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Energy and Resources Memo suggests U.S. light oil threatens approval of Keystone pipeline

The Keystone pipeline under construction in North Dakota.

REUTERS

Booming U.S. oil production poses a new threat to TransCanada Corp.'s controversial Keystone XL pipeline project, Canada's top energy expert in Washington warned in a memo to the ambassador to the U.S.

In an analysis prepared last summer and obtained under Access to Information, Canadian embassy energy counsellor Paul Connors warned Ambassador Gary Doer that Canada could not rely on a previous State Department finding that the pipeline would not increase greenhouse gas emissions, and said the jury was still out on whether the U.S. would approve the project.

In June, U.S. President Barack Obama laid out an aggressive new climate policy and said he would only approve the Keystone XL pipeline if it did not "significantly exacerbate the problem of carbon pollution."

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Keystone supporters – including Natural Resources Minister Joe Oliver – have noted that a State Department draft environmental impact statement concluded last March that the oil sands bitumen would get to market with or without the Keystone XL pipeline, and that therefore approval of the project would have little impact on greenhouse gas emissions.

Mr. Connors, however, warned that booming production of unconventional light oil in North Dakota and Texas could give rise to a new rationale for denying the pipeline, since light oil is less greenhouse-gas intensive than oil sands crude. The e-mail – written the day after Mr. Obama's climate policy announcement – was sent to several embassy staff and obtained by the Calgary-based environmental think tank Pembina Institute after an access request.

The U.S. State Department will soon issue a final analysis of the project, and its conclusion as to whether the pipeline would increase carbon dioxide emissions will be key. A positive determination would create pressure for Mr. Obama to block the project.

However, if the State Department maintains its previous stance, Mr. Obama would have little grounds to reject it.

The federal and Alberta governments – along with the oil industry – see the Keystone XL project as a key link between Alberta oil sands producers and the massive refining complex on the U.S. Gulf Coast, and an important part of Canada's effort to expand its market for oil exports.

While the focus until now has been on the impact on emissions from oil sands production, the President could potentially block the pipeline to reduce emissions from American refineries.

Surging American supplies have already virtually eliminated imports of light crude into the Gulf Coast, and rising production has prompted calls for Washington to ease its virtual prohibition on oil exports to prevent a glut from building up in the United States. The International Energy Agency forecast recently that the U.S. will become the world's largest oil producer by 2016, although it will still need more than five million barrels a day of imports.

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While many Gulf Coast refiners are equipped to process heavy crude like oil sands bitumen, Mr. Connors suggests they would have a greater incentive to process light crude if Keystone XL is turned down.

"While this is economically suboptimal for the heavy-oil refineries, it would make the mix of U.S. crude oil lighter and less GHG intensive," he wrote.

A spokeswomen for the Canadian embassy said Wednesday that the Canadian oil is expected to replace imports from Venezuela, Mexico and the Middle East, rather than compete with U.S. light production.

"The embassy email of June 26th 2013 analyses a speculative, future, non-economic scenario, one of many, which we have no reason to believe that the US Administration would pursue, and which the current State Department report does not support," Alexandra Vachon White said in an e-mailed statement. She added that the State Department has previously concluded that, without the Keystone XL pipeline, Canadian heavy oil would be shipped to the Gulf Coast by rail, a method that produces more greenhouse gas emissions than transport by pipeline.

TransCanada spokesman Shawn Howard said he could not comment specifically on Mr. Connors' analysis, but he said there is a clear demand for Alberta crude on the Gulf Coast.

"Our Keystone XL customers have signed 20-year, binding commercial agreements because they needed to connect oil supplies in Canada and the U.S. to refineries in the Midwest and Gulf Coast," he said in an e-mailed statement.

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However, Pembina's director of federal policy, Clare Demerse, said the embassy memo describes "a plausible scenario in which building the Keystone XL pipeline would increase U.S. emissions, which means the proposal would fail President Obama's climate test."

Roger Ihne, who recently retired as head of Deloitte & Touche's energy practice, said most refiners on the Gulf Coast are already looking for ways to process more light domestic oil.

Editors Note: The name of Canadian embassy energy counsellor Paul Connors has been corrected in this online story.

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