Article: TransCanada Keystone XL Pipeline: Background-Part 1

Due to the tremendous attention in the media, the controversy associated over the United States approval of the Keystone XL Pipeline project has been the table talk for a long while not only for the people who live in small towns but also for the highest diplomatic circles in the US and Canada.  The pending decision is portrayed as a political litmus test for the Obama administration, pitting environment and climate change against energy security, jobs, and the economy.  It also affects US relations with an important northern neighbor. 

Just to clarify the fact that the Keystone Pipeline system has been operational for over three years and the current controversy is associated only with the proposed expansion of 700 b/d of pipeline capacity to transport tar sands (crude oil) from Canada and North Dakota’s Bakken field to reach refineries in Houston and Port Arthur, Texas which will allow Canada to ship 830,000 barrels of oil a day to Texas Gulf Coast refineries.Slide1Keystone’s first application for the Keystone XL pipeline was submitted on September 19, 2008, and a Final Environment Impact Statement (EIS) was published on August 26, 2011. The route proposed included the same U.S.-Canada border crossing as the currently proposed Project but a different pipeline route in the United States. The 2011 Final EIS route traversed a substantial portion of the Sand Hills Region of Nebraska, as identified by the Nebraska Department of Environmental Quality (NDEQ).  Moreover, the 2011 Final EIS route went from Montana to Steele City, Nebraska, and then from Cushing, Oklahoma, to the Gulf Coast area.

The following graph illustrates all phases of the project in the context of the respective locations:Slide2

In the summer of 2010, Phase 1 of Keystone Pipeline was completed, delivering crude oil from Alberta, Canada to Steele City, Nebraska, and then east through Missouri to Wood River refineries and Patoka, Illinois.  It has the capacity to deliver up to 590,000 barrels per day of Canadian crude oil into the Mid-West refining markets.  Phase 2 of the Keystone-Cushing extension was completed in February 2011 with the pipeline from Steele City, Nebraska to storage and distribution facilities at Cushing, Oklahoma, a major crude oil marketing/refining and pipeline hub.  While two phases are in operation, a third phase from Oklahoma to the Texas Gulf Coast is under construction and the fourth is awaiting US government approval as of September 2013.  At the end of this phase, the Keystone Pipeline System would have completed a total of 4,991 miles Keystone Pipeline.   It should be kept in mind that the proposed route differed from the route analyzed in the 2011 Final EIS in that it would avoid the environmentally sensitive NDEQ identified Sand Hills Region and no longer includes a southern segment from Cushing, Oklahoma, to the Gulf Coast area.

1.      GLOBAL PERSPECTIVE:

As far as the growth of crude oil production is concerned, here is a global perspective from Belfer Center (Harvard Kennedy School) -It may come as a shock to learn that oil supply capacity is growing worldwide at such an unprecedented level that it might outpace consumption.  This could lead to a glut of overproduction and a steep dip in oil prices.  Based on original, bottom-up, field-by-field analysis of most oil exploration and development projects in the world, an unrestricted, additional production (the level of production targeted by each single project, according to its schedule, unadjusted for risk) of more than 49 million barrels per day of oil (crude oil and natural gas liquids, or NGLs) is targeted for 2020, the equivalent of more than half the current world production capacity of 93 mbd.

It is predicted based on the available data that the aggregate, production capacity growth will occur almost everywhere, bringing about also a “de-conventionalization” of oil supplies.  During the next decades, this will produce an expanding amount of what we define today as “unconventional oils”– such as U.S. shale/tight oils, Canadian tar sands, Venezuela’s extra-heavy oils, and Brazil’s pre-salt oils.

As illustrated in Figure 3, in the aggregate, production capacity growth will occur almost everywhere, bringing about also a “de-conventionalization” of oil supplies. Slide3According to the U.S. Energy Information Administration (EIA) definition, conventional crude oil and natural gas production refers to oil and gas “produced by a well drilled into a geologic formation in which the reservoir and fluid characteristics permit the oil and natural gas to readily flow to the wellbore.” By converse unconventional hydrocarbon production doesn’t meet these criteria, either because geological formations present a very low level of porosity and permeability, or because the fluids have a density approaching or even exceeding that of water, so that they cannot be produced, transported, and refined by conventional methods.  This umbrella definition, then, encompass ultra-heavy oils, shale and tight oils, tar sands, and oil shale.

