U.S. CHAMBER OF COMMERCE

Energy Blog

Energy Blog

US Chamber of Commerce Blog

Sean Hackbarth An oil terminal in Hardisty, Alberta.An oil terminal in Hardisty, Alberta. Photo credit: Brett Gundlock/Bloomberg.

Something to think about after the Senate failed to override President Obama's Keystone XL veto is that not long ago, pipelines weren’t tied up in regulatory limbo and the focus of anti-energy advocates.

Ken Cohen, Exxon Mobile’s vice president of public and government affairs, looks at a pipeline approved by the Obama administration that does the same thing Keystone XL will do--move Canadian oil sands crude [emphasis mine]:

Consider that the original Keystone pipeline took 693 days to approve. The current Keystone XL application has languished for 2,356 days and counting.

Then there’s the Alberta Clipper pipeline, another cross-border pipeline whose comparison to Keystone XL should leave many people scratching their heads.

That pipeline took 829 days to approve.  That’s about one-third as long as the Keystone XL review.

The Alberta Clipper pipeline moves oil from Alberta to Wisconsin.

alberta_clipper_map.jpg Alberta Clipper pipeline map.Alberta Clipper pipeline map.Alberta Clipper pipeline map. Image credit: Enbridge.

Cohen quotes the State Department’s 2009 announcement of the Alberta Clipper’s approval [emphasis his]:

The addition of crude oil pipeline capacity between Canada and the United States will advance a number of strategic interests of the United States. .… Canada is a stable and reliable ally and trading partner of the United States, with which we have free trade agreements which augment the security of this energy supply.

Approval of the permit sends a positive economic signal, in a difficult economic period, about the future reliability and availability of a portion of United States’ energy imports, and in the immediate term, this shovel-ready project will provide construction jobs for workers in the United States.

“The same arguments that prevailed for Alberta Clipper in 2009 apply even more to Keystone XL today,” Cohen writes.

[In 2013, I broke down in more detail how the State Department’s rationale squared with arguments for the Keystone XL pipeline.]

Remember, this is President Obama’s State Department.

Its attitude toward Keystone XL is a mirror image of what it was toward the Alberta Clipper even though they have similar benefits.

Instead of appreciating how Canadian oil sands crude improves U.S. energy security, the president gets called out for misleading the public that oil through the Keystone XL pipeline will be exported from the U.S.

And instead of applauding the jobs what will be created by the pipeline, the president considers some construction jobs better than others.

What’s the difference between then and now? Politics.

Organizations are cynically using the Keystone XL pipeline as a symbol to gin up anger, expand membership rolls, and raise money to push a “not here or anywhere” anti-energy agenda.

Not that this opposition is stopping oil sands production. Record volumes of oil sands crude are being refined in the U.S. while President Obama feeds the hopes of activists that he’ll reject a project that his State Department says will have few negative effects on the environment.

Going back to the Senate's veto override attempt, Karen Harbert, President and CEO of the Institute for 21st Century Energy, released a statement:

In an era when Congress can't agree on much, the Keystone XL pipeline has stood out because it has such strong, bipartisan support.  Unfortunately, pipeline supporters were a few votes short of the super-majority needed to overturn President Obama's veto, but the President should not ignore this strong level of support when he makes his final decision on the pipeline.

Sean Hackbarth Ryan Lance, Chairman and CEO, ConocoPhillips.Ryan Lance, Chairman and CEO, ConocoPhillips. Photo credit: Ian Wagreich / © U.S. Chamber of Commerce.

ConocoPhillips’ CEO told an audience at the U.S. Chamber, American oil is “not a product we want to land lock” in the U.S.

Ryan Lance said that maintaining the domestic oil boom will require ending the 40-year-old ban on oil exports.

Mark Perry at the American Enterprise Institute shows us that hydraulic fracturing has boosted American oil production to a 42 year high! We’ve got a good thing going.

aei_oilproduction_012015_800px.jpg U.S. crude oil productionU.S. crude oil production

However, Lance said there’s not enough domestic refining capacity to process the lighter oil produced from shale formations. “Light oil production already exceeds refining capacity seasonally – during maintenance turnarounds. That surplus could become year-round by 2017,” he warned. As a result, domestic oil prices have been pushed down and new investment in domestic exploration has slowed, he argues.

At the same time, most of the country’s refining capacity is along the Gulf Coast and is set up to process heavier oil, like that from Canada’s oil sands. It is possible to reconfigure these refineries to more efficiently process lighter domestic oil, but it would be expensive. Lance estimates that because of investments already underway to meet tougher gasoline specifications and the difficulty in getting air permits, retrofitting would cost an average of $400 million per refinery. That’s cost-prohibitive.

A fix to this oil-refinery mismatch is to listen to David Ricardo and embrace comparative advantage and trade. Import heavier oil and export some domestic oil.

This does two things:

It takes advantage of domestic refining capabilities. It expands the market for domestic oil producers and encourages continued development.

The economic benefits from lifting the oil export ban would be significant, Lance said:

On the world market, light oil sells for more than heavy oil. So the U.S. would gain by exporting our surplus light oil, and then importing the cheaper heavy oil that suits our refinery system.

