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Canadian Oil Sands Headed to Asia?

Decision on Alberta-to-Houston pipeline could decide the destination of much of the oil.
September 13, 2011

Protests in front of the White House earlier this month against the proposed Keystone XL oil pipeline, which would run from Alberta to the U.S. Gulf Coast, brought attention once again to the potential environmental impact of Canada’s oil sands deposits. But industry experts say that the fate of that particular pipeline—which President Obama will decide upon later this year—will have little effect on the ultimate future of the vast petroleum resources in the oil sands.

One reason is that the oil will simply go elsewhere. Proposed pipelines to Canada’s Pacific coast could give Alberta’s oil producers access to rapidly growing Asian markets. That would accelerate the demand for oil sands crude, which is made into gasoline. If the Keystone pipeline is not approved, says Ralph Glass, director of energy valuation and operations at Calgary-based petroleum industry consultancy AJM Deloitte, “there will be a stronger push for sending the oil offshore.”

In January, Canadian energy and environment authorities will begin hearings on a proposed 550,000-barrel-per-day pipeline from Alberta to Kitimat, British Columbia. And Houston-based pipelines giant Kinder Morgan is thinking about expanding its 300,000-barrel-per-day pipeline to Vancouver and Seattle to 700,000 barrels per day. It could also add a branch line to Kitimat. The Keystone XL pipeline proposed by Calgary-based pipeline operator TransCanada could transport up to 900,000 barrels a day.

Protestors are concerned by the environmental impact of oil sands developments: mining of shallow bitumen deposits has transformed boreal forests and left behind toxic tailings ponds that pose a threat to wildlife and drinking-water supplies. Oil sands production also results in greenhouse-gas emissions. Large volumes of natural gas are used to extract buried bitumen and then upgrade it to pipeline-ready crude. A life-cycle assessment project by researchers at the University of Toronto and the University of Calgary’s Institute for Sustainable Energy, Environment and Economy have estimated that driving one kilometer on gasoline from oil sands crude releases the equivalent of 260 to 350 grams of carbon dioxide, compared to 250 to 280 for gasoline from conventional oil.

Proposed projects could boost Alberta’s output of crude from the oil sands from 1.5 million barrels a day last year to five million barrels per day by 2020. But Alberta is unlikely to max out the crude export capacity on existing pipelines for at least another decade, according to a December 2010 analysis by the Pembina Institute, an Alberta-based environmental group and longtime critic of both the oil sands industry and additional pipeline capacity.

Glass at AJM Deloitte predicts that oil sands producers will add enough capacity to fill both of the proposed pipelines to Canada’s west coast, and he expects at least one to proceed, despite the unpopularity of increased tanker traffic and opposition from aboriginal nations along the proposed routes. Pressure from the oil industry will win the day, says Glass, because of the immense economic value that the pipelines promise—particularly if Keystone XL were to be blocked.

Currently, Canadian oil producers must sell to U.S. refiners, a weak bargaining position that Glass blames for much of the $10- to $15-per-barrel discount on Canadian crude sold into the U.S. relative to crude imported from offshore. “The oil sands have one market, and it’s flat or declining. There has to be an alternative,” says Glass.

Environmentalists take a starkly different view to the potential for expanded western pipeline routes. In his December 2010 analysis, for example, Pembina Institute senior policy analyst Nathan Lemphers argues that the Asian market is not eager for oil sands crude. He says northern China could refine less than 400,000 barrels a day of the heavy crude produced by oil sands operators. He also notes that Calgary-based Enbridge has yet to firm up contracts for its proposed Kitimat pipeline.

As for Keystone XL, Lemphers acknowledges that it is too early to say if last week’s high-profile protests have dealt their intended blow to oil sands development. Even as the protests were happening, the U.S. State Department issued an environmental impact study finding that the pipeline would have no significant impacts.

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