Energy Ink

A no for Keystone XL could ‘stall growth’ in oil sands

IOCs could look elsewhere for a better ROI without Gulf Coast link

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November 04, 2011

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Photo Courtesy Government of Alberta

Oil sands boardrooms are starting to resemble war rooms these days as companies begin to seriously weigh their options in the event that the Obama administration says no to TransCanada Corp.’s Keystone XL expansion. The proposed $7-billion pipeline has dominated quarterly conference calls hosted by the big industry names over the past two weeks. Will it be built? What will you do if it’s not? Are rail shipments an option? What of Nebraska’s zealous legislators?

Many executives believe the controversial outlet will ultimately go ahead, but they are concerned enough that it won’t that talk of “Plan Bs,” as Suncor Energy Inc. president and CEO Rick George put it the other day, is beginning to circulate in earnest.

Canadian Natural Resources president Steve Laut yesterday offered reassurances that industry could “move very quickly” to send bitumen and synthetic crude oil to other (read: Asian) markets in the event that Keystone were scotched. Yet there are doubts about whether Enbridge Inc.’s Northern Gateway will be up and running by 2016 as planned. More than 4,000 people have registered to comment on the West Coast pipeline with the National Energy Board. Add in unsettled land claims issues along the route, and the Keystone regulatory slog starts to look downright zippy. “There’s a lot more hoops to go through on Gateway,” Robert Mark, an oil and gas analyst at MacDougall MacDougall & MacTier, told BNN yesterday.

Nonetheless, we are left with the view that additional outlets for Alberta bitumen must be found. “Strategically, diversification would seem sensible,” Neil Beveridge, a senior analyst with Bernstein Research, wrote this morning. In a note to clients, he warned that although the U.S. has traditionally been a haven for Canadian exports, “The backlash against oil sands (as seen in Europe) and the possibility of further political pressure down the line cannot be discounted.”

Theories on what might happen in the event that Keystone is blocked abound. Jackie Forrest at consultancy IHS CERA calculates that oil sands output could climb by another 700,000 barrels per day, up from roughly 1.5 million barrels per day today, without Keystone. “It wouldn’t get to the three million barrels that we’re projecting right now,” she said in an interview. “So in the big scheme of things, less oil supply in the world would mean higher prices for oil, potentially.”

On the other hand, we are told there is a surfeit of new supplies available, from oil shales in North Dakota to deepwater barrels offshore Brazil. According to Baker Institute researchers Amy Jaffe and Ken Medlock, there are a whopping 1.35 trillion barrels of proven oil reserves out there, a vast pool of prospective resources sought after by many of the international oil companies that – through their Canadian offshoots – are driving a good deal of today’s investment in the oil sands.

Enough spare pipe leaving Western Canada will keep bitumen production going in the medium-term, Forrest says. A more immediate squeeze could come from refiners in the Mid-continent. “There isn’t an unlimited set of refineries there that we can sell to,” she says. By 2015, under current growth scenarios and without additional outlets (meaning without Wrangler or other projects that would move oil away from the Midwest), those refineries would reach capacity, forcing Canadian producers to accept large price discounts. “That will affect the economics of [oil sands] projects and eventually stall growth,” Forrest says.

“If these large oil companies that are investing right now see that there’s no way to get this oil out, their money will leave and it will go to other upstream investments that are in their portfolio.”

We’ll see if Alberta Energy Minister Ted Morton, pictured above and armed with his new marching orders, can solve that one.

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