Keystone XL Pipeline Update

On Friday, January 31, 2014, the U.S. Department of State released the eleven volume Final Supplemental Environmental Impact Statement for the Keystone XL Pipeline. If you recall, back on May 4th 2012 TransCanada Corporation made a new application for a Presidential Permit to construct and operate the Keystone XL Pipeline after the Department of State rejected their original 2008 application in January 2012. At the time, the Department of State was under a deadline imposed by Congress and rejected the application because of inadequate time to determine the environmental impact of the proposed pipeline.

TransCanada Corporation turned around and on May 4th 2012 announced a new application for a Presidential Permit to build the northern most section of the Keystone XL pipeline (Phase IV) from the Canadian Border from where Saskatchewan meets Montana using a route that would cross South Dakota and a route (that would be determined later) to cross Nebraska and meet up with the Keystone Phase II which runs from Steel City, Nebraska to Cushing, Oklahoma. On January 22, 2013 Governor Heineman of Nebraska signed the recommendation to the U.S. Department of State for a Presidential Permit for the Keystone XL pipeline to cross the international border after the Nebraska state regulators recommended approval of the revised route selected (with their guidance) for the Keystone XL Pipeline.

There is currently a pipeline Keystone I that runs east from Hardesty Saskatchewan to Manitoba and then south through the Dakotas to Steel City, Nebraska. It is a less direct route and is a lower volume pipeline. Keystone II runs from Steel City to Cushing, Oklahoma at the Oklahoma storage facilities. Keystone III running from the Cushing Oklahoma to the Nederland, Texas began delivering crude oil from Cushing, OK, to the oil refineries in Texas on Wednesday, January 22, 2014. The Gulf Coast Project, Keystone III, did not require a Presidential Permit because it does not cross an international border.

I did not review the 11 volumes of the Supplemental Environmental Impact Statement. I read the 38 page Executive Summary and though I spent a large portion of my professional career preparing and reviewing environmental reports, my eyes glazed over at reading more than the executive summary. Keystone XL is “unlikely to significantly impact the rate of extraction in the oil sands or the continued demand for heavy crude oil at refineries in the United States based on expected oil prices, oil-sands supply costs, transport costs and supply-demand scenarios.” In other words, no matter what action the Administration chooses to take on this portion of the pipeline-approve, reject, or stall- the oil sands are not staying in the ground in Canada. There is world demand for heavy crude oil and it will be met. The Texas refineries are optimized for heavy crude either from South America or Canada. The crude oil will come by pipeline, boat, and truck or rail road.

There is strong opposition to the Keystone XL pipeline. However, as the Supplemental Environmental Impact Statement argues the pipeline will not determine if the oil sands resources in Canada will be mined. To account for uncertainties about oil production, consumption, and transportation, the Environmental Impact Statement modeled 16 different scenarios that combine various supply-demand assumptions and pipeline constraints. Under most scenarios examined in the report whether or not the pipeline is built had limited impact on development of the oil sands. Oil sands production and development will slow or accelerate depending on oil price trends, regulations, and technological developments. The Canadian oil sands have been known for decades, but until oil prices rose and technology improved these oil deposits were too expensive to exploit beyond the limited scope of surface mining. Advances in technology in both oil sand extraction and refining techniques and rising oil prices altered the economics and have made the extraction of oil sand possible. While the advances in extraction techniques have quadrupled recoverable oil reserves and moved Canada into second place in proved world oil reserves, it requires more energy to produce the oil and increases the carbon footprint of the crude as compared to fracked light sweet crude from Montana.

Now that the final Supplemental Environmental Impact Statement is complete the Presidential Permit review process will now focus on whether the Keystone XL Pipeline serves our national interest. The Department of State is opening a 30 day comment period on February 5, 2014 where members of the public and other interested parties can submit comments on the Keystone XL Pipeline. Though under the executive order currently in place, Secretary Kerry is empowered to make the final decision, the next step requires consideration of: energy security; environmental, cultural, and economic impacts; foreign policy; and compliance with relevant federal regulations and issues. During this time, the Department will consult with, at least, the eight agencies identified in the executive order: the Departments of Defense, Justice, Interior, Commerce, Transportation, Energy, Homeland Security, and the Environmental Protection Agency.

