Why the Keystone XL Crude Oil Pipeline Deal Is Far from Done

[Editor's Note: This insider's look at the recent update regarding the Keystone XL crude oil pipeline is one of Dr. Kent Moors' Oil & Energy Investor columns from this week. Go here to learn how to access Moors' research as soon as it's released.]

Late Friday afternoon, the Keystone XL crude oil pipeline cleared one of its biggest hurdles.

In its Final Environmental Impact Statement, the U.S. Department of State concluded that completing the pipeline's northern leg would not have a major impact on global greenhouse gas emissions.

According to the much-anticipated report, the Canadian oil sands are likely to be developed - with or without the controversial pipeline.

That makes the Keystone XL something of a non-factor in the broader environmental debate.

Yet, it is still not clear whether this project measures up to the climate priorities of the White House.

That means there is still serious some politics ahead...

Keystone XL Crude Oil Pipeline: 4,000 Miles of Heated Political Debate

Of course, politics has never been very far from this pipeline discussion. Environmental groups have argued long and hard against the Keystone XL oil pipeline from the get-go.

A major environmental problem surfaced early in the debate when the initial route took it across an aquifer in Nebraska used by a large portion of the Midwest. That brought about concerns over the impact pipeline leaks could have on millions of Americans.

That battle largely ended once the route was changed. Even the Nebraska legislature, who had been opposed to the project because of the aquifer, dropped its opposition.

But that was hardly the only roadblock to the project.

The $5.4 billion network of pipelines is designed to connect Canadian heavy oil into the primary American oil trunk line.

However, the XL portion requires State Department approval because it crosses an international boundary. The southern segments from Cushing, Okla., to the refineries on the Gulf Coast do not require such approval. They have been under construction for some time.

These southern additions are considered crucial in easing the crude oil glut at Cushing. This is the site of the largest intersection of pipeline systems in the country, and the location where the daily West Texas Intermediate (WTI) oil price is set. WTI is the benchmark crude rate upon which NYMEX future contracts are written.

This ongoing glut at Cushing has been one of the main reasons why WTI has been trading below the Brent oil benchmark set daily in London, even though WTI is a slightly better grade of oil.

Both the cross-border and Gulf State elements of the expansion (three other phases of Keystone have actually been in operation since 2010) are designed to complete a massive north-south movement of Canadian heavy crude over 4,000 miles across North America.

As the unconventional (tight and shale) oil boom has pushed U.S. production to levels not seen in decades, the prospect of energy self-sufficiency (or energy independence, as the media would have it) has emerged.

That goal is likely attainable, probably within the next 15 years. When it happens, the United States would still have to import about 30% of its daily oil requirements. But what a difference that makes from only a few years ago, when we were looking at importing 70% of our needs.

And there is an important change here as well, one that provides a distinct advantage to American national security. All of that 30% could come from Canada. "Energy independence" would encompass an entire continent.

But this project still must overcome persistent environmental objections, the more logical stemming from the type of oil being conveyed via Keystone.

Heavy oil does have a more negative impact on the areas where it is extracted, transported, and processed. So there are a range of issues here that require technological development and oversight.

Having considered the issues from both sides (environmentalist opposition and pipeline supporters), my view is that these safeguards can be put in place along with a concerted administrative presence to protect the lives and livelihoods of the folks impacted by the Keystone XL pipeline.

The "Dueling Standards" Problem

And that leads us to a possible major policy impasse...

There has been a fundamental confusion in the Obama administration's policy approach to Keystone from the beginning. The latest version is found in the State Department report's "net increase in overall greenhouse gas emissions" standard.

You see, just last June, U.S. President Barack Obama first articulated his approach to the pipeline by applying what appeared to be a different standard. Then, he said that:

Allowing the Keystone pipeline to be built requires a finding that doing so would be in our nation's interest. And our national interest will be served only if this project does not significantly exacerbate the problem of carbon pollution. The net effects of the pipeline's impact on our climate will be absolutely critical to determining whether this project is allowed to go forward.

This version was later reflected in the president's broader approach to climate impacts, which he reiterated last week in the State of the Union address.

Now from experience, I can assure you the word "significantly" cannot be parsed politically. It provides considerable leverage but no clear counsel on what the standard means.

Equally difficult is equating one standard - emphasizing aggregate global greenhouse gas emissions - with another advancing a "carbon pollution" yardstick.

Now, both of the groups supporting and those against Keystone XL are flooding into the divide between these two. This controversy will continue, offering some room for concessions elsewhere.

My own view is that the pipeline will now be approved, although the process is hardly over.

The bigger problem is this: As the "dueling standards" indicate, what politicians need to say in assuaging certain interests and occasionally pursuing the general good rarely make for good policy foundations.

This is especially the case in energy, where we are entering a period requiring clarity and focus, not politics as usual. To make matters even more difficult, we are now operating on a global stage - not a domestic one.

This requires a new outlook and an even bolder approach. I'll outline both beginning in the next issue.

More exclusive research from Dr. Kent Moors: We Found a Clear Path to Energy Profits, Even in Volatile Markets

About the Author

Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.

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