Keystone Pipeline Killed By Plunging Oil Prices? Canada's oil is very expensive. Hard to to stay competitive when extraction costs are above market prices

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WASHINGTON – I suspect that the Keystone pipeline project is dead, or at least is in a coma. And this time I believe it will die of “natural causes”. In the past, I have repeatedly written in support of this proposed (but still under review) TransCanada pipeline that would deliver additional Canadian heavy crude from Alberta, all the way across the United States to refineries in Texas.

Get more oil from Canada

It makes perfect sense to increase our oil supplies from Canada, and cut our imports from OPEC. This is simple common sense. America is producing a lot more oil these days. However, we still buy abroad about half the oil we consume. Therefore, get more of America’s imported energy from Canada, an old ally and a neighbor. Get less of it from far away, unstable countries.

Political opposition

We do know that the project could have been authorized years ago by the US Government. But it has been held hostage by politics. The well-organized US environmentalists have made Keystone into a symbol of all that is wrong with continued dependence on oil, gas and coal.

In their view, by bringing to market more Canadian heavy oil, the Keystone pipeline would accelerate the ongoing environmental devastation that in the long run will kill life on earth. Yes, heavy crude means higher emissions, therefore more greenhouse gases, rising temperatures, and all the rest of it.

Anyway, this extremely vocal ideological opposition managed to freeze the approval process. (I say ideological opposition because in a world that consumes 90 million barrels of oil a day an additional 800,000, most of which would get to market anyway with or without this new pipeline, would not tip the scales).

Therefore, no decision from Washington, while project reviews were followed by more reviews. Of course, nobody expected President Obama to say anything about Keystone before the mid-term elections.

A different obstacle: low oil prices

But now, with the elections behind us, there is a different obstacle: plummeting oil prices. Yes, oil prices have collapsed. In a very short time they have gone from $ 100 per barrel to less than $ 70. However, the very high cost of extracting and then shipping Canada’s heavy oil has remained the same.

They way it looks, in this brand new market Canada’s oil has become too expensive, and therefore its may no longer be competitive. Of course, it is for the Canadians to decide when the pain of lower and lower prices will be too high and stop, (or at least cut down), production.

Canadian oil is too expensive

However, right now I do not see how Canadian companies can extract, deliver and sell their super expensive oil and make a reasonable profit, assuming that oil prices will stay below $ 70 per barrel. Add to this that the projected cost of constructing the Keystone pipeline, because of all the changes and delays, has gone up: from $ 5.4 billion to about $ 8 billion.

Taking all this together, I think that Keystone, unless oil prices recover soon and significantly, does not make much economic sense any more.

Will Canada sell its oil below cost?

Whatever the sound geopolitical and energy security reasons for building this pipeline, in the end the companies involved have to make money. If Canadian crude is priced out of the market (at least for a while) because it is way too expensive, I do not see that many buyers.

Unless the Canadians are willing to bet on future higher prices while absorbing heavy losses by selling now their oil below cost, Keystone will not happen any time soon.

 

 

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