Meanwhile, TransCanada’s proposed pipelines to Canada's West Coast, the Northern Gateway, would carry crude oil from Alberta to the Pacific port of Kitmat, for export to Asia is also facing opposition from environmentalists and the aboriginal Yinka Dene Alliance and Coastal First Nations. TransCanada is also moving forward with an east-west pipeline, the Energy East Pipeline project. The Energy East Pipeline project would convert a redundant 1,864 mile portion of the TransCanada's Canadian Mainline natural gas distribution pipeline to a crude oil pipeline and build the additional 870 miles of new pipeline to reach the port in Saint John, New Brunswick. This pipeline has more public support after the Lac-Mégantic train disaster that killed 47 and obliterated sections of the town last year and the incident this month when 19 cars derailed in New Brunswick.

The cylindrical DOT-111 rail cars used to transport oil have come under scrutiny in recent years for some of their design flaws. Last month the Canadian Minister of Transport announced proposed regulatory amendments to improve the safety of transporting oil by rail. She announced plans to alter DOT-111 regulations, requiring that all new cars be built with thicker steel, include a reinforced top fitting, and a head protection shield to lessen the risk of puncture. The new regulation does not require that older tank cars be retrofitted to come into line with new regulations, but that is expected to happen gradually. DOT-111 tank cars are non-pressurized, cylindrical railcars designed to transport a variety of liquids. They are also the most common tank cars in service with an estimated 265,000 of them operating in Canada and the United States.

Keystone Pipeline the Never Ending Story

On February 27th 2012 TransCanada Corporation announced their intension to build the Cushing Oklahoma to the Gulf Coast portion of the Keystone XL pipeline, the Keystone Phase III, a 435 mile extension of the existing Keystone pipeline to Port Arthur and Houston. The existing Keystone Pipeline Phase I runs from Hardesty, Canada to Steel City, Nebraska near the Kansas and Nebraska border. Keystone Phase II runs from Steel City to Cushing, Oklahoma where it terminates, leaving the Canadian crude oil stranded in Oklahoma along with U.S. domestic production from North Dakota that has been using the pipeline to reach the Oklahoma storage facilities. As oil prices have climbed recently the 55 million barrels of oil that can be stored in Cushing have produced a glut of oil waiting to be refined and the lowest gas prices in the nation for the mid-west.

In response to the glut of oil in Cushing, Enbridge Inc. and Enterprise Products Partners (who purchased a 50% interest in November) owners of the Seaway pipeline that runs from the gulf coast area to Cushing, Oklahoma, announced their intention to reverse the flow in their gas pipeline to move crude from Cushing to the gulf coast refineries. The reversal requires pump station additions and modifications, scheduled to be completed by June 2012, the capacity of the reversed Seaway Pipeline will be up to 150,000 barrels per day and further expansions could increase that volume. Now, TransCanada Corp. has announced that it will build a portion of the Keystone XL pipeline from the Cushing oil hub south to the Gulf Coast to compete with the Seaway pipeline while attempting to obtain approval of a revised route for the Keystone Phase IV leg to increase flow from Canada to Steel City, Nebraska.

The Keystone XL Pipeline has been very controversial. Most of the environmental controversy has focused on the porous soils of the Sandhills and fears of a possible oil leak into one of the nation's most important agricultural aquifers, TransCanada is reapplying for State Department and Presidential approval of a revised rout for the northern portion that bypasses the Sandhills. However, many who oppose the Keystone XL pipeline want to prevent the development of the oil sands resources in Canada to prevent the acceleration of global warming. The Canadian oil sands have been known for decades. Until the recent protests against the Keystone XL pipeline that labeled these oil reserves “Canadian Oil Sands,” they had been variously known as unconventional oil or crude bitumen. These oil sands have been surfaced mined in Canada with drag lines and power shovels since the late 1960’s, but until oil prices rose and technology improved these oil deposits were too expensive to exploit beyond the limited scope of surface mining. Advances in technology in both oil sand extraction and refining techniques and rising oil prices altered the economics and have made the extraction of oil sand possible.