The United States Geological Survey (USGS) and the World Energy Council estimated that there could be more than 9 trillion barrels of unconventional oil resources beneath the surface of our planet, with only 300 billion barrels of them potentially recoverable at the time of that estimation.  However, as we can see from the shale/tight natural gas and oil boom in the U.S., those kinds of evaluations were both based on a conservative probabilistic approach that was already outdated, as they could not factor in the rapidly evolving use of new technologies to explore and develop hydrocarbon basins.

In fact, the current decade could herald the advent of “unconventional oil” as “the oil of the future,” changing the geopolitical landscape that has marked the oil market for most of the 20th Century.   Most of the known unconventional oil resources, and about 70 percent of those considered “recoverable” today, are concentrated in Canada, the United States, and Venezuela.

It is important to know that oil reservoirs play an important role on a global level.   The total estimated amount of oil in an oil reservoir includes both producible and non-producible oil.  Because of reservoir characteristics and limitations in petroleum extraction technologies, only a fraction of this oil can be brought to the surface, and it is only this producible fraction that is considered to be reserves. The ratio of producible oil reserves to total oil in place for a given field is often referred to as the recovery factor.

The estimated increases in crude oil, natural gas, and natural gas liquids that could be added to existing reserves through extension, revision, improved recovery efficiency, and the discovery of new pools or reservoirs connected with a reservoir that is already producing oil. In other words, it refers to the upgrading of already discovered reservoirs, and not to the discovery of brand-new fields.

The following graph illustrates the global crude oil reserves by country:

Slide4

It is predicted that the oil market will remain highly volatile until 2015 and prone to extreme movements in opposite directions, thus representing a major challenge for investors, in spite of its short and long term opportunities.  After 2015, however, most of the projects around the world will advance significantly and contribute to a strong build-up of the world’s production capacity.  This could provoke a major phenomenon of overproduction and lead to a significant, stable dip of oil prices, unless oil demand were to grow at a sustained yearly rate of at least 1.6 percent for the entire decade.

2.      TAR SANDS:

Tar sands (also referred to as oil sands) are a combination of clay, sand, water, and bitumen, a heavy black viscous oil.  Tar sands can be mined and processed to extract the oil-rich bitumen, which is then refined into oil.  The bitumen in tar sands cannot be pumped from the ground in its natural state; instead tar sand deposits are mined, usually using strip mining or open pit techniques, or the oil is extracted by underground heating with additional upgrading.

Tar sands are mined and processed to generate oil similar to oil pumped from conventional oil wells, but extracting oil from tar sands is more complex than conventional oil recovery.  Oil sands recovery processes include extraction and separation systems to separate the bitumen from the clay, sand, and water that make up the tar sands.  Bitumen also requires additional upgrading before it can be refined.  Because it is so viscous (thick), it also requires dilution with lighter hydrocarbons to make it transportable by pipelines.Slide5Much of the world’s oil (more than 2 trillion barrels) is in the form of tar sands, although
it is not all recoverable. While tar sands are found in many places worldwide,
the largest deposits in the world are found in Canada (Alberta) and Venezuela,
and much of the rest is found in various countries in the Middle East.  In the United States, tar sands resources are primarily concentrated in Eastern Utah, mostly on public lands.  The in-place tar sands oil resources in Utah are estimated at 12 to 19 billion barrels.Slide6From an industry point of view, currently, oil is not produced from tar sands on a significant commercial level in the United States; in fact, only Canada has a large-scale commercial tar sands industry, though a small amount of oil from tar sands is produced commercially in Venezuela. The Canadian tar sands industry is centered in Alberta, and more than one million barrels of synthetic oil are produced from these resources per day.  Currently, tar sands represent about 40 percent of Canada’s oil production, and output is expanding rapidly.  Approximately 20 percent of US crude oil and products come from Canada, and a substantial portion of this amount comes from tar sands.  The tar sands are extracted both by mining and in situ recovery methods.  Canadian tar sands are different than US tar sands in that Canadian tar sands are water wetted, while US tar sands are hydrocarbon wetted.  As a result of this difference, extraction techniques for the tar sands in Utah will be different than for those in Canada.

