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Skeptics in oil industry question whether Keystone XL pipeline is still needed

Skeptics in oil industry question whether Keystone XL pipeline is still needed

Only $5 for 5 months

LINCOLN — On Friday, the developer of the Keystone XL pipeline said what more and more people in the oil industry have been saying: that the Keystone XL pipeline might be unnecessary.

Some opponents of the controversial tar sands pipeline have suggested this, but more and more people inside the oil industry are saying time has passed by the project.

Consider this:

» A column on oilprice.com questioned whether the Keystone XL had become “obsolete” due to low oil prices and cheaper sources of oil than Canada.

» “A New Problem for the Keystone XL: Oil Companies Don’t Want It” was the headline in a Wall Street Journal story last month about the shortage of oil producers willing to sign long-term contracts to finance the XL.

» Jeff Share, editor of Pipeline & Gas Journal out of Houston, wrote that the revival of the pipeline by President Donald Trump was “the biggest fake news story of the year.”

“As much as I would like to see it get built, I have serious doubts that it ever will,” Share said in an interview with The World-Herald. “Too much time has passed, too much controversy, the economics no longer work, and the need is far less.”

TransCanada, the company seeking to build the pipeline, acknowledged Friday that the project might be abandoned.

Paul Miller, TransCanada’s executive vice president and president of liquid pipeline, told shareholders a decision is expected by December. He said it will be based on demand for oil shipments — whether shippers sign long-term contracts to use the pipeline — and whether Nebraska approves the pipeline.

Nebraska’s consideration of the Keystone XL’s route across the state is entering the stretch run. The legal courtlike hearings to determine whether the 275-mile route will be approved by the Nebraska Public Service Commission are scheduled from Aug. 7 to 11 in Lincoln. By Nov. 23 the five-member elected commission must decide if the pipeline route is in the “public interest.”

State law doesn’t appear to require a consideration of the economic viability of the pipeline by the commission.

Officials with TransCanada, which is seeking contracts to finance the $8 billion project, have been pushing back against the doubters.

They say that oil refineries on the U.S. Gulf Coast — the end point of the Keystone XL — need heavy crude oil, like that steamed and processed out of sticky tar sands in northern Alberta, because of expected reductions in their current supplies from Mexico and Venezuela.

A company spokesman said he could not say whether oil producers are turning away from the XL, as is being reported, because the information is proprietary. But Matt John of TransCanada said that talks with producers continue and the company remains optimistic the 36-inch pipeline from Alberta to a junction at Steele City, Nebraska, will be built.

“If the market says there’s no need for this project, then there won’t be a need for the project,” John said. “However, we’re fairly confident, based on the ongoing demand for this heavy oil.”

Much has changed since the Keystone XL was first proposed in 2008. Gasoline was selling for record-high prices back then, more than $4 per gallon, about twice today’s cost. Oil prices were also peaking, at $147 per barrel in July of 2008, which is about three times today’s price ($49 on Friday).

Oil prices are predicted to hover around $50 a barrel for the next five years, and there’s concern in the industry about slowing demand in the longer term because of the development of electric cars and the growth of renewable energy sources such as wind and solar.

Meanwhile, U.S. production of oil has taken off, rising 77 percent between 2008 and 2016 due to the advent of fracking.

And other pipelines have been proposed and built to transport oil.

TransCanada completed the southern leg of the Keystone XL — considered the more critical leg — in 2011 to link Steele City to an oil tank farm at Cushing, Oklahoma. And its Keystone pipeline, which crosses eastern Nebraska, has been hauling crude since June of 2010.

At one time the XL was going to haul 100,000 barrels of U.S. oil a day from fields in Montana and North Dakota. But pipeline capacity from North Dakota has increased 500 percent in the past decade. An official with the North Dakota Pipeline Authority said last week that another pipeline isn’t needed now, though it might be in the long term.