Steam Assisted Gravity Drainage (SAGD) is the current method of extraction. In SAGD, two horizontal wells are drilled in the oil sands, one at the bottom of the formation and another about 15-20 feet above it. In each well pair, steam is injected into the upper well melting the bitumen, which flows into the lower well and is pumped to the surface. SAGD was the breakthrough that has quadrupled recoverable oil reserves and moved Canada into second place in proved world oil reserves. SAGD is cheaper than previous methods, allows very high oil production rates, and recovers up to 60% of the oil in place. It is the SAGD method that has created the need for a pipeline to deliver the oil to the American markets and the controversy. SAGD requires more energy to produce the oil and increases the carbon footprint of the crude. Those who believe completely in the positive feedback global warming model where increased CO2 raises global temperature, increases evaporation of water vapor to the atmosphere, and in turn increases the functional impact of CO2 on global warming see any increase in carbon as quickening the destruction of the earth. The Canadian oil sands increase the CO2 released in every gallon of gas adding to man’s carbon footprint. In addition, older methods of mining the oil sands left open pits that still need to be reclaimed, thought today groups of wells are typically drilled off a central pad and like fracking wells and can extend for miles in all directions. This reduces surface disturbances of the land and the footprint of the area to be reclaimed..

In June 2010 TransCanada commenced commercial operation of the first phase of the Keystone Pipeline System. Keystone's Phase I was the conversion of natural gas pipeline to crude oil pipeline and construction of a bullet line that brings the crude oil non-stop from Canada to Steel City at 435,000 barrels a day. Phase II of Keystone was an extension of the pipeline from Steele City, Nebraska to Cushing, Oklahoma and began operations in February 2011. Keystone Phase II increased the volume per day of Keystone Phase I with the addition of pumping stations, the system now runs at 591,000 barrels a day. The Seaway pipeline will begin operations in June completing the ability to pipe crude from Canada to the Gulf Coast carrying 150,000 barrels a day. The Keystone Phase III when it is completed will simply increase volume. The Keystone Phase IV when and if approved will increase volume of the upper portion of the pipeline from the current 591,000 barrels a day to 1.3 million barrels a day.

Keystone XL, Fracking, and the Price of Natural Gas

Last year, New York placed a moratorium on hydro fracturing in the New York portion of the Marcellus Shale while it assessed the effects of fracking. New York Department of Environmental Conservation’s draft environmental impact statement (EIS) on drilling was released almost four months ago and recommended that drilling be permitted, but with conditions. The comment period was scheduled to end on December 12, 2011, but was extended to January 11, 2012 and closed after having received more than 20,000 comments. In their press release at the close of the comment period the New York Department of Environmental Conservation stated: “Public input is an important part of establishing responsible conditions for high-volume hydraulic fracturing as well as determining whether it can be done safely. Many significant improvements were made to the 2009 draft based on comments DEC received. We expect additional improvements will be made to the 2011 draft based on the comments submitted during this comment period." The pressure is off on immediately ending the ban on hydro fracking in New York because the price of natural gas has hit a two year low, but the ban will be lifted. There is really no way to permanently prevent drilling to access the shale gas. Sooner or later it will be done, hopefully in a safe and environmentally sensitive manner.

The race to lock up leases on shale gas and a mild winter (so far) in significant parts of the United States has resulted in an oversupply of natural gas. Despite the fall in natural gas prices fracking will continue, not because it is profitable at this price, but because drilling leases and agreements made when gas prices were higher required drilling within a certain period of time. If a company fails to drill they will lose the lease and the money paid for those leases. So, for the next two years or so, no matter the price of natural gas, they will drill where permits are available. In addition, natural gas is often a by-product of much more profitable oil drilling. With oil prices topping $100 a barrel, oil companies in Texas continue to produce natural gas. In Texas where gas is often a by-product of oil production about 40 billion cubic feet of natural gas is flared off each year for the past several years as drilling has expanded. Texas requires oil wells to hook up to gas pipelines eventually which will increase the supply of available natural gas as the hookups catch up with production.

The high oil prices driving the Texas tight oil boom are also making the crude bitumen contained in the Canadian oil sands highly profitable. The current price of oil combined with threats from Iran to close the Strait of Hormuz and block oil shipments from the Middle East have made the oil sands even more attractive. A provision that was attached to the recent payroll tax bill signed by President Obama requires a decision by February 21st 2012 on the construction of the controversial Keystone XL pipeline from Canada to the U.S. The proposed Keystone XL, is an approximate 1,660 mile, 36 inch crude oil pipeline that would begin in Alberta and extend southeast through Saskatchewan, Montana, South Dakota and Nebraska continuing through Oklahoma to an existing terminal not far from Port Arthur, Texas. The oil would arrive at the Texas refineries and ports for American market and export. The U.S. State Department is the lead handling the issue because the pipeline crosses national boundaries, but President Obama has made it clear would make the final decision on whether to approve the pipeline, and the recent tax bill has forced a decision the issue that had been delayed until 2013.