Recently, prices for crude oil have again risen to levels that may make tar-sands-based oil production in the United States commercially attractive, and both government and industry are interested in pursuing the development of tar sands oil resources as an alternative to conventional oil.

3.      CANADIAN EXTRACTION METHODS:

Here is a brief description of each Canadian extraction method:

3.1        Open Pit Mining Extraction Techniques:

These techniques were introduced in the 1990s which considerably improved the efficiency of tar sands mining, thus reducing the cost.  These techniques use large hydraulic and electrically powered shovels to dig up tar sands and load them into enormous trucks that can carry up to 320 tons of tar sands per load.

After mining, the tar sands are transported to an extraction plant, where a hot water process separates the bitumen from sand, water, and minerals. The separation takes place in separation cells.  Hot water is added to the sand, and the resulting slurry is piped to the extraction plant where it is agitated. The combination of hot water and agitation releases bitumen from the oil sand, and causes tiny air bubbles to attach to the bitumen droplets, that float to the top of the separation vessel, where the bitumen can be skimmed off.  Further processing removes residual water and solids. The bitumen is then transported and eventually upgraded into synthetic crude oil.Slide7About two tons of tar sands are required to produce one barrel of oil. Roughly 75 percent of the bitumen can be recovered from sand.  After oil extraction, the spent sand and other materials are then returned to the mine, which is eventually reclaimed; and

3.2             In Situ Extraction Techniques:

In-situ production methods or techniques are used on bitumen deposits buried too deep for mining to be economically recovered.  These techniques include steam injection, solvent injection, and firefloods, in which oxygen is injected and part of the resource burned to provide heat.  So far steam injection has been the favoured method. Some of these extraction methods require large amounts of both water and energy (for heating and pumping). Slide8The bottomline is that both mining and processing of tar sands involve a variety of environmental impacts, such as:

  • Global warming and greenhouse gas emissions;
  • Disturbance of mined land; and
  • Impacts on wildlife and air and water quality.

4.      THE PROPOSED PROJECT: DESCRIPTION:

The purpose of the Project is to respond to the market demand of refineries for crude oil of the kind found in Western Canada (often called heavy crude oil).  The proposed Project would also provide transportation for the kind of crude oil found within the Bakken formation of North Dakota and Montana (often called light crude oil).

The proposed Project would have the capacity to deliver up to 830,000 bpd, of which 730,000 bpd of capacity has been set aside for Western Canadian Sedimentary Basin (WCSB) crude oil and the remaining 100,000 bpd of capacity set aside for Williston Basin (Bakken) crude oil.  Keystone has represented that it has firm commitments to transport approximately 555,000 bpd of heavy crude oil from producers in the WCSB, as well as 65,000 bpd of crude oil from the Bakken.  The ultimate mixture and quantity of crude oils transported by the proposed Project over its lifetime would be determined by market demand.

There is existing demand for crude oil—particularly heavy crude oil—at refiners in the Gulf Coast area, but the ultimate disposition of crude oil that would be transported by the proposed Project, as well as any refined products produced from that crude oil, would also be determined by market demand and applicable law.

The proposed Project would consist of approximately 875 miles of new 36-inch-diameter pipeline and related facilities for transport of WCSB and Bakken crude oil, the latter from an oil terminal near Baker, Montana. Crude oil carried in the proposed Project would be delivered to existing pipeline facilities near Steele City, Nebraska, for onward delivery to refineries in the Gulf Coast area. The proposed Project would also include two pump stations (one new and one expanded) along the existing Keystone Pipeline in Kansas.

