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Energy and Resources Keystone foes energized as tumbling crude prices pinch oil sands

Pipes sit stacked at the TransCanada Corp. Houston Lateral Project pipe yard in Mont Belvieu, Texas, U.S., on Wednesday, March 5, 2014. The pace of oil sands production is key in the debate over Keystone, a Canada-to-U.S. line TransCanada Corp. proposed in September, 2008, when oil was more than $100 a barrel.

Scott Dalton/Bloomberg

Falling oil prices have energized opponents of the proposed Keystone XL pipeline.

U.S. benchmark crude has tumbled 10 percent this month, closing at $81 (U.S.) a barrel on Monday, and further declines are forecast. At $75, a government analysis said producers may be discouraged from developing Canada's oil sands without pipelines such as Keystone.

"It changes the narrative quite a bit," Anthony Swift, an international lawyer at the Natural Resources Defense Council in Washington, said of the tumble in crude prices.

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The pace of oil sands production is key in the debate over Keystone, a Canada-to-U.S. line TransCanada Corp. proposed in September, 2008, when oil was more than $100 a barrel.

Environmentalists oppose developing oil sands because the process releases more greenhouse gases than other types of crude. U.S. President Barack Obama has said he won't approve the $10-billion project if it would significantly exacerbate carbon pollution. It only would do that if it promotes more oil sands production.

"If you build cheap infrastructure to enable tar sands development, you are going to get tar sands development," said Jim Murphy, a senior lawyer at the National Wildlife Federation. A lack of pipelines means less development, he said.

An environmental analysis released by the U.S. State Department said oil prices would have to fall to $75 a barrel for Keystone XL to affect development of Canadian heavy crude. The report said higher transportation costs might have a "substantial impact on oil sands production levels" at that price, a scenario they deemed as unlikely.

When crude prices are higher, producers would find another way to get the heavy, tar-like bitumen delivered to refiners – by trains, for example – even if Mr. Obama blocked the link, a January environmental assessment from the department said. The State Department is overseeing the review because the pipeline would cross an international border.

Now that prices are lower, environmental groups are renewing their argument that Keystone is a linchpin to oil sands development and rail isn't a reliable option. At the very least, they say, the tumble shows the State Department's assumptions aren't reliable.

Kevin Book, an analyst at ClearView Energy Partners in Washington, said falling oil prices may help environmentalists make a case that alternatives such as rail, which cost more, aren't viable. But he called the current price drop a "blip" that probably won't affect the U.S. review of Keystone.

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"I don't believe you have too many people making the case that oil is going to fall in the $70 range and stay there for five years," Mr. Book said in an interview.

Some analyses predict a rebound, and the State Department said its assumptions are based on long-term price models, not short-term swings. For this year, crude reached $107.26 on June 20, and fell to $80.52 on Oct. 22 – the lowest since late June, 2012.

Environmental groups tie their opposition to research showing the production and refining of the oil sands releases more carbon dioxide than conventional oil. They call Keystone a threat to the climate.

Keystone could add the equivalent of as much as 27.4 million tonnes of carbon dioxide a year over what a less-carbon intensive type of oil would release. The pipeline's carbon is equal to emissions from about 5.7 million cars or 7.8 coal-fired power plants, the State Department said.

A 2013 draft environmental review concluded Keystone "is unlikely to have a substantial impact on the rate of development in the oil sands."

The NRDC, the Sierra Club, National Wildlife Federation and other groups lobbied the department to remove that statement, urging officials to account for rail's higher cost.

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The final report concluded Keystone probably wouldn't affect development, even though it concluded rail might add as much as $8 a barrel to the transportation costs. In a win for environmentalists, the report included a scenario in which the absence of Keystone could affect development, if oil prices fell below $75 a barrel.

Shawn Howard, a spokesman for TransCanada, said the Calgary-based pipeline builder has commitments from the oil sands producers to ship using Keystone XL, showing their confidence that the market is sustainable.

"They don't build projects like this on short-term prices, it's with a long-term view in mind," Mr. Howard said in an interview.

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