As expected the State Department declined the Keystone XL Pipeline that would have provided a guaranteed oil supply from Canada. The project's critics argue that the mining and refining of oil sands would increase greenhouse gas emissions, pollute water and destroy the Canadian forests. Many Nebraska residents also opposed the Keystone XL pipeline because it originally would have crossed the Ogallala aquifer, the main source of drinking water in the upper Midwest. The administration decided in November to require bypassing the aquifer, but the increased carbon dioxide load associated with tapping the oil sands is a problem to the administration. Proponents of the project worry about lost jobs and energy security and that rejecting the Keystone XL project will push the Canadians to build the 730 mile Enbridge pipeline to a new port in British Columbia and ship the oil to China. However, building a pipeline through British Columbia's northern wilderness faces British Columbia environmental regulations, the stronghold of Canadian environmental regulations, and that project is also experiencing resistance from an existing decades-old moratorium on oil tanker traffic on the British Columbia coastline. The rejection is about the carbon content of the fuel.

Like all petroleum production, oil sands operations can adversely impact the environment. In the past open pit mining of oil sands projects have impacted the land when trees, brush and overburden have been removed for the mining site. As a condition of licensing, projects are required to implement a reclamation plan, but reclamation is a slow process. In addition, large amounts of water are used for oil sands operations for the steam in the current method of extraction. Despite recycling, most of the water ends up in tailings ponds, but newer treatment methods have reduced the treatment and recovery time for tailing ponds as environmental regulations evolve with advances in technology in both oil sand extraction and refining techniques that have allowed the profitable extraction of this oil. These advances and rising oil prices have altered the economics and have made the extraction of oil sand possible and inevitable. Still the energy required to heat the oil sands so that they will flow results in increase the carbon footprint for each barrel of oil. The politics of energy security are not consistent with the overall goal of reduction of greenhouse gas emissions since the extraction and refining of oil sands reportedly produce more greenhouse gases than the extraction and refining of Iranian oil. The President has pledged to reduce U.S greenhouse gas emissions to 17% below the 2005 levels by 2020 and all regulatory and policy decisions have been consistent with that goal. The United States thirst for oil is not going to abate and the Middle East is becoming increasingly unstable. Given his consistent record in reducing greenhouse gas, it is likely the administration will choose the geopolitical risk over the environmental risk of oil with a higher carbon footprint.

Keystone XL and Canadian Oil Sands

The Canadian oil sands have been known for decades. Until the recent protests against the Keystone XL pipeline that labeled these oil reserves “Canadian Oil Sands,” they had been variously known as unconventional oil or crude bitumen, the Canadians use oilsands as a single word. These oil sands had been surfaced mined in Canada with drag lines and power shovels since the late 1960’s, but until oil prices rose and technology improved these oil deposits were too expensive to exploit beyond the limited scope of surface mining. Advances in technology in both oil sand extraction and refining techniques and rising oil prices altered the economics and have made the extraction of oil sand possible.

The crude bitumen contained in the Canadian oil sands is a semi-solid or solid in natural deposits. It is a thick, sticky form of crude oil, so heavy and viscous that it will not flow unless heated or diluted with lighter hydrocarbons. Decades ago Canadian oil companies discovered that if they removed the sand filters from the well pumps and pumped as much sand as possible with the oil, production rates improved remarkably. This technique became known as Cold Heavy Oil Production with Sand (CHOPS). Pumping out sand opened "wormholes" in the sand formation which allowed more oil to reach the well improving production rates and recovery from around 6% to 10%. However, it produced large quantities of sand with oil residue that need to be disposed of, the recently used method has been to dispose of them in underground salt caverns.

More advances in drilling techniques and the use of steam injection have allowed the Canadians to expand their recoverable oil. In Cyclic Steam Stimulation (CSS) steam at extremely high temperature is injected into a well over a period of weeks to months; then, the well is allowed to rest while the heat to soaks into the formation. Finally, the hot oil is pumped out of the well for weeks or months until the production rate falls off. Once the production rate falls off, the well is put through another cycle of steam injection, rest and production. CSS and has a recovery rate around 20 to 25%; the disadvantage is that the cost to inject steam is high.

