Keystone XL Pipeline: Just Build It (TRP, ENB, KMI)

In 2010, US refineries took delivery of about 5.4 billion barrels of crude oil. Of that total, more than 50%, 2.8 billion barrels, arrived at the refineries by pipeline. The US petroleum pipeline system comprises about 170,000 miles of pipe carrying both crude oil and refined products. The Keystone XL pipeline, proposed by TransCanada Corp. (NYSE: TRP), would add about 1,700 more miles to the system, and would ultimately transport about 1.1 million barrels of synthetic crude from Alberta to the US Gulf Coast.

A decision on the pipeline was due last December, but it was delayed due to a request from the US EPA to the US State Department for a new environmental review. That review has been completed, but now the State Department appears to be bowing to pressure to consider an alternative route for the pipeline as a result of concerns raised by Nebraska farmers and environmentalists about the effect of the proposed route on the environment and, especially, the vast Ogallala acquifer that provides water to a large portion of the state. A decision on the project, which was due by the end of this year, has now been delayed until after the 2012 US presidential election.

Environmental objections to the pipeline fall into two basic groups: first, mining the oil sands is an environmental disaster and should be stopped; and second, transporting the synthetic crude by pipeline to the US is too great an environmental risk.

The first objection raises the ire of Canadian officials who don’t believe that “outsiders” have any business telling them how to run their country. The counter-argument is that stopping an environmental disaster, wherever it is taking place, is everyone’s business. There’s little question that mining the oil sands requires vast amounts of water and energy, both of which Canada appears willing to spend.

As to the second objection, Canada is determined to send its synthetic crude somewhere, and if it is not to be the US, then the country will build a pipeline to the west coast and export the oil by ship to Asia. There has also been some chatter about reversing an east-to-west pipeline to carry the synthetic crude to Canada’s east coast.

Canada’s finance minister has said that the new delay jeopardizes the viability of the entire $7 billion project. Two other pipeline companies, Enbridge Inc. (NYSE: ENB) and Kinder Morgan Inc. (NYSE: KMI), are either proposing a new pipeline to the west coast (Enbridge’s Northern Gateway) or expanding an existing pipeline to carry more crude (Kinder Morgan’s Trans Mountain). Canada is clearly committed to producing the oil sands, and if the US is not interested in the synthetic crude, then the country will just sell it elsewhere.

US resistance to the project could be mitigated by a route change to avoid the environmentally sensitive area in Nebraska, but that may not be enough to mollify US protesters who want mining in the oil sands to stop completely. At this time next year, their success in getting a delay could well encourage further protests to kill the pipeline altogether. TransCanada and the Canadian government may not be willing to wait to find out.

To some degree, TransCanada is partially responsible for the delays for failing to recognize or respond to the issues raised in Nebraska. Merely saying that the Keystone XL will be really safe and that any spills will be cleaned up quickly and thoroughly is not much comfort when the water supply for more than a million people is at stake. A modest shift in the proposed route could have moved the pipeline farther east, where it could have run through the same right-of-way as the existing pipeline. There could be some reason that wouldn’t work, but there’s no evidence that TransCanada even considered it.

The US needs (or at least is expected to consume) the oil carried by the Keystone XL pipeline, and that oil will get here one way or another. By tanker, if from a non-North American source, or by rail or truck if from Canada. A pipeline moves much more crude much more safely than any other method of transport. It would be foolish for the US to prevent the Keystone XL pipeline from being built. So far, though, the fools seem to be in charge.

Paul Ausick