Keystone XL pipeline would raise Midwest gas prices, study finds

A new U.S. Department of Energy-funded analysis of the proposed Keystone XL oil pipeline echoes some arguments made by environmental groups.

The U.S. State Department is considering whether to approve the construction of the pipeline which would move crude from the tar sands region of Western Canada to refineries on the U.S. Gulf Coast.

DOE asked EnSys Energy to examine the pipeline’s impact on the U.S. refining industry, and on crude imports to the U.S, expected demand for Canadian tar sands crude, and the consequences of not allowing the pipeline.

Liz Barratt-Brown of the Natural Resources Defense Council has examined the 124 page report and picked out these as some of the reports most salient points:

Keystone XL is not needed well into the foreseeable future: As we expected, the analysis found that there was tar sands pipeline overcapacity up to the early 2020s and possibly until 2030. It also found that there were other pathways to the Gulf for companies interested in moving tar sands crude from the Midwest to the Gulf coast.

Sending large quantities of tar sands oil to Asia is an uncertain outcome: As we also expected, the analysis found that building pipelines to the northern British Columbia coast was uncertain because of opposition to these pipelines by First Nations – the native people living on the coast and along the pipeline routes – and by environmentalists. More likely were smaller pipeline proposals for going South to Vancouver. These would increase pipeline capacity to Vancouver by 400,000 barrels of oil per day (for perspective, we use nearly 20 million barrels per day in the U.S.).

Keystone XL would cause oil prices, and therefore gas prices, to rise in the Midwest: Right now, Canadian tar sands has one major market, the Midwest. In the analysis, this is called “shut-in”, which is not a bad way to describe what is happening. Because it cannot go elsewhere, and there are growing quantities of tar sands oil that can only be refined by specially outfitted refineries, this creates a price differential (lower price) for tar sands crude. Moving it to the Gulf is converting a big fish in a small pond to a small fish in a big pond. The differential disappears and the price goes up, profiting the Canadian oil companies at the expense of the American gas consumer.

Expansion of tar sands pipelines does cause expansion in production of tar sands: As we expected, because of pipeline overcapacity, it is hard to find upstream impact until the 2020s. Based on the Canadian Association of Petroleum Producers’ (CAPP) projections used in this analysis (which stay static in this analysis), you would only expect to see an impact after 2025, once pipeline capacity is filled. But there it is, in the Ensys analysis, after 2025, when you see production break with its historical projections and start to trend down.

The greenhouse gas impact of not building Keystone XL is the equivalent of the emissions reductions of two California Low Carbon Fuel Standards: While the Ensys analysis puts the emissions impact into the global transportation emissions context, which can make anything look pretty small, the difference between building Keystone XL and no expansion in 2030 is 26 million tons of carbon dioxide.