Oil’s Path of Least Resistance

In February 2012, a crew of environmental lobbyists like the Sierra Club’s Executive Director Michael Brune and President Allison Chin, along with activists like Robert Kennedy Jr. and actress Daryl Hannah, protested the construction of the Keystone XL pipeline. For the first time the "by invitation only" crew engaged in civil disobedience, using zip ties to attach themselves to the iron fence in front of the White House. While they protested, pipeline companies devised ways to feed crude oil from the fields in the North to the refineries in the Gulf of Mexico.

As the usual suspects fired up their rhetoric machines to fight the march of commerce, some of them attempted to get media time by getting arrested for tying themselves to the fence in front of the White House and refusing to move. This invitation-only act of civil disobedience to thwart the development of oil sands and the Keystone XL pipeline, marked the first time the Sierra Club had engaged in acts of civil disobedience.

In their attempt to send a message of discontent with President Obama’s refusal to halt the advance of the Keystone XL project, the activists demonstrated a willful ignorance that oil, like any liquid, naturally moves in the direction of demand.

"If Congress won't act soon to protect future generations, I will," the President declared in his State of the Union Address February 12, 2013. "I will direct my Cabinet to come up with executive actions we can take, now and in the future, to reduce pollution, prepare our communities for the consequences of climate change, and speed the transition to more sustainable sources of energy."

It may take quite a bit of executive action to stop the Southward flow of crude to market.

Last week the US Department of State Bureau of Oceans and International Environmental and Scientific Affairs released the Draft Supplemental Environmental Impact Statement for the Keystone XL Project. The XL sized report (over 50 different downloadable PDF files) undermines the effort of the folks zip-tying themselves to the White House Fence.

Page 15 of the Executive Summary hammers away a few inconvenient truths to the story.

Based on information and analysis about North American crude transport infrastructure (particularly the proven ability of rail to transport substantial quantities of crude oil profitably under the current market conditions, and to add capacity relatively rapidly) and the global crude oil market, the draft Supplemental EIS concludes that approval or denial of the proposed Project is unlikely to have a substantial impact on the rate of development in the oil sands, or on the amount of heavy crude oil refined in the Gulf Coast area.

Based on the analysis, the report estimates that even if the application for the Keystone XL is denied, other proposed pipelines would move forward, so the impact on the oil sands market would be a decrease of 0.4 - 0.6 percent of total production by 2030. Even if all other pipeline projects halted (something the federal government can't do without making major effort), the study estimates a production decrease of 2 - 4 percent by 2030.

Hair on Fire

The release of the report, and the damming news that stopping the Keystone accomplishes nothing to halt production of the fields, set environmental and liberal media news outlets and bloggers' hair on fire. The opposition media started to make big hay about how Trans-Canada paid the consulting company, Environmental Resources Management (ERM), to write the report. In a typical form of telling only part of the story, what appears to be hundreds of articles now cite an Investigative Report by Inside Climate that "exposes" that Trans-Canada paid ERM to write the report, and that ERM subcontracted some of the work to two different consulting companies that provide services to the oil industry.

What a load of bull excretion.

Let's take the half truth apart. The State Department lacks the skill and ability to do an Environmental Impact Statement (EIS). Further, by law, the company that makes application MUST PAY for the EIS. Trans-Canada paid for the creation of the first EIS, and by law they must pay for the second. Following the law, the State Department selects the 3rd party that does the research and writes the report, while the applicant pays for the report. The relationship and the ground rules are clearly spelled out in the RFP that appears on the State Department web site about the project.

If you don't want to read the entire document, this snip should provide enough insight.

Next, let's consider the charges regarding ERM hiring consulting companies that do work in the oil industry as subcontractors. Consider for a moment you work for ERM, and while you have substantial knowledge about ground water, oil spills, geological soils and can calculate the Greenhouse Gases created by millions of cars burning gasoline, you don't know what the energy requirements are for moving crude oil via other methods, like trains, or via other pathways, like alternative pipelines and ocean tankers. Where would you turn to get the data, to learn about how the alternatives would work? Who would you go to?

