Why the Keystone XL Pipeline May Not Be Built

Forget about the fight in Washington—the pipeline might not make economic sense anymore.

Pete Marovich/Bloomberg/Getty

When viewed as a political grudge match, the ongoing battle over the Keystone XL pipeline remains one of the hottest fights in Washington. Proof of that can be seen by looking at yesterday’s vote in the Senate on the project, which failed to get the 60 votes needed for filibuster-proof passage.

But when considered solely on its economic merits, Keystone XL may end up being the pipeline equivalent of a jilted bride left waiting at the altar.

To be certain, that’s not what environmental activists want to hear. They have made Keystone XL the poster child of their climate-change efforts. Meanwhile, Republicans are seething over the years-long delays on the project and are eager to score political points against President Obama and the Democrats by forcing them to approve the federal permits needed for the pipeline. And Republicans are already promising another vote on the project in January when they will have a majority in the Senate.

Congressional Republicans can stage as many high-profile votes on Keystone XL as they like, but they can’t force Calgary-based TransCanada to build it. And if you look at the challenges now facing the pipeline, the biggest hurdles aren’t political, they’re economic.

Indeed, the pipeline’s soaring costs, coupled with rapidly falling global oil prices, and soaring domestic oil supplies, may well prove more dangerous to Keystone XL than a Megabus-load of Bill McKibbens. Add in a big slug of new rail-terminal capacity that is available to move crude out of Alberta to refiners, and it becomes clear that for all of the furor over Keystone XL, the transport capacity that the pipeline might provide matters less now than it did during the Bush administration, when the project was first proposed.

Earlier this month, TransCanada said that the cost of the 1,179-mile pipeline has dramatically increased since 2008. The company now estimates it will cost $8 billion, nearly 50 percent more than the $5.4 billion projected six years ago. Those higher construction costs will mean higher costs for companies who want to use the pipeline to ship their crude to market.

Higher shipping costs mean additional friction for companies working in the Canadian oil sands. Since July, the benchmark price for domestic crude oil, known as West Texas Intermediate, has fallen from over $100 per barrel to less than $75. The companies operating in the Canadian oil sands have always had to sell their product at a discount to the price of West Texas Intermediate because their crude is heavier and more difficult to refine.

Sandy Fielden, director of energy analytics at Texas-based RBN Energy, told me that if prices continue falling, then the companies producing crude from the oil sands “don’t have a profitable enterprise. And that’s true if we are talking about transporting the oil to market by rail or by pipe.”

Nor is it clear when prices might hit bottom. Thanks to the shale revolution, domestic oil production is soaring. Since 2004, US oil output has jumped by about 56 percent, the equivalent of pumping an extra 3.1 million barrels a day. To put that in perspective: that’s equal to Kuwait’s oil production!

All that new oil has to go somewhere. But US refineries are already running at capacity. As Fielden says, “We have plenty of crude.” And in particular, the refineries on the US Gulf Coast, which are capable of converting the heavy crude coming out of Alberta into gasoline, jet fuel, and other refined products, are already at capacity.

Despite the fall in prices, domestic oil production is likely to continue growing. In July, Ed Morse, the head of commodities research at Citigroup Global Markets, declared that the US is now producing more oil than both Russia and Saudi Arabia. The US is producing so much oil, said Morse, that the US now must begin exporting large quantities of crude, and those crude exports will come on top of the 3.5 million barrels per day of refined products that are already being exported from US refineries to customers overseas.

Now to the last issue: oil by rail. By the end of this year, western Canada will have about 1.1 million barrels per day of rail-terminal capacity which can be used to ship crude to refineries across the US and Canada. Keystone XL has a design capacity of 830,000 barrels per day. Yes, it costs more to move oil by rail than it does by pipeline. And yes, there has been a regulatory crackdown on that mode of transport after a series of dramatic accidents, including the disastrous derailment and fire in the small Quebec town of Lac-Mégantic, which left 47 people dead.

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Tougher regulations on tank cars and oil-by-rail make sense. But they are also unlikely to significantly slow the trend. Oil producers in Canada (as well as those in North Dakota) have grown accustomed to shipping their product by rail as it gives them more marketing options that those that are available with a single pipeline like Keystone XL.

Let me conclude with an observation I got this morning from J. Mark Robinson, an energy consultant who spent 31 years working on infrastructure-siting issues for the Federal Energy Regulatory Commission. Robinson, who favors the construction of Keystone XL, said the project is “not any better or worse than any other pipeline out there. The difference is that the environmentalists have successfully attached a symbolism to the project that is far greater than what it actually merits.”

In other words, symbolism can work for a while. And the politics can get nasty. But in the end, Keystone XL’s future depends on whether or not the pipeline will be profitable. And right now, that profitability is not certain.

Robert Bryce is a senior fellow at the Manhattan Institute. In May, he published his fifth book, Smaller Faster Lighter Denser Cheaper: How Innovation Keeps Proving the Catastrophists Wrong.