Three other pipelines from Canada have been proposed, and some analysts think that, given the opposition in the U.S. to the Keystone XL and the expected legal battles, at least two of them are on a faster track than the nine-year-old XL, and will fulfill any need for new pipelines.

One, Kinder Morgan’s Trans Mountain, which heads to the Canadian west coast, could be operating by 2020; another, Enbridge’s Line 3 replacement project, could be pumping oil across northern Minnesota by 2019.

TransCanada also is proposing Energy East, a pipeline to Canada’s east coast, that could be ready by 2021.

Some oil analysts say that leaves the XL as the odd pipeline out, since it wouldn’t go into service until 2020 or 2021 if it gets approval for its Nebraska route and overcomes the expected lawsuits.

The CEO of a competing pipeline company, Al Monaco of Enbridge, says that only two of the three leading pipelines proposed — Trans Mountain, Keystone XL and Enbridge’s Line 3 project — are needed, though you’d expect Monaco to tout his pipeline over competitors.

One Canadian oil analyst, Mark Oberstoetter of Wood Mackenzie, threw a bit of cold water on the “XL not needed” bandwagon. He said that while there could be an oversupply of pipelines to the mid-2020s, there is a need for heavy crude oil on the Gulf Coast. He added that of the three leading pipelines, the Trans Mountain likely had the most upside, since it would service new markets in Asia.

For almost six years, Paul Blackburn, a Minneapolis environmental lawyer, has been arguing that more pipelines aren’t needed from the tar sands region of Canada, not only because other pipelines can fill the need, but also because of less interest in the high-cost tar sand oil.

Both Shell and Exxon divested their tar sand holdings earlier this year. With a worldwide glut of oil, there are just cheaper and easier sources of oil elsewhere.

“They pulled out because tar sand oil is an economic dog,” Blackburn said. “You need (oil prices of) $60 a barrel or $70 a barrel to pay off your debts and you’re getting $45. It doesn’t work.”

Forecasts for oil production in the oil sands regions have fallen dramatically since oil prices plummeted in 2014.

XL critics, including in the oil industry, point out that TransCanada has bet on some losers in the past.

The company was picked by then-Alaska Gov. Sarah Palin to build an 800-mile natural gas pipeline there. But by 2014, natural gas was cheap and plentiful and the project was dead.

The same thing happened to TransCanada with the proposed $8 billion Mackenzie Valley Pipeline from Canada’s Northwest Territories.

John, the TransCanada spokesman, said those projects were different, and the company still sees customer need for the Keystone XL.

If the controversial pipeline isn’t built because it isn’t needed, it wouldn’t be the first time such a change has happened in Nebraska.

Remember the low-level radioactive waste repository? Nebraska dropped out of the multistate compact that was determined to build the dump in Boyd County. It cost Nebraska $141 million when it lost a lawsuit, but ultimately, the waste repository wasn’t built. The reason? Time had passed it by, and other repositories were sufficient.

Of course, things could change, oil analysts said. If the worldwide supply of oil is disrupted, particularly the flow of heavy crude oil from strife-torn Venezuela, oil prices would skyrocket, brightening the outlook for the Keystone XL.

But right now, observers like Share, the oil industry magazine editor, say that oil producers are shying away from signing up the 20-year contracts required to use and, more importantly, finance the pipeline.

“Frankly, I don’t see it getting built,” Share said. “The best odds I’d give it is 50-50, and that would be very optimistic.”

paul.hammel@owh.com, 402-473-9584

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Reporter - Regional/state issues

Paul covers state government and affiliated issues. He specializes in tax and transportation issues, following the governor and the state prison system. Follow him on Twitter @PaulHammelOWH. Phone: 402-473-9584.

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  • Updated

The sides have until Sept. 25 to file reply briefs before the five independently elected members of the Public Service Commission work toward a Nov. 23 deadline to decide whether to approve, deny or order another route for the pipeline through Nebraska. The PSC application represents the company’s final hurdle to building a project that has generated nearly a decade of international controversy.

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