Alternative projects ready to carry Keystone XL oil

CALGARY, ALBERTA – Keystone XL backers say the proliferation of alternative pipeline projects and rail-loading terminals undercuts opponents who claim blocking the pipeline will keep high-carbon Canadian crude oil in the ground.

Kinder Morgan Energy Partners LP and Imperial Oil on Friday announced a 50-50 joint venture to build a terminal in Edmonton, Alberta, capable of loading up to three crude oil trains per day by 2017. It would have connections to the Canadian Pacific and Canadian National railroads, whose tracks through Minnesota offer a pathway to the U.S. market.

A day earlier, Canadian energy regulators recommended approval with conditions of Enbridge Inc.'s Northern Gateway pipeline, a project that would bring as much as 525,000 barrels a day of oil sands to a port at Kitimat, British Columbia. The recommendation, by the National Energy Board, leaves the final decision up to federal government.

The projects are the just the latest proposals to transport Canada's oil sands bounty. Kinder Morgan also plans to almost triple the capacity of a line to Vancouver. TransCanada Corp. plans to convert a gas line to oil, and last week its CEO, Russ Girling, told the Financial Post that the company could develop a rail bridge from Canada to Nebraska if its Keystone XL project is further delayed.

"The fact that there are other routes means that the pipeline isn't a significant source of emissions," said Kevin Book, managing director of ClearView Energy Partners, a Washington-based consultant. High-carbon Canadian crude is finding its way to market without Keystone XL, he said in an interview.

President Obama has said he won't approve TransCanada's application to build the Keystone line between Alberta's oil sands and United States if it were found to substantially boost carbon dioxide emissions, which scientists say are raising the Earth's temperature.

"To say yes on the terms that the president has established, there have to be other pathways for the crude to get to market," Book said.

"Keystone is critical for expansion of tar sands and that remains the case even with the further developments in the existing pipeline proposals," Susan Casey-Lefkowitz, director of international programs at the Natural Resources Defense Council, said in an interview. "If Keystone is rejected, it's going to have a significant impact on the expansion plans for tar sands."

The U.S. State Department is completing a final report assessing the environmental risks of building the proposed $5.4 billion project. A draft released in March found that Keystone wouldn't have a big climate impact because oil sands would be developed even if the administration blocked the project. The EPA and others disputed that conclusion.

Kinder Morgan wants to almost triple the size of its Trans Mountain pipeline from near Edmonton, Alberta, to Vancouver to 890,000 barrels a day, by 2017. TransCanada is considering converting a gas line to oil so it could transport as much as 1.1 million barrels a day of crude to refineries in eastern Canada. The company's proposed Edmonton terminal joint venture could carry 100,000 barrels per day with the potential to expand to 250,000 barrels per day.

"The State Department is generally right," Michael Mc­Kenna, a Republican strategist and president of MWR Strategies, a Midlothian, Va.-based lobbying firm, said in an interview. "That oil is going to come to market."

Yet, almost a decade after it was proposed, the $7.4 billion Northern Gateway project still faces opposition from aboriginal groups and the New Democratic Party, Canada's official opposition party. Thursday's ruling by the regulators recommended 209 conditions, including assurances the project would not endanger the environment and that the company has an emergency response plan.

TransCanada says delays in building the Keystone XL pipeline have resulted in more crude shipments by rail, which creates higher carbon emissions.

"What has actually occurred in the marketplace would corroborate the accuracy of those estimates, where they said rail and other things would allow the oil sands to continue to develop and Keystone wouldn't have any impact on either refining or production," Girling, TransCanada's CEO, said in an interview with Bloomberg.

World demand for oil won't decrease even if oil-sands production is halted, he said. The United States, for example, will import crude from places such as Venezuela, where emissions associated with crude production and consumption are higher on average than in the oil sands, he said.

Keystone could carry 830,000 barrels of oil a day to U.S. refiners. By comparison, an average of 175,000 barrels of oil were imported by rail each day this year, about 75,000 barrels of it heavy oil, according to the Canadian Association of Petroleum Producers. About 45,000 barrels of oil were shipped to the U.S. daily on average in 2012, according to the group.

Oil-sands producers including MEG Energy Corp. and Cenovus Energy Inc. say they have booked capacity on rail cars in order to work around pipeline bottlenecks.

Obama rejected the initial application after officials in Nebraska said the pipeline would imperil a sensitive ecosystem. TransCanada, which is headquartered in Calgary, reapplied in May 2012 with a new route that has won approval from Nebraska officials.

As the environmental review has dragged on, investments in rail cars that carry crude have risen. The capacity of rail terminals to load crude oil in Alberta and Saskatchewan will quadruple by the end of next year to 905,000 barrels a day, according to an Aug. 26 report by Calgary investment bank Peters & Co.

"Rail seems to be an option for light sweet crudes," Casey-Lefkowitz said. "What we're seeing in practice is that companies aren't willing to pay the high cost that transporting raw bitumen by rail."

NextGen Climate Action, a group funded by billionaire investor and pipeline foe Tom Steyer, sponsored a recent event in Washington to rebut the State Department finding that the pipeline's effects are limited.

"The pipeline changes the economics of this and makes it profitable for people to develop a ton more of it," Steyer, the founder of Farallon Capital Management, said in an interview.

Increased reliance on rail in lieu of the pipeline could benefit companies including Burlington Northern Santa Fe, a unit of Berkshire Hathaway Inc., that carry crude to refineries.

"Oil sands are either going to come to market or not come to market on the basis of underlying oil prices," McKenna said. "Stopping Keystone isn't going to stop the oil sands."