The Brookings Institution predicts U.S. production would rise by up to 3 million barrels a day. Jobs would be created, economic growth would be generated, and household income would grow.

IHS says that our industry’s capital investments would rise by $750 billion thru 2030.

That’s a lot of economic stimulus.

The annual GDP would gain $135 billion at the peak. We’d add a million jobs, also at the peak. The trade balance would improve by $67 billion annually, and government would gain $1.3 trillion in higher tax and royalty revenue thru 2030.

And because fuel prices are determined by world oil prices, consumers would also gain. “IHS estimates savings on gasoline of $18 billion annually, and Brookings estimates 9-to-12 cents per gallon,” Lance said.

Exporting domestic petroleum isn't an alien idea; it’s already happening in the form of petroleum products. Oddly, gasoline and diesel fuel “can be exported legally, but not the crude oil from which they are made,” Lance said, “We are the world’s 2nd-leading product exporter. Products and services together generated $2.3 trillion from exports in 2013.”

While the economic case is clear, Lance said the public and Congress need to be convinced:

We have to change the mind-set of scarcity. It’s really a hold-over from the last century. Today’s energy renaissance is real. It’s here for the long term. It can continue driving economic growth. And we can help ensure that by recognizing the new realities – and allowing oil exports.

House Energy and Commerce Committee, Chairman Fred Upton said, his committee will undertake a "thorough review and will consider all perspectives" before considering lifting the ban.

Sean Hackbarth Warren BuffetWarren Buffett, CEO of Berkshire Hathaway. Photo credit: Jeff Kowalsky/Bloomberg.

While President Obama says he'll decide on the Keystone XL pipeline before he leaves office, Warren Buffett, America’s most-famous investor, said it's a good idea and is shaking his head that it still hasn’t been built:

"I would have passed Keystone," Buffett said in an interview with CNBC.

"I think that we have an enormous interest in working with Canada, as they have in working with us. That oil is going to get sold. If we make it more difficult for them, who knows how they'll feel about making things more difficult for us someday."

Buffett warned that U.S.-Canada relations could take a hit:

That (oil) is a valuable resource of North America, and Canada has been a terrific partner over the decades, and for us to kind of thumb our nose at them, you know, (that's) not what I would do.

In other Keystone news, Glenn Kessler, the Washington Post’s Fact Checker, gave President Obama four Pinocchios for misleading the public that oil that will go through the pipeline will “bypass” the United States:

A report released in February by IHS Energy, which consults for energy companies, concluded that “Canadian crude making its way to the USGC [Gulf Coast] will likely be refined there, and most of the refined products are likely to be consumed in the United States.” It added that “for Gulf refineries, heavy bitumen blends from the oil sands are an attractive substitute for declining offshore heavy crude supply from Latin America.” It concluded that 70 percent of the refined product would be consumed in the United States.

Kessler notes that the State Department looked into the export claim and concluded there was a low probability that large amounts of Canadian oil sands crude would be exported: [emphasis mine]:

Once WCSB [Western Canadian Sedimentary Basin] crude oil arrives at the Gulf Coast, Gulf Coast refiners have a significant competitive advantage in processing it compared to foreign refiners because the foreign refiners would have to incur additional transportation charges to have the crude oil delivered from the Gulf Coast to their location….Gulf Coast refineries have the potential to absorb volumes of WCSB crude that go well beyond those that would be delivered via the proposed Project.

A big reason why it’s so unlikely that Canadian oil sands crude will be exported is that the oil is similar to that from Venezuela and Mexico, and Gulf Coast refineries are designed to handle these types of heavy, “sour” crudes.

What’s more, as the U.S. shale oil boom in North Dakota and Texas has produced more quantities of lighter and “sweeter” crudes, Canadian oil sands crude complements shale oil in American refineries, as Reuters market analyst John Kemps explains:

U.S. refineries are processing record volumes of Canadian oil, even as U.S. production is rising, and they are hungry for more. Canadian oil is being processed together with U.S. shale oil to enable U.S. refineries to make best use of their equipment, which is why refiners support Keystone.

Without more imported Canadian oil, which could come via pipeline or on rail cars, refineries will have to turn to other suppliers of heavy crude. The prime candidates would be Venezuela, Saudi Arabia, Iraq and Mexico.

Do we prefer to get our energy from North America or from places that don’t like the U.S. very much?

Back to Kessler’s piece. He mentions that 100,000 barrels of oil from Montana and North Dakota will also travel through the Keystone XL pipeline. President Obama ignores this fact.

Now, Anthony Swift at the Natural Resources Defense Council can dismiss this as well. But last year I spoke with people in Baker, MT who told me the Bakken Marketlink would help the town become a regional energy center:

Mona Madler, executive director of the Southeast Montana Area Revitalization Team (SMART) told me that the “Marketlink will be a huge asset.” Not only will it increase the tax base, but it will turn Baker into a regional energy hub that could include a refinery, a power plant fueled by natural gas, and by building plants to capture carbon dioxide for enhanced oil recovery.

President Obama should stick to the facts his State Department collected instead of echoing the false talking points of anti-pipeline opponents.

A vote in the Senate to override President Obama’s veto is expected this week.

Tell President Obama: It's Time to Build the Keystone XL Pipeline