President Obama Speaks At Southern Site Of The Keystone Oil Pipeline

President Obama’s June 25 Climate Action Plan speech has cast a pall over prospects for the Keystone XL oil pipeline project to deliver Canadian oil to US Gulf Coast refineries.

Environmentalists cheered both the subject matter of the President’s speech and the possibilities it raised for blocking the controversial pipeline. But some in industry were surprised that Mr. Obama chose to raise the Keystone XL issue in the context of his plan to address climate change.

“Obama was not expected to mention the $5.3 bln pipeline – which, if approved, would transport 830,000 bpd of heavy crude from the Alberta oil sands to the US Gulf Coast – in his speech outlining new measures his administration will pursue to limit greenhouse gas emissions,” said Barclays Capital analysts in a note to investors on Thursday.

But the President’s comments linked prospects for the pipeline’s approval directly to its potential climate impact.

 “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.  It’s relevant,” Mr. Obama said.

“He seemingly placed environmental concerns ahead of economic ones, when he announced that he would grant approval only if is determined that the pipeline would not ‘significantly’ increase emissions,” said Barclays.

The bank’s analysts noted that the State Department has been widely expected to approve the pipeline, having argued that it would not lead to a significant increase in emissions, as Canada’s oil sands are likely to be developed with or without Keystone XL, with transportation needs filled in by rail in the event that the line is not built. And with the oil and gas boom in the US, Canada is looking to expand its options for getting its oil to markets both within Canada and abroad.

But “with environmental concerns now the key consideration and with government agencies drawing different conclusions, the approval of Keystone could be significantly delayed, and the risk that the project might be ultimately rejected no longer appears entirely negligible”, Barclays said.

A lack of capacity for delivery to high-value markets has led to some deep discounts for heavy Western Canadian crude relative to other grades, such as US benchmark West Texas Intermediate, though Barclays noted that the addition of rail capacity has narrowed the spread substantially since December.

But crude output from the Western Canadian Sedimentary Basin is expected to shoot up in 2015-16, with 2.3 million barrels per day coming from oil sands, up by 500,000 bbls/d from 2012 levels, said Barclays. “It is within the context of a longer-term horizon (2015-16) when Keystone XL would have the biggest impact.”