Will Obama’s ‘No’ on Keystone Curtail Canada’s Oil Boom?

The U.S. rejection ends Keystone’s seven-year quest for approval, but it hardly ends debate over Canada’s oil sands.

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The Keystone Steele City pumping station, into which the northern leg of the Keystone XL pipeline was to connect , is seen in Steele City, Nebraska, on November 3, 2015.

President Barack Obama’s rejection of a controversial U.S.-Canadian oil pipeline signals U.S. leadership on climate change, but it’s not expected to stop the growth in Canada’s oil production —at least not anytime soon.

Ending a seven-year saga, Obama announced Friday that his administration would not give Calgary-based TransCanada a U.S. permit to build the Keystone XL’s northern leg, which would carry carbon-heavy crude from Alberta’s oil sands into the U.S. Midwest.

Obama said the pipeline would not boost the U.S. economy or lower gasoline prices. He further said the country doesn’t need Keystone for energy security because of its own oil boom. Plus, with UN climate talks beginning later this month in Paris, he said the U.S. needs to set an example on climate change.

“Approving this project would have undercut that global leadership,” Obama said at the White House, calling the oil it would carry “dirtier.” A State Department review said this viscous oil would produce 17 percent more heat-trapping carbon emissions over its life cycle than average U.S. crude.

Environmentalists, who painted Keystone as a "carbon bomb" because of its potential to spur oil-sands production, waged an epic fight against the pipeline and cheered its rejection. "With this historic decision, President Obama has cemented his legacy as a true champion in the fight against climate change," said Gene Karpinski, president of the League of Conservation Voters. Erich Pica, president of Friends of the Earth, said Keystone "awakened a grassroots climate movement.”

But What About the Oil?

Beyond its political symbolism, Obama’s decision will likely have little immediate impact on Canada’s oil bonanza. Industry analysts expect oil prices, which have plummeted in the last year, will do more to determine the ultimate fate of Canada’s oil sands development than Keystone’s rejection.

“In the near term, this doesn’t change anything,” said Skip York, vice president of integrated energy for Wood Mackenzie, a research and consultancy group. He said current oil sands projects will simply continue their production. They have high upfront costs, but once completed, they’re fairly inexpensive to operate.

Even without Keystone, Wood Mackenzie forecasts that Canada’s oil sands will produce 3.0 million barrels per day by 2020 and 3.9 million barrels per day by 2030—up from 2.3 million today.

“We still have growth through 2030,” York said, adding low prices could curb production beyond that timeframe. Canada's oil sands account for about half of its total oil production, which has risen about 50 percent over the last decade, according to U.S. government data.

Dinara Millington, vice president of research at the nonprofit Canadian Energy Research Institute, expects oil-sands growth will continue, though at a slowing pace. She said producers, throughout the years Keystone sought U.S. approval, have shown “ingenuity” in finding alternate ways such as trains and barges to get their oil into the U.S. In fact in August, oil imports from Canada hit a record daily average of 3.4 million barrels per day, according to data from the U.S. Department of Energy.

Millington said Enbridge, another Canadian pipeline operator, has expanded its capacity and is now carrying about three-fourths of what Keystone was expected to transport. She said more oil was also moved by rail in 2013, but that amount has since fallen.

“There are other pipeline projects out there,” York said. He noted that TransCanada, despite losing Keystone’s 1,179-mile (1,897-kilometer) northern leg, is seeking to convert some of its Energy East pipelines so they can carry oil instead of gas across Canada. (Learn more about the oil-sands industry looking eastward.) TransCanada completed Keystone’s southern leg, which runs from the Midwest to the Gulf Coast, last year.

Another pending pipeline is Enbridge's Northern Gateway, which would move oil sands to Canada's west coast. Yet its fate is uncertain. Canada's newly elected Prime Minister Justin Trudeau said during the campaign that he opposed the project.

In the long term, though, Keystone’s demise might curtail oil sands production if crude prices remain low. The reason: companies might not invest big bucks in new projects if they’re not confident of sufficient pipeline capacity. Pipelines often offer cheaper transport than oil trains or barges.

This year, Shell* cancelled two oil-sands projects: Carmon Creek and Pierre River. In a statement last month, it cited both low prices and a “lack of infrastructure to move Canadian crude oil to global commodity markets.”

*Shell is sponsor of National Geographic’s Great Energy Challenge initiative, which explores energy issues. National Geographic maintains autonomy over content. For more, visit The Great Energy Challenge.

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