Oil Sands Project in Canada Will Go On if Pipeline is Blocked

June , 2011
Ian Austin
The New York Times



OTTAWA — One way or another — by rail or ship or a network of pipelines — Canada will export oil from its vast northern oil sands projects to the United States and other markets.

So the regulatory battle over the proposed Keystone XL pipeline, which would link the oil sands to the Gulf Coast of the United States, may be little more than a symbolic clash of ideology, industry experts say. Even if the Obama administration rejects the Keystone plan, the pace of oil sands development in northern Alberta is unlikely to slow.

Oil producers in Canada have several alternatives for reaching the United States market. And recent investments by Chinese companies in the oil sands suggest that a growing alternative market lies across the Pacific.

“The Canadian oil sands will continue to be developed irrespective of whether the pipeline goes ahead,” said Russell K. Girling, the president and chief executive of TransCanada, the company behind the $7 billion project.

That determination to proceed has become almost beside the point in the battle over Keystone XL’s fate, which has dragged on since November 2008.

Environmentalists are using the project as a proxy for their general antagonism toward oil sands production, which consumes large amounts of water and energy and can be destructive to the boreal forest that sits on top of the tarry rock from which the oil is extracted.

“This is really a campaign against tar sands expansion rather than a single pipeline,” said Susan Casey-Lefkowitz, the director of the international program at the Natural Resources Defense Council, an environmental group that is a leading American critic of the process.

Advocates, meanwhile, say that oil sands extraction is getting cleaner and represents a potentially major source of oil from a politically stable ally that will help ensure America’s energy security.

The stakes are enormous. The oils sands have reserves of 171.3 billion barrels, according to estimates by the provincial government of Alberta — enough to change the balance of world oil markets, some energy experts say; by comparison, Saudi Arabia has reserves of 264.2 billion barrels.

Because of that, the debate over the pipeline has been unusually protracted and fractious, and, according to some analysts, characterized by hyperbole on both sides.

“This situation has reached such talismanic significance that whatever the U.S. government does will be read far more deeply than the substance merits,” said Michael A. Levi, the senior fellow for energy and the environment at the Council on Foreign Relations.

The State Department, which must approve the project because it crosses international borders, is nearing the end of its environmental review and then will examine national interest questions. It has said it expects to make a ruling by the end of the year.

As the world’s largest importer of oil and a next-door neighbor of Canada, the United States is the most attractive and logical market for oil sands crude and already buys virtually all that Canada exports. But producers are eager to move their product all the way to the Gulf of Mexico, where there are more refineries capable of handling the unusually thick crude.

It is now shipped through an existing pipeline — an earlier part of the Keystone project — to Cushing, Okla., where large storage facilities are fed by a variety of pipelines. There, it is priced against lighter oil and generally commands a lower price.

Because demand for oil in the United States is unlikely to fall significantly in the foreseeable future, Canadian producers are sure to look for other ways to ship their oil south if the Keystone XL project is rejected. While backup plans are not fully developed, other options do exist.

Shipping by rail is one. Last October, in a joint venture with the Canadian National Railway of Montreal, Altex Energy, an oil shipping company, began shipping relatively small amounts of tar sands crude along Canadian National’s tracks directly to the Gulf of Mexico.

Not only does rail avoid billions of dollars in infrastructure investment, it also escapes any regulatory reviews in the United States.

“It’s no different than shipping grain,” said Glen Perry, the president of Altex, which is based in Calgary, Alberta.

Mr. Perry acknowledged that rail was considerably more expensive than pipeline shipping. Pipelines, however, require the oil sands crude to be diluted with chemicals that thin it and make it flow more easily. Rail cars do not.

In addition to rail, there are other pipelines available. The Trans Mountain pipeline owned by Kinder Morgan already moves Alberta oil, including tar sands production, to ports on Canada’s Pacific Coast. Some of that travels by sea to refineries in the United States.

While that pipeline is operating at near capacity, Kinder Morgan is considering increasing its capacity to the coast and has already upgraded the line inland.

Enbridge, another large Canadian pipeline company, is proposing its own line, from just north of Edmonton, Alberta, to the northern British Columbia port of Kitimat.

While both of those projects have encountered opposition from environmentalists and some aboriginal groups, the political climate favors the energy industry. Last month Canadians re-elected a Conservative government that has its traditional power base in Alberta, which has staunchly promoted the oil sands.

Other pipeline projects could develop if Keystone XL does not. It is technically feasible to convert one of two natural gas pipelines to eastern Canada to carry oil. Once there, shipments could enter the United States through existing trans-border crossings in Ontario and Quebec.

Ronald Liepert, the energy minister in Alberta, said that while Canada would prefer to sell its oil to the United States, “this commodity will go someplace.”

In particular, he said, China is already a major consumer of other Canadian natural resources and a small investor in the oil sands. “I can predict confidently that at some point China will take every drop of oil Canada can produce.”
A version of this article appeared in print on June 7, 2011, on page B10 of the New York edition with the headline: Canada Prepares Plans B and C in Case Oil Sands Pipeline Hits a Roadblock.


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