Construction of the proposed Project would include the pipeline itself plus various aboveground ancillary facilities (e.g., access roads, pump stations, and construction camps) and connected actions.   Construction of the proposed Project would generally require a 110-foot-wide temporary ROW and is expected to last 1 to 2 years.  After construction, the proposed Project would generally maintain a 50-foot-wide permanent ROW easement over the pipeline in Montana (approximately 285 miles), South Dakota (approximately 316 miles), and Nebraska (approximately 274 miles).  Keystone would have access to property within the easement, but property owners would retain the ability to farm and conduct other limited activities within the easement.  The permanent aboveground ancillary facilities would include electrically operated pump stations, mainline valves, and permanent access roads.

The U.S. portion of the proposed Project is estimated to cost approximately $3.3 billion, and would be paid for by Keystone.  If permitted, the pipeline would begin operation approximately 2 years after final approvals were received, with the actual in-service date dependent on construction as well as obtaining any additional permits, approvals, and authorizations necessary before operations can commence.

5.     THE PROPOSED PROJECT – ECONOMIC ACTIVITY:

 5.1      Economic Activity – During Construction:

Construction contracts, materials, and support purchased in the United States would total approximately $3.1 billion.  Another approximately $233 million would be spent on construction camps for workers in remote locations of Montana, South Dakota, and northern Nebraska.

Construction of the proposed Project would contribute approximately $3.4 billion to the U.S. GDP.  This figure includes not only earnings by workers, but all other income earned by businesses and individuals engaged in the production of goods and services demanded by the proposed Project, such as profits, rent, interest, and dividends. When compared with the GDP in 2012, the proposed Project’s contribution represents approximately 0.02 percent of annual economic activity across the nation.

Construction spending would support a combined total of approximately 42,100 jobs throughout the United States for the up to 2-year construction period.  A job consists of one position that is filled for one year.  The term support means jobs ranging from new jobs (i.e., not previously existing) to the continuity of existing jobs in current or new locations. The specific number of jobs at any location would result from the individual decisions of employers across the country affected by the proposed Project based on their labor needs, work backlog, and local hiring conditions.  Of these jobs, approximately 16,100 would be direct jobs at firms that are awarded contracts for goods and services, including construction, by Keystone. The other approximately 26,000 jobs would result from indirect and induced spending; this would consist of goods and services purchased by the construction contractors and spending by employees working for either the construction contractor or for any supplier of goods and services required in the construction process.

About 12,000 jobs, or 29 percent of the total 42,100 jobs, would be supported in Montana, South Dakota, Nebraska, and Kansas. Also, of the 42,100 jobs, approximately 3,900 (or 1,950 per year if construction took 2 years) would comprise a direct, temporary, construction workforce in the proposed Project area.

Employment supported by construction of the proposed Project would translate to approximately $2.05 billion in employee earnings. Of this, approximately 20 percent ($405 million in earnings) would be allocated to workers in the proposed Project area states. The remaining 80 percent, or $1.6 billion, would occur in other locations around the country.

5.2       Economic Activity – During Operations:

Once the proposed Project enters service, operations would require approximately 50 total employees in the United States: 35 permanent employees and 15 temporary contractors.  This small number would result in negligible impacts on population, housing, and public services in the proposed Project area.

The total estimated property tax from the proposed Project in the first full year of operations would be approximately $55.6 million spread across 27 counties in three states. This impact to local property tax revenue receipts would be substantial for many counties, constituting a property tax revenue benefit of 10 percent or more in 17 of these 27 counties.  Operation of the proposed Project is not expected to have an impact on residential or agricultural property values.

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Resources:

  1. Belfer Center – Obama’s Dilemma;
  2. Executive Summary – Final Environmental Impact Statement for the proposed Keystone XL Project;
  3. Wikipedia – Keystone Pipeline;
  4. Trans Canada;
  5. Harvard Kennedy School) Belfer Center – The Next Revolution;
  6. About Tar Sands;
  7. Oil Sands Truth;
  8. Zintro – Examples of Oil Sands Experts/Vendors; and
  9. Oil Sands Truth – Shut Down the Tar Sands.

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