Over the past 18 months the Carbon Tracker Initiative has written a number of studies on the economics of the controversial Keystone XL pipeline.
The proposed KXL pipeline provides a lower-cost route to market for oil supply than existing rail freight. One of the key findings that emerged from our research was that this transport differential lowers producers’ costs sufficiently to stimulate a wave of new oil sands production that would not go ahead if KXL is scrapped. No wonder companies in the industry are so keen for it to be built.
Crucially, the additional production may be sufficient to fill the pipeline; in other words it is not a question of a set amount of production switching from rail to pipe, it centres on a larger amount being transported by both. On that basis, we maintain that KXL does not pass the President’s key test: that it should not “significantly exacerbate the problem of carbon pollution”[1].
Given the cost advantage of KXL and the uncertainty of other routes to market, we believe that “it will get there anyway” argument is highly questionable.
In October we published a letter in the Financial Times reiterating our view that the price differential will stimulate Canadian supply. We also highlighted how Saudi Arabia’s reluctance to cut production was now changing the oil market dynamics in favour of lower-cost supply and away from the high prices needed to support new oil sands projects. Since then the oil price has dropped significantly. In the short-term, at these lower prices the cost advantage that the pipeline offers over rail is just as important, and some believe more so.
Indeed, our analysis supports recent comments in the EPA’s review of the State Department’s final impact statement that, with oil prices in a sustained range of $65-$75, “construction of the pipeline is projected to change the economics of oil sands development and result in increased oil sands production, and the accompanying greenhouse gas emissions, over what would otherwise occur” [2].
Longer term, a major issue remains: will lower-cost supply severely impact higher-cost exports, like the Canadian oil sands. With global oil markets currently heavily oversupplied and US shale looking likely to take the position of swing producer in the short term, does the US or world really need more oil?
Therefore we welcome the decision of President Obama to veto the approval of Keystone XL announced on 24th February 2015.
Mark Fulton, Carbon Tracker Research Advisor and Anthony Hobley CEO of Carbon Tracker