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Keystone Pipeline and Hydrocarbon Wars - what it means...


War Against Keystone Pipeline and Hydrocarbons Ended?

                
Perspective:  War Against Keystone Pipeline and Hydrocarbons Ended?
Brian Blazina
Energy Resource Americas (ENRAM)
March 27, 2017 (last updated)
          
Chicago - TransCanada's Keystone XL Pipeline project to transport heavy tar sands crude oil from Canada to the U.S. Gulf Coast and Illinois, has been in the works for nearly a decade, half that time tied up in political delay with some stakeholders set on stopping the project in an environmental war on hydrocarbons, and some angry landowners.  On January 24, 2017, in his second day in office, President Trump signed an executive order moving the project forward. 
        
The President also signed an executive order advancing the Dakota Access Pipeline, and a third executive order requiring all U.S. pipeline projects to use U.S. made pipe.  ENRAM estimates these actions benefit U.S. investment, employment, and consumer economy, while slightly lowering world crude oil prices, U.S. refinery input costs, and eventually U.S. refined product prices such as gasoline, diesel and jet fuel.
         
We project the Trump actions may raise pipeline project costs, but incentives and speedy project approvals may offset these higher costs. Like most things in high demand, the economics of tar sands oil was never stopped, but merely slowed down, however long the delay. In the view of some "experts", longer delays help raise world crude oil prices further, making tar sands crude oil more valuable due to tar sands' lower netback cost. So what does this mean for Keystone and Hydrocarbons?
     
OPEC and Russian crude oil production cuts are also helping stabilize world oil prices improving Canadian tar sands value to U.S. heavy oil refiners.  When any one resource is limited, then all other resources, such as natural gas and heavy tar sands crude oil (in this case both currently affordable versus higher cost coal and alternative benchmark crude like WTI and Brent), increase in value. 

The U.S. "
war on coal
" also indirectly improves the value of natural gas and tar sands oil in North America.  Coal use went from a 60% plus share to a third of all energy production in the U.S., the largest economy on earth consuming about a quarter of world energy.  Limited energy resources requires either new imports from some hostile places, or new North American resources and infrastructure to meet demand. For tar sands oil that means more production, and new pipelines, the most efficient and safest way to transport energy.
             


...tens of thousands of pipelines have been built in the US over the last 50+
years, with little fanfare.  Why is Keystone so different?  The reason may be the
renewed effort to attack hydrocarbons as a source of global climate change
.


                     
From strictly a world and U.S. economics perspective, the new XL pipeline may help reduce world crude oil prices by bringing additional supply to market, and provide billions in U.S. investment and thousands of jobs.  Some of that tar sands oil should make its way into U.S. refineries spurring billions in investment.  On the down side, not realizing these economic benefits, and poking Canada, our #1 trading-partner, with a stick in the eye was always a potential diplomacy mistake not easily forgotten.  At some point in time we were going to help our largest trading partner.  TransCanada had already indicated plans to re-apply for the project almost immediately after President Trump approved the project, and as of March 27, 2017, the President issued the permit to finish the XL Pipeline.
  
    
However, TransCanada should have dealt with politicians, landowners and environmentalists in a more proactive manner, such as adding more U.S. manufactured pipe; using more U.S. suppliers; contracting U.S. firms specialized in landowner negotiations; and re-routing the pipeline around the Nebraska water reservoir.  They still can do that today, just as Sohio accommodated various special interest groups when building the Trans Alaskan Pipeline System - such as building in room under the pipe for animal crossings, among hundreds of other custom construction changes to ease concerns raised by environmentalists, native Americans, Alaskans and government. 

        
Tar sands crude oil is already traversing throughout the U.S. on old converted and reversed pipelines, and by rail car – both higher environmental and safety risks than a new pipeline, proven in a number of old pipeline and rail incidents including residential neighborhood pollution and railcar accidents. So the delays have actually raised pollution and safety risk in the U.S. and Canada.  We had another tar sands crude oil train derailment in Canada that burned a city center.  So the longer we delayed bringing the lower cost tar sands oil to market, the higher the realized safety and environment risks - contrary to the goals of environmentalists, one would think. Real consequences from a number of incidents due to XL Pipeline delays.
 
