Why the Keystone XL Pipeline Is Already Dead

Why the Keystone XL Pipeline Is Already Dead

The Keystone XL Pipeline project is almost certainly dead.

No, not because a bill that would have finally given the go-ahead to begin construction fell one vote short in the lame duck Senate last month. Sure, that halted the legislative approval process in its tracks, but only until January, when a new Congress arrives and is sworn in. Republicans, who will have a majority in both the House of Representatives and the Senate, have pledged to bring it back for another vote in the next session.

The next vote may well bring a different result, but will the pipeline ever be built? That is something else altogether.

Related: Keystone XL Pipeline — No Oil, Plenty of Propaganda

A lot has changed since TransCanada Pipelines first proposed building the nearly 1,200 mile-long extension to its existing pipeline network delivering Canadian crude oil to refineries in the Gulf Coast of Texas. The oil in question would come from the so-called oil sands projects in northern Alberta, ventures that high oil prices have made economically viable. The explosion in the oil sands developments has transformed Alberta’s Fort McMurray into “Fort McMoney,” a boom town where houses and salaries can be higher than those in Canada’s largest city, Toronto — and where crime rates and drug usage rates are higher, too.

The extensive delays — prompted by the requirement that the U.S. government sign off on the project, since it crosses an international border, and the fierce battle waged by environmentalists to stop that from happening — have driven up the project’s costs. TransCanada says building the Keystone link across Montana, South Dakota, and Nebraska would now cost some $8 billion, up from the originally estimated $5.4 billion, with shippers covering much of the additional charges.

Meanwhile, oil prices are plunging, with Saudi Arabia clearly taking aim directly at Canada’s oil sands projects as one of the chief threats to its global market dominance. The so-called sour crude that the Saudis are selling to the U.S., doesn’t compete head-to-head with the light, sweet crude oil produced in Texas and Oklahoma. Rather, Saudi Arabia has taken aim at making Canadian oil sands output too costly in the American marketplace. That’s why Saudi Arabia has initiated a price war, slashing prices to the U.S. and pressing OPEC to keep production at its current levels.

Related: This Is Where the Real Fracking Money Is

To the extent that shippers now would have to cover higher pipeline construction costs as well, that is going to make the Keystone project an increasingly unattractive venture from a purely economic perspective. Alberta oil sands producers — already operating the world’s costliest wells — are bracing themselves for a drop in cash flow and earnings and may be preparing to cut their capital spending plans.

Then there are the political considerations. The environmentalists aren’t simply going to fold up their tents and go home if Congress does approve the pipeline (and overturns a likely presidential veto). There could still be a constitutional challenge, too. It would be a real test of whether the issue is one of foreign policy, and thus up to the administration, or foreign commerce, and thus appropriate for Congress to approve.

But the federal government isn’t the last stop, either. Nebraska, in particular, has seen a tug of war over who has the right to give out the required approvals — the state governor or the state’s Public Service Commission. Anyone who assumes that all the approvals are in the bag is probably indulging in some very wishful thinking.

Canadian rocker Neil Young may whip up outrage about the pipeline, but what matters more is that landowners on the American side of the border — who vote those local politicians into office — still have anxieties about the project. Among these are indigenous communities like the Rosebud Sioux of South Dakota, who have declared that they will view the construction of the Keystone XL pipeline as an “act of war.” “We will close our reservation borders” to the project, the tribe’s president declared. Who really wants to go revisit that kind of conflict?

Then, too, there is the fact that the United States probably doesn’t need the oil, anyway. The shale oil production revolution has made the project less vital, and each year that passes without the pipeline being built makes it less likely that it will go forward, as the U.S. is able to more readily meet its refinery needs with domestic crude oil, produced and transported at a lower cost. True, it isn’t free of controversy (fracking, anyone?) but even with the latest plunge in crude oil prices in the wake of last week’s OPEC meeting, few plan to rein in their production.

Related: Oil Price Plunge Adds Pressure on Putin

The real question is how long those producers can continue to keep operating at a loss. For now, at least some will keep going, perhaps because they have sold forward their production at higher prices, or because they believe that in the giant game of chicken underway, the Saudis — with their aging wells and their need to enforce compliance among OPEC members — will give way first. Regardless, those domestic producers are still going to have a relative cost advantage over the far more expensive Canadian output.

Put all that together, and it’s a good bet that Keystone XL won’t be built, but other pipelines will. They will link the new domestic shale oil and gas reserves with refineries, which will continue to operate. Canada’s oil sands projects will continue to operate, and will continue to generate emissions. Some of the output will flow to U.S. markets through the existing Keystone pipeline; some will be shipped via rail (itself a far from environmentally benign solution), and some will be transported domestically in Canada. In the short term, lower oil prices mean that less is likely to be produced and transported, but the demise of Keystone XL isn’t going to have a dramatic impact on climate change — unfortunately enough.

Undoubtedly, a group of folks will clamor to claim credit for Keystone XL’s defeat — whenever and however that becomes clear — but the reality is that it will be due to something fairly banal and yet inescapable: market forces.

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