Heavy oil still flows, despite Obama's Keystone XL rejection: Wood Mackenzie

11/7/2015

EDINBURGH -- Ironically, the rejection of Keystone XL could lead to higher CO2 emissions via more crude-by-rail, according to energy consultant Wood Mackenzie.

On Nov 6, the U.S. State Department recommended that TransCanada's petition to build Keystone XL (KXL) be rejected. President Obama agreed with the recommendation citing concerns that the pipeline would advsersely impact climate change and would have limited to no positive impact on the economy.

Wood Mackenzie did not expect KXL to be built before 2020, so this decision is aligned with their current view. This announcement does not materially impact Wood Mackenzie's view of Canada's oil sands production through 2020 nor does it have an impact on heavy Canadian crude oil price differentials. The consultant expects Canada's oil sands production to have market access between now and 2020 regardless of this decision.
The rejection comes at a troubling time for Alberta's heavy oil producers as low oil prices delayed new projects:
·         Shell and Statoil have stated concerns about takeaway capacity. Two weeks ago Shell halted its 80 Mbd Carmon Creek project. Year-to-date, oil sands projects totaling 485 Mbd have been delayed.
·         The newly elected Canadian Prime Minister is not in favor of the Northern Gateway proposal.
·         The new NDP government in Alberta is considering royalty reviews and carbon taxes.

After 2020, there is more uncertainty about market access for oil sands production, making TMX and Energy East ever the more important. Inadequate pipeline takeaway capacity suggests an increased call on crude-by-rail. Ironically, transporting oil by rail may yield more GHG emissions than by pipe. This goes against one of the State Dept.'s reasons for rejecting the pipeline. Should oil sands supply decline then GHG reductions may be achieved.

Alberta has over 700 Mbd crude-by-rail loading capacity. Wood Makenzie expects Canada to increase heavy oil exports to the U.S. Gulf Coast by rail and pipe. These exports could be even higher if West Canadian oil does not gain coastal access to Asian  refineries. This would not be a bad thing for Gulf Coast refiners as 70% of their heavy oil is sourced from Mexico and Venezuela both of which have risks. There is a market for Canadian heavy oil in the Gulf Coast.

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