Trouble in the pipeline for the US and Canada

Keystone XL, taking oil from Alberta's tar sands to the Gulf, has set unions against the green lobby

For a generation, for the oil giants who have crowded into Canada in the hope of exploiting the vast reserves of petroleum trapped in the oily sands of Alberta, the main question has been: how can we get this stuff out the ground? Now thoughts are turning to another question: how do we get it out the country?

The UK's Shell and BP, and their international peers, plus dozens of Canadian oil producers working in Alberta, had hoped to know by now that the US government had approved a new $7bn (£4bn) pipeline to transport oilsands crude over the border. But a campaign by environmentalists who oppose all oilsands development, and an outcry by residents along the route, caused the Obama administration to push a decision out beyond next year's election, and yesterday the Governor of Nevada signed a new law that could force the pipeline to be rerouted away from environmentally sensitive areas of that state.

The Nevada law, according to the pipeline's proponents, should make it easier to agree a compromise deal. Green groups, though, have won a major battle and are pushing on with their war to stop the pipeline altogether.

"The extraction of tar sands is a disaster for the climate, because it produces far more greenhouse gases than other oil extraction, as well as poisoning the water for local communities," says Friends of the Earth's Nick Berning. "We have a broader goal of keep the tar sands in the ground, and stopping the pipeline is part of that. We don't need to be doubling down on our dependence on oil. There are cleaner alternatives and any number of means to meet our energy needs."

Oilsands are highly controversial because the method of production involves mining large amounts of material – a mix of sand, clay and a form of petroleum called bitumen – and separating it using water. The resulting polluted water has to be safely stored, and transport of the dense crude is energy-intensive. The European Union is currently working to designate Canadian oilsands a carbon-intensive fuel, which would limit businesses' ability to use it and comply with environmental rules.

TransCanada, based in Calgary, Alberta, is the pipeline company behind Keystone XL. It already runs the smaller Keystone project which takes oilsands crude over the border, but the 36-inch Keystone XL connects more directly to the storage and distribution facilities at Cushing, Oklahoma, the main US crude pipeline hub. It will be able to transport 700,000 barrels a day, through Cushing and on down to the Gulf Coast, where it can be refined and exported.

The company says the project will create 20,000 construction and manufacturing jobs, which has won it the backing of US unions; environmentalists say it is an ecological disaster in the making, since oilsands crude is some of the heaviest, stickiest and most toxic oil there is. The first set of proposals routes the pipeline directly through Nevada's Sandhills – which includes a high concentration of wetlands of special concern, a sensitive ecosystem, and extensive areas of very shallow groundwater – and over the vast Ogallala aquifer, a water source used throughout the Midwest.

Nebraska Governor Dave Heineman's signature on the new laws brings to a close a 15-day special legislative session called solely to craft pipeline regulations that will give the state a say in the route Keystone XL takes. "Our work is done," he said. "I want to say thank you to our citizens and our lawmakers."

The Obama administration used the rerouting discussion to justify a 15-month delay to the approval process. The State Department is the branch of government with the final say.

The delay has already earned the US a stinging rebuke from Canada's Prime Minister. Stephen Harper used the Apec summit hosted by Barack Obama this month to say the decision had produced "extremely negative reactions" and he ostentatiously discussed oil exports with Chinese President Hu Jintao on the sidelines. "This does underscore the necessity of Canada making sure that we are able to access Asian markets for our energy products," Mr Harper said.

The implication was clear. If Europe is going to discriminate against Canadian oilsands and if the US is going to balk at letting the crude into the country, there is one energy-guzzling nation that will be happy to take it.

Plumb job making the difference to oil prices

It is not always about supply and demand. Sometimes, to understand the oil price, you have to look at the plumbing of the world's oil supply.

The price you usually see quoted is the cost of taking delivery of a barrel of oil at a particular place on a particular day. The US traditionally uses the WTI crude contract traded on Nymex as its benchmark; UK newspapers usually use the price of Brent crude from the North Sea. Normally, WTI costs more than the lower-quality Brent. But in recent months, these Brent prices have overtaken WTI like never before. In October, Brent was 30 per cent more expensive than WTI, $114 to $86 a barrel, a $28 spread at its widest.

The reason is a bottleneck at Cushing, pictured, the Oklahoma facility where traders take physical possession of their oil. As oil production from Canada and in the northern states of the US has ramped up, the amount of oil flowing into Cushing has grown dramatically, and not nearly as fast as the infrastructure for transporting it away again.

TransCanada's Keystone XL pipeline is designed in part to alleviate some of this pressure, by providing a big new pipe out of the facility and down to the refiners in Texas. The delay in approval for Keystone XL unnerved oil traders, but TransCanada is proposing building the southern portion of the pipeline in any case, since it is only the cross-border piece that requires a presidential OK.

In the meanwhile, Enbridge, an oil transporter that controls a pipeline from the coast up to Cushing, which has traditionally brought oil from Gulf of Mexico rigs up for trading, says it will reverse the flow of the pipeline next year, providing a new exit route for crude backed up in Oklahoma. The effect of this little bit of plumbing? The gap between WTI and Brent is down to less than $10.

Stephen Foley

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