         
Why not produce every last drop of Canadian tar sands crude oil until gone as a resource?  The world demand can deplete the resource relatively quickly.  Only some extraordinary event, like Peak Oil Demand, could be an Achilles heel to hydrocarbons some day.  ENRAM is studying this theory in a similar way we covered
Peak Oil Production.  However, estimated impacts and events are difficult to forecast in this theoretical realm with many moving parts. 


Keystone XL Pipeline route, TransCanada
Keystone XL Pipeline route, source: TransCanada

       
The argument that the tar sands crude oil will only be transported to the U.S. Gulf Coast and shipped out of the U.S. - bringing no value to the U.S. - is simply not true.  Billions of U.S. dollar investments have been made in U.S. refineries over the last decade to run the heavy crude oil, like the tar sands.  So as much tar sands volume as economically feasible, will run in U.S. refineries, because lower cost inputs means higher margin outputs.  Finished product manufacturing benefits U.S. investment in manufacturing, infrastructure, etc., meaning thousands of jobs for refinery workers, engineering firms, consultants, and temporary XL Pipeline workers.  Alternative routes existed through western and eastern Canada, that would have provided little investment or jobs in the U.S.
        
Heavy crude oil comes from Mexico and Venezuela, too, creating surplus heavy oil beyond the capacities of the U.S. Gulf Coast refineries.  So the surplus will go out on tankers to the rest of the world. Nobody will ship on a long supply chain unless the net back to the producer exceeds dropping off some volume in the U.S. Gulf Coast.  Secondly, some of the crude oil is owned by other countries and companies, like China, so they can take it anywhere they please.  Fair trade, right?
            
Finally, tens of thousands of pipelines have been built in the U.S. over the last 50+ years, with little fanfare.  Why is Keystone so different?  The reason may be the  renewed environmental effort to attack hydrocarbons as a source of global climate change, evidenced in part by significant adverse weather over the last decade.  Is there a solution where you can do both - use hydrocarbons and deal with climate change through market incentive carbon trading credits?  That solution is not analyzed here in this discussion, but offers a way to deal with the long-term situation rationally, logically and economically. 
         
Unfortunately, crude oil of any quality, is in relative short supply from a long-term reserves perspective. World demand for energy grows almost every year by 1 to 2 percent.  Existing oil production declines about 4% per year, and must be replaced, or energy price inflation may increase significantly.  Does the U.S. really want to lead the charge by limiting oil production to the point where the rest of the world has lower energy costs than the U.S.?  Low energy cost is the backbone of U.S. manufacturing, and refined products manufacturing has been the most successful U.S. industry over the last decade.  Coal is already dead by most estimates, so mission accomplished for some; however, energy prices are back on the rise, to a point where energy alternatives may get more traction.  Higher traditional energy prices help alternative energy initiatives and projects compete -- a good thing for the future.  However, aggressively overplaying our alt-energy hand to the point of crippling U.S. manufacturing, may
negatively impact the U.S. economy and national security
.
             
In summary, hopefully, pragmatic, actions are taken to minimize damage to the U.S. economy, by approving the new pipeline, but adding requirements that assure the U.S. gets more business and jobs from the project; that landowners - many conservatives - are treated fairly; and the Nebraska water reservoir is circumvented by the pipeline. 
U.S. citizens get angry at perceived unfair deals, so some reasonable degree of cooperation should get things rolling again.  If the real deal, then U.S. steel producers should benefit from the "Made in USA" requirement.  However, many executives and congressmen are likely rolling eyes and planning business as usual, to use foreign steel, benefit their own interests, foreign interests and donors.  If the President is serious about "Made in the USA", then executives and congressmen getting exposed for taking foreign contributions, undermining their own country, U.S. jobs and families, may "not look too good" to stakeholders and voters in Trump World.  While domestic oil production is on the rise, benefiting U.S. production related equipment and steel manufacturing, there are strong indications that most of the XL pipe is already bought, and not American made - for this project anyway.


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