Analysts: Keystone XL delays won’t stop Canadian crude exports

The longer it takes the Obama administration to make a final decision on the controversial Keystone XL pipeline, the better the opportunity for alternatives that would move Canada’s oil sands crude throughout the United States, energy analysts suggested Wednesday.

Already, old-fashioned rail increasingly is moving high-tech oil harvests across North America, including some supplies that might be carried by Keystone XL.

But existing pipelines also may be reconfigured to help transport Canadian supplies to the U.S. and other countries, said Katherine Spector, executive director of commodities strategy for CIBC World Markets Corp.

“The market will find a way. The market is always looking for opportunities to take advantage of significant price differentials,” she said, noting Western Canadian crude trades at a “pretty tremendous” discount over U.S. oil.

“Rail has so far been part of that way,” of getting Canadian crude to market, as the State Department reviews TransCanada Corp.’s proposal to build the Keystone XL pipeline linking Alberta crude with Gulf Coast refineries. But now, “its a question of timeline,” Spector said. “Does it take so long that perhaps other options become viable?”

Spector’s comments at a Bipartisan Policy Center event on energy tap into a major debate over Keystone XL: whether the pipeline is essential to sustaining (or growing) oil sands development in Canada, and whether other options could fill the void if the project is blocked.

The State Department concluded earlier this year that Keystone XL isn’t critical to oil sands development, and the project was unlikely to dramatically boost demand for Canada’s oil sands.

But the Environmental Protection Agency suggested that oil sands development may not be inevitable and pushed the State Department for a better analysis of the viability of alternative pipelines and rail transport.

And environmentalists said British Columbia’s recent decision to oppose Enbridge’s planned Northern Gateway pipeline show possible pipeline alternatives to Keystone XL may not materialize.

Still there are other possibilities.

For instance, Spector cited Enbridge’s proposal to reverse the flow of oil in its Line 9 pipeline, which now flows to the west from Quebec to Ontario. Another option comes in the form of TransCanada’s bid to convert half of its Eastern Mainline natural gas pipeline’s capacity to oil. Possible extensions of the pipeline could connect it to the port city of St. John, New Brunswick.

“We’re seeing lots of bits and pieces, other ways of moving the crude,” Spector observed. “Will there be a mirror image of Keystone XL that miraculously goes right through the legal process? Probably not, but we could end up with a whole bunch of other bits and pieces that make the market look very different.”

All those pipelines are sure to get extra scrutiny — and cost more to build, noted Paul Sankey, an oil analyst for Deutsche Bank Securities Inc.

Related story: Canadian ambassador insists Alberta’s oil sands crude will get to market

Beyond Canada’s zeal to build pipelines shipping its crude south, in the United States, more pipelines are needed to end a mid-continent bottleneck.

But recent spills from existing pipelines have ramped up fears and illustrate the environmental risks of crude transport. Sankey noted that in contrast to the 2010 Gulf of Mexico oil disaster — when crude gushed into a water body that was accustomed to natural seeps — the spill of diluted bitumen from an Enbridge pipeline into Michigan’s Kalamazoo River polluted virgin territory. Three years later, the cleanup is ongoing. It turns out the bitumen — a heavy sticky hydrocarbon made viscous for pipelines with the addition of diluents — sinks and doesn’t break down like conventional crudes.

“If you spill this heavy oil in the us, you’ll have a major environmental problem,” Sankey said. “The environmental threat is enormous here.”