EPA, the Keystone XL Pipeline, and the Green Campaign to Restrict Trade in Fossil Fuels

The State Department’s Final Supplemental Environmental Impact Statement (FSEIS) on the Keystone XL Pipeline vexes environmentalists. While acknowledging that petroleum made from Canadian oil sands emits 17% more CO2 than other types of heavy crude (FSEIS, ES-15), State concluded that U.S. refiners would obtain roughly the same amount of Canadian crude whether permission to build the pipeline is granted or denied.

If denied, the oil would just come by alternate modes of delivery, principally trains but also incremental pipelines and barges. Those other routes are not only more costly but also less energy efficient than transport via the proposed KXL. Thus, State concluded, compared to the KXL, transport by rail would emit 28% to 42% more CO2. [FEIS, ES-34] Implication: If you’re really worried about global warming, then you should support the Keystone XL Pipeline. Beautiful!

In a letter sent Monday Feb. 2, EPA Assistant Administrator for Enforcement and Compliance Assurance Cynthia Giles asked State to revisit that assessment. State estimated that as long as crude oil sells for $75 per barrel or higher, “revenues to oil sands producers are likely to remain above the long-run supply costs of most projects responsible for expected levels of oil sands production growth.” [FEIS, ES-12]. Producers would still earn profits notwithstanding the extra cost – roughly $8 per barrel — to ship the oil by rail rather than through a big new pipeline.

Times have changed, Giles argues. State published its FSEIS in January 2014, when West Texas Intermediate (WTI) crude sold at about $94 per barrel. In recent weeks, WTI crude has been selling below $50 per barrel.

Giles quotes State’s conclusion that if oil prices decline to $65-$75 per barrel, the higher transport costs of shipment by rail “could have a substantial impact on oil sands production levels — possibly in excess of the capacity of the proposed project.” Indeed, State goes on to say,  “Prices below this [$65-$75] range would challenge the supply costs of many projects, regardless of pipeline constraints, but higher transport costs could further curtail production.” [FSEIS, ES-12]

Giles concludes: “In other words, the Final SEIS found that at sustained oil prices within this range, construction of the pipeline is projected to change the economics of oil sands development and result in increased oil sands production, and the accompanying greenhouse gas emissions, over what would otherwise occur.” She advises State to give “additional weight” to the “low price scenario” in the FSEIS “due to the potential implications of lower oil prices on project impacts, especially greenhouse gas emissions.”

Allow me to translate. The future of Canada’s oil sands industry may have looked bright a year ago. Today that future is clouded by falling prices and profit margins. A long period of low prices could force a large contraction and throw tens of thousands of people out of work. So let’s kick ‘em while they’re down! Let’s deny oil companies the option to invest their own money to cut operating expenses, protect their capital investment, or just plain survive.

To opponents, the Keystone XL Pipeline is objectionable precisely because it will increase the economic efficiency of an industry they believe should not exist.

Giles’s ‘gotcha’ is a bit of an exaggeration. She attributes to State the view that, in a long-term period of oil prices below $75 per barrel, construction of the KXL would change the economics of oil sands development and increase CO2 emissions over what would otherwise occur. What State actually says is that the high cost of transport by rail constrains oil sands development if “all new and expanded Canadian and cross-border pipeline capacity, beyond just the proposed Project, is not constructed” (emphasis added). [FSEIS, ES-12]

In one scenario considered by State, permission to build a cross-border pipeline is denied, but pipelines are built from Alberta to Canada’s west and east coasts. In that case, oil sands development is not crippled by higher transport costs: “If additional east-west pipelines were built to the Canadian coasts, such pipelines would be heavily utilized to export oil sands crude due to relatively low shipping costs to reach growing Asian markets.” [FSEIS, 1.4-3]

More importantly, Giles fails to grasp that the Keystone XL Pipeline is climatologically irrelevant. Even if we make the unrealistic assumption that the KXL would always run at full capacity (830,000 barrels per day) and each barrel would be additional oil in the global supply that would otherwise remain in the ground, EPA’s own climate model projects a warming contribution of 0.01ºC by century’s end – an “inconsequential and unmeasurable impact,” observes Cato Institute scientist Chip Knappenberger.

“Ah,” but our greener brethren might reply, “if we block Keystone and east-west pipelines to the Canadian coasts, we can shut down most of Canada’s oil sands production, and that will take a huge bite out of global warming.” Not so. Neil Stewart and Andrew Weaver, scientists cited as authorities on Alberta oil sands and climate by none other than Hockey Stick inventor Michael Mann, estimated in 2012, when WTI prices were above $90 per barrel, that development of all “economically-viable” oil sands would add 0.03ºC to global temperatures.

Let’s cut to the chase. A for-profit company will not produce what it cannot sell. And a company excluded from one market after another eventually downsizes and/or goes broke. EPA knows that. So do its environmentalist allies. Unsurprisingly, they seek to block the KXL and other potential pipeline routes, oppose lifting the 40-year-old ban on crude oil exports, and oppose construction of export terminals for coal and liquefied natural gas.

Keystone foes — and ‘progressives’ generally — believe they have a right to prevent companies they dislike from competing for customers in the global marketplace, and from investing their own resources to reduce costs, become more efficient, and grow and prosper rather than wither and die.

The day cannot come too soon when we have an administration that does not view bankrupting major industries as one of its core missions.