That the consultants at Environmental Resources Management turned to two consulting engineering firms that have substantial experience in the oil industry to gather the required information is not surprising. It is not nefarious nor is it unethical. To the contrary, it is an act of professional competence to admit that you turned to industry experts to assist and validate data used in the study. That ERM reported the actions in the report, in full disclosure, is very ethical. Arguments to the contrary ignores professional conduct.

All For Naught?

But all of this noise is for naught. It is wasted hot air by people that want to ignore the reality of the marketplace.

Consider the announcement of another pipeline project between a Canadian energy transport company, Enbridge, Inc., and a US energy transport company, Energy Transfer Partners, LP (ETP). The two companies announced a joint development to move 420,000 – 660,000 barrels of crude oil per day from the oil pipeline crossroads of Patoka, Ill. to St. James, Louisiana to feed the Eastern Gulf Coast refineries.

And the federal government has limited resources to stop this project. Look at the map below. The green line is the Keystone XL. Imagine a pipeline that connects the crude oil terminal at Patoka to the refineries in Louisiana. This is the kind of alternative that the EIS highlights, and why the arguments about the Keystone XL are moot.

The plan included the conversion of existing segments of gas pipelines owned by ETP’s subsidiary, Trunkline Gas Company, to carry liquids. ETP is one of the fastest-growing oil and gas energy transport players in the marketplace. Last year ETP purchased Sunoco, mainly to obtain control of the extensive pipeline systems that Sunoco owned.

The project depends on the approval of the US Federal Energy Regulatory Commission. In July of 2012, Trunkline requested permission to remove certain segments of existing pipeline from natural gas service. With government approval, Trunkline can convert those segments to carry crude oil and other petroleum liquids along a new 700-mile route that ties the Patoka tank farm terminals to the Eastern Gulf refineries and ship-loading facilities. The project includes a new lateral line from Boyce, Louisiana to St. James to make the needed connection between the existing gas pipeline and the refineries and loading facilities.

Enbridge already owns and operates a substantial network that carries crude from Western Canada and the North Dakota Bakken fields through a variety of existing pipelines. Starting in early 2015 the new Enbridge Southern Access Extension adds in an additional 300,000 daily barrels of crude flow to the massive Patoka terminals in early 2015.

The Western Gulf Coast of Louisiana and Texas is an attractive demand point for Bakken and Canadian crude oil. The existing refinery infrastructure and the export operations for refined product make Baytown and the surrounding areas an obvious destination for the crude. However, without the Keystone, pipeline access did not exist until pipeline companies converted finished petroleum pipelines into crude pipelines and reversed the flow to the south.

Crude by Rail (CBR) is a solution, except for the lack of direct rail access from North Dakota to Texas. Trains out of North Dakota must first travel through Chicago, then turn south through Kansas City and onto Texas. Or from Chicago, go to New Orleans and then west to Texas. The extra miles means extra time in transit, and the need for extra trains to carry the oil. All of those extras create extra costs, making the North Dakota oil less attractive and less valuable per barrel.

A 100-car unit train of crude carries 70,000 barrels of oil. Assume that a Gulf Coast refinery needs 100,000 barrels per day to function. If it takes ten days for a unit train to transit the distance from the oil fields of North Dakota to Texas, the daily feed of 100,000 barrels of oil requires 26 trains at a minimum, equal to 2,600 tank cars. In 2014 the monthly lease cost for a DOT-111 car was about $2,400. The new DOT-117’s required for carriage of the more volatile Bakken oils was about $3,000. Assume the cars could carry one load per month because of the long transit time. The cost for just the car lease is $3.60 per barrel, plus the cost of the transit of the car, which in 2014 was about $8.25. That is almost $12 in transport cost to move a barrel from North Dakota to the Gulf Refineries.

A $12 in transport cost was about half the cost difference between WTI prices and the price for North Dakota Sweet in 2014. Even with the lower costs, the gulf refineries still worked crude out of West Texas, as the supplies were more stable than the crude by rail systems. The only thing that would start moving Bakken oil south was the Keystone, and a promise of higher capacity at a cost less than half of the rail.

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