Defense Council:
“Even though the State Department continues to downplay clear evidence that the Keystone XL pipeline would lead to tar sands expansion and significantly worsen carbon pollution, it has, for the first time, acknowledged that the proposed project could accelerate climate change,"Contrasted with:
Jack Gerard of the American Petroleum Institute:
"Five years, five federal reviews, dozens of public meetings, over a million comments and one conclusion ─ the Keystone XL pipeline is safe for the environment,"John Boehner (R-Ohio):
“If President Obama wants to make this a ‘year of action’ he will stand up to the extreme Left in his own party, stand with the overwhelming majority of American people, and approve this critical project,”USA Today had a couple of good clips as well:
From Barbra Boxer (D-Calif.)
"I will not be satisfied with any analysis that does not accurately document what is really happening on the ground when it comes to the extraction, transport, refining and waste disposal of dirty, filthy tar sands oil,"(ie. I will not believe any report that doesn't line up with my priors)
Raul Grijalva (D-Ariz):
"The State Department is asking us to believe this pipeline is in the national interest,"... "How can a pipeline that ships Canadian tar sands to the Gulf of Mexico for export, that does nothing to increase our energy independence, and that will deal irreparable damage both to our landscapes and our air quality possibly meet that definition?"A mixed bag of reactions where the individuals priors surviving unscathed. While I find the need for this type of document, offering no new information (this point is debatable, I just don't see what new information people thought might materially impact the process), would add to the process. To me it's simply one of those required political processes that we just have to roll our eyes at and wait out.
The only thing that matters is the impact it will have on the political landscape.
My only concern was that it offer up a serious argument that a no to XL would have a significant impact on Oilsands development. I thought that the on going battles for Canadian pipelines and the possibility of increased rail regulation (in response to the increase in oil by rail incidents) might add some uncertainty into alternative transport modelling, but the effect does not seem to warrant a rethink at this level.
Summary of the Market AnalysisI just wanted to add a few thoughts on the Market Analysis portion (which I found the most interesting).
The report addresses the on going build out of rail capacity, showing that the expected capacity to hit 1.1 million bopd coming out of the Western Canadian Sedimentary Basin (WCSB) by the end of 2014 (between 900,000 and 1,000,000 being heavy oil). See page 5 of the report for a great map at existing and planned rail loading and off-loading facilities.
The viability and impact of XL was tested against four different pipeline scenarios: 1)unconstrained, 2) no new cross-border crossing, but east and west pipelines out of Alberta, 3) cross border, but no east and west pipelines, and 4) no new pipelines.
Basically we see that price will ultimately decide whether the oilsands are developed. The rail build out has demonstrated that, even with the heavy discounts we've seen recently, it is still economic. The report outlines two assumption that would see production slowed due to transportation constraints are: 1) a material low side miss on projected price, and 2) that absolutely no pipeline projects are approved, Canadian or Cross border.
The $65-$75 range is given as the long-term price point where the added costs of moving oil by rail begin to produce questionable economics. A great graph on page 7 is given.
In the global context, this report points out that some 20% of global consumption is American with no realistic scenario of 'oil independence'. In terms of American production potential the report points to a set of ranges that vary considerably (on page 15) citing the EIA, IEA, PIRA Energy, Sanford C. Bernstein that kind of sketch out how much uncertainty is produced by the current tight-oil boom and it's unknown decline parameters.
An interesting graph on page 26 shows that Canadian Oil is offseting declining inmports from countries like Nigeria, Venezuela, and Mexico. Both Venezuela and Mexico would be seen as our competitors in marketing heavy oil to the American refineries, however both are declining with Mexican export mixes becoming lighter and Venezuela pushing to expand export markets (as we should also be doing). The point is that the market demand should remain robust for heavy Canadian oil.
Another key that this report acknowledges is the nature of the Oil Sands operations. Compared with tight oil production with say 2 or 3 year payouts that require constant (increasing) drilling levels to maintain (grow) production the oilsands have huge upfront costs with planning and licensing phases, to say nothing of build out and start up phases, exceeding the entire life cycle of tight oil investments. With the significant sunk cost nature of the oilsands, it is the long run price constraints that matter. (page 35 offers an interesting graph that shows where the $65-$75 estimate range for a price constraint comes from).
Transportation: Current pipeline take-away capacity is currently at 3.7 million bopd, with about 3.3 million bopd crossing the US border. While plenty of capacity currently exists the report estimates production potentially hitting 5.9 million bopd by 2030 and 6.1 by 2035. With the long lead time required on these projects (hopefully not all of the 5+ year XL variety) the need to push these projects is obvious.
The basic take away is this, while Keystone XL is generating all of the headlines more oil is flowing south then ever before. In addition, plans are underway to increase that even further, regardless of XL's decision.