Is the ‘Asian threat’ for tar sands an empty one?

Advocates for the Keystone XL project often argue that if the pipeline from Alberta to the Gulf Coast is not built, the tar sands oil will instead be transported to Canada’s west coast and shipped to Asia instead of staying here in North America. An analysis by Americans for Energy Leadership suggests this claim is exaggerated.

The DOE report also addresses the so-called “Asian threat”, an oft-repeated “use-it-or-lose-it” warning from Keystone advocates that if the growing supply of oil sands crude is not permitted to enter US markets it will instead be transported to the Canadian west coast and subsequently shipped to Asia to satiate burgeoning demand, with Asia constituting 75% of the world’s refining capacity growth between now and 2030.  Potential pipelines to connect the Athabasca oil sands to West coast shipping terminals include Kinder Morgan’s TMX 2 and 3 projects, which would increase capacity along the company’s existing TransMountain pipeline, as well as the Enbridge Northern Gateway project, requiring completely new right-of-way and infrastructure.

Although the Northern Gateway project recently received some publicity for its revelation that Sinopec, one of China’s increasingly assertive national oil companies (NOCs), was amongst the members of a Chinese-Canadian consortium that has contributed $100 million so far to the project and stands ready to line up further financing, many remain skeptical of the pipeline’s viability in the near future.  The DOE report highlights the right-of-way challenges that Enbridge has encountered due to strong opposition from native peoples living along the pipeline route, and the Northern Gateway’s commercial viability has come under scrutiny as well.  Traditionally, no shovels will be brandished on a costly pipeline project unless the “shippers” – those companies actually producing the oil – have signed long-term supply contracts guaranteeing that the pipeline capacity will be utilized.  Enbridge has not yet signed any supply contracts, meaning that even if the project is approved by the Canadian government at some point next year, the targeted completion date of 2016 may still be overly optimistic.

The analysis also says that the primary beneficiary of the pipeline would be Canadian oil producers, not American oil consumers:

Perhaps most salient, however, is the possibility that the pipeline will only marginally increase the overall supply of Canadian oil while delivering significant benefits to producers by boosting the market price of Canadian heavy crude.  Currently, existing markets for Canadian crude are oversupplied, a dynamic that is set to become even more exaggerated in March once TransCanada completes an extension of its existing pipeline system to pump an additional 165,000 barrels/day into Cushing, Oklahoma.  Cushing, of course, is a major oil hub and the physical delivery point of all NYMEX futures contracts, and the problem is that nearby storage capacity for commodities traders who wish to take physical delivery and then store their oil has been increasingly strained in recent years.  This dynamic, referred to by many as “Cushing syndrome”, is partially responsible for the growing spread between WTI and Brent crude prices and means that the incoming shipments of Canadian crude will only add to the glut and put more downward pressure on prices.  The significance of Keystone XL, then, is that it would allow oil to flow to the DOE administrative district known as “PADD 3”, including the gulf coast, where it then has the ability to be refined and/or shipped onwards to other markets.

The long-term effect would be for Canadian oil producers to see a price increase of at least $3/barrel.  According to figures included in a TransCanada report submitted to the Canadian government in 2009, this could boost annual oil sands producer revenues from the current $2 billion to $3.9 billion in 2013.  Depending on how much of the added price is absorbed by refiners who purchase the oil and how much is passed on at the pump, consumers could see an increase of up to around 7 cents per gallon as a result.

AEL is a project of Scientists and Engineers for America and the organization apparently has relatively close ties to the Obama administration. The president and founder of the group, Teryn Norris, was one of the principal authors of the clean energy initiative that Obama included in his 2008 campaign platform.