Keystone XL Inching Toward Approval

BMI View: A recently issued US State Department report, indicating that approving the Keystone XL project will not significantly affect the environment, represents a boost for proponents of the project. Indeed, while we acknowledge that the issue remains highly divisive, given both the report's conclusions and the current political calculus facing the president, we believe it is looking increasingly likely that the project will be approved.

On January 31, the US State Department issued its final supplemental environmental impact assessment on the Keystone XL pipeline. The report's conclusions increase the likelihood that the controversial project will eventually be approved by the Obama administration. Namely, one of the key findings was that, in and of itself, the project is unlikely to have a substantial impact on the development of Canada's oil sands. While this assessment is still fervently disputed by many pro-environmental activists, it brings into question one the key environmental reasons against building the pipeline. As such, and given the benefits of approving the pipelines, we believe that it is looking increasingly likely that the president will, sooner or later, give the project his blessing.

We stress the recent report from the State Department does not necessarily mean that approval is imminent. Rather, this was one of a series of steps that needs to be taken before a verdict on the project can be reached. Next, the State Department will commence a consultation period with other federal agencies, not to exceed 90 days, in which it will be determined whether the pipeline serves the US national interest. At the same time, the agency will hold a 30-day public comment period, from February 5 to March 7. After the public and interagency consultation period is finished, the president's decision to offer or refuse his permission for the project will follow, though there is no deadline for a decision. However, we ultimately believe that the project will go forward sooner or later.

Winding Toward Completion
Keystone XL Pipeline Evaluation Process

BMI View: A recently issued US State Department report, indicating that approving the Keystone XL project will not significantly affect the environment, represents a boost for proponents of the project. Indeed, while we acknowledge that the issue remains highly divisive, given both the report's conclusions and the current political calculus facing the president, we believe it is looking increasingly likely that the project will be approved.

On January 31, the US State Department issued its final supplemental environmental impact assessment on the Keystone XL pipeline. The report's conclusions increase the likelihood that the controversial project will eventually be approved by the Obama administration. Namely, one of the key findings was that, in and of itself, the project is unlikely to have a substantial impact on the development of Canada's oil sands. While this assessment is still fervently disputed by many pro-environmental activists, it brings into question one the key environmental reasons against building the pipeline. As such, and given the benefits of approving the pipelines, we believe that it is looking increasingly likely that the president will, sooner or later, give the project his blessing.

Winding Toward Completion
Keystone XL Pipeline Evaluation Process

We stress the recent report from the State Department does not necessarily mean that approval is imminent. Rather, this was one of a series of steps that needs to be taken before a verdict on the project can be reached. Next, the State Department will commence a consultation period with other federal agencies, not to exceed 90 days, in which it will be determined whether the pipeline serves the US national interest. At the same time, the agency will hold a 30-day public comment period, from February 5 to March 7. After the public and interagency consultation period is finished, the president's decision to offer or refuse his permission for the project will follow, though there is no deadline for a decision. However, we ultimately believe that the project will go forward sooner or later.

Keystone Approvals Process Inching Forward

The Keystone XL project would significantly increase existing pipeline throughput capacity from Canada's heavy tar sands to refineries in the US, carrying 830,000 b/d. First proposed in 2008, the Keystone extension was intended to stretch 1,660 miles, ultimately connecting Hardisty, Alberta to Port Arthur, Texas. Transcanada has already largely completed work on the 485-mile southern leg of the project, running from Cushing, Oklahoma to the Gulf Coast. However, the northern leg of the project - meant to run 1,179 miles from Hardisty to Steele City Nebraska - has faced continued delays.

Moving Ahead Slowly
Keystone Oil Pipeline

These delays have largely been caused by the highly politically charged nature of the pipeline project. Given the size of the project, and the fact that it runs across an international border - requiring presidential approval for the pipeline to proceed - Keystone XL has taken on considerable political significance. Indeed, we see it as having become a test of President Obama's environmental policy legacy.

Getting To Yes

Ultimately, we believe that the benefits of the pipeline may be too great at this stage in Obama's presidency to turn away from.

  • First, the ability to make a case against the pipeline on environmental terms seems to be dimming. President Obama has said he would approve the plans unless there was clear proof that they would "significantly exacerbate" carbon pollution. While the report states that tar sand crude was noted to produce 17% more greenhouse gases than conventional oil and up to 10% more than regular heavy crude, the assessment ultimately concluded that denying the project the go ahead would likely not stop Canadian oil sands from being developed. Disassociating the two widens the scope for approval. With a recent spate of high-profile crude-by-rail accidents suggesting that the alternatives to pipelines may not be substantially better for the environment, ( see 'Is Crude-By-Rail Reaching The End of the Line', January 9), the environmental argument for not approving the pipeline seems weakened.

  • Second, the project offers significant advantages to both Canadian producers and US refiners. US refiners would benefit from greater access to heavy crudes. In the years before the US shale boom and the realisation that the US would be a major light crudes producer, a large number of the Gulf Coast refiners had invested substantially into being able to process heavy crudes, such as those from Canada. Meanwhile, we have long highlighted that Canada's oil sands face significant midstream infrastructure constraints, depressing the price of Western Canadian Select noticeably ( see 'Midstream Infrastructure Still The Missing Link, January 14). While it would not be a panacea, the Keystone XL project could ease some of the bottlenecking, helping to improve overall energy security across the continent.

  • Third, while the lion's share of the jobs created will be short term in nature, there are economic benefits to building the pipeline. These include the creation of 42,100 jobs (16,100 direct and the 26,000 indirect) over the two year build period, contributing US$3.4bn to the economy. (The pipeline would create a more modest 50 permanent jobs.)

  • Finally, the political calculus looks increasingly favourable to the pipeline's eventual approval. Not only would the refusal to permit the pipeline likely prove to be a bone of contention in the US' relationship with its neighbour and close ally, Canada, but approving the project also offers support to Democratic legislators in the run-up to this year's November midterm election. For instance, there are a number of senators who are facing close races in traditional energy producing states such as Alaska, Louisiana and West Virginia. The approval of the project could be a boon for these legislators. While potentially damaging to Obama's own environmental credentials, we see this as less of an issue than when he rejected the pipeline initially (January 2012), given that he is not up for re-election.

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Related sectors of this article: Oil & Gas, Transportation
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