Steam Assisted Gravity Drainage (SAGD) was developed after improvements in directional drilling technology made it possible. In SAGD, two horizontal wells are drilled in the oil sands, one at the bottom of the formation and another about 15-20 feet above it. Groups of wells are typically drilled off a central pad and like fracking wells can extend for miles in all directions. This reduces surface disturbances of the land and the footprint of the area to be reclaimed under the environmental license (the Canadian version of a permit). In each well pair, steam is injected into the upper well melting the bitumen, which flows into the lower well and is pumped to the surface. SAGD was the breakthrough that has quadrupled recoverable oil reserves and moved Canada into second place in proved world oil reserves. SAGD is cheaper than CSS, allows very high oil production rates, and recovers up to 60% of the oil in place. There are refinements in the technology using in-situ hydrocarbon dilution under development that could reduce cost and energy used in mining even further, and could further reduce the cost of extracting oil sands. It is the SAGD method, however; that has created the need or desire for a pipeline to deliver the oil to the American markets.

Like all petroleum production, oil sands operations can adversely impact the environment. In the past open pit mining of oil sands projects have impacted the land when trees, brush and overburden have been removed for the mining site. As a condition of licensing, projects are required to implement a reclamation plan, but reclamation is a slow process. The mining industry asserts that the boreal forest will eventually recolonize the reclaimed lands. In addition, large amounts of water are used for oil sands operations for the steam in the current SAGD method. Despite recycling, most of the water ends up in tailings ponds. The Alberta provincial government limits how much water oil sands companies can remove from the Athabasca River to avoid impact and newer treatment methods have reduced the treatment and recovery time for tailing ponds. Still environmental regulations need to evolve with technology. Last winter the Canadian press reported that Wikileaks released a cable written by the U.S. Ambassador to Canadian Environment Minister in 2009 that revealed that the Obama administration had inquired about a possible moratorium on new oil sands development. Former environment minister Jim Prentice responded (in 2009) to the U.S. Ambassador that he was prepared to step in and impose tougher regulations on the oil sands if the industry damaged Canada's green reputation and said that if industry did not take voluntary measures and the provincial government did not set more stringent regulations, he would step in and press federal environmental legislation.

Recently, the current Canadian Environment Minister Peter Kent announced that Ottawa will introduce environmental regulations to address oil sands and reduce greenhouse gas emissions without implementing a cap-and-trade program. Canada has committed to reducing greenhouse gas emissions by 17% below 2005 levels by 2020, the same target that the United States has committed to. Environmentalists contend that emissions trends suggest the expansion of the oil sands will prevent Canada from hitting its targets, unless tougher environmental rules are put in place, and strongly oppose further development of oil sands until a stronger regulatory framework is in place . These groups are fighting to stop the Keystone pipelines to the United States and western Canadian ports as a method of stopping the expansion of oil sands production. The Pembina Institute in Alberta states: “Filling the proposed KXL pipeline with oil sands will result in nearly a 50% increase in oil sands production. Until environmental management of the oil sands is improved, KXL will cause significant environmental harm due to increased oil sands production.”

In June 2010 the first phase of the Keystone Pipeline System went into operation moving crude oil from Canada to market hubs in the U.S. Midwest. Keystone Cushing (Phase II of the pipeline) extending the pipeline went into service in February 2011, connecting the storage and distribution facilities at Cushing, to the Midwestern hubs. The proposed Keystone XL, is an approximate 1,660 mile, 36 inch crude oil pipeline that would begin in Alberta and extend southeast through Saskatchewan, Montana, South Dakota and Nebraska continuing through Oklahoma to an existing terminal not far from Port Arthur, Texas. The oil would arrive at the Texas refineries and ports for American market and export. The U.S. State Department is the lead handling the issue because the pipeline crosses national boundaries, but President Obama has made it clear he will make the final decision on whether to approve the pipeline.

Recently, the Canadian Prime Minister Harper told reporters the project would create a vast number of jobs in Canada and the United States, and he fully supported the project. President Obama has said environmental issues would weigh just as heavily in any decision as job creation and energy security. The pipeline was originally planned to run through the Osgallala aquifer in Nebraska, a very important water source to mid-west agriculture. On Monday in response to U.S. State Department indications that the pipeline needed to avoid the Osgallala aquifer and the Sand Hills area, TransCanada (the pipeline owner) announced it had reached a tentative deal with Nebraska officials to move the proposed route of its Keystone XL pipeline away from Osgallala aquifer. After the announcement the U.S. State Department made it clear that another environmental assessment would be necessary and would take 12 to 18 months, pushing the decision to 2013. A decision should never be made too soon or too late.