Last Friday the U.S. Department of State released its Final Supplemental Environmental Impact Statement (SEIS) for the Keystone XL pipeline project. Instantly, many media outlets were only too eager to suggest that with this report the Keystone decision to be made by President Obama is a foregone conclusion; namely, in favor of the controversial project. So, the White House felt compelled to come out the same evening with the following statement, as reported by Reuters:

“The President has clearly stated that the project will be in the national interest only if it does not significantly exacerbate the problem of carbon pollution. The Final Supplemental Environmental Impact Statement includes a range of estimates of the project’s climate impacts, and that information will now need to be closely evaluated by Secretary [of State John] Kerry and other relevant agency heads in the weeks ahead. (…) A decision on whether the project is in the national interest will be made only after careful consideration of the SEIS and other pertinent information, comments from the public, and views of other agency heads.”

The Canadian Pembina Institute, with its objective of leading Canada’s transition to a clean energy future and, at the same time, trying to constructively address environmental concerns of uninhibited Albertan oil sands development, channeled the view of many environmentalists in a first reaction to the report in the following press release:

“Today’s final assessment is a clear improvement over the State Department’s March 2013 draft, which argued there was virtually no connection between pipelines and the growth in oil sands production. The final assessment is updated with stronger analysis that better reflects the environmental and market realities. The assessment now acknowledges that under some circumstances, constraints on new pipeline capacity could have ‘a substantial impact on oil sands production levels.’ In other words, building the Keystone XL pipeline could help spur increased oil sands production and the carbon pollution that goes with it.”

Sifting through the State Department report unearths some interesting conclusions the study draws from scenarios based on alternative oil prices and potential effects of pipeline constraints on oil sands production levels:

1. Varying pipeline availability has little impact on the prices that U.S. consumers pay for refined products or for heavy crude oil demand in the U.S. Gulf Coast because heavy Canadian crude oil supplies can be replaced with heavy crude from Latin America and the Middle East. Note, in this case the U.S. would opt to put our national interest and energy security ‘in the hands’ of politically unstable oil exporting regimes instead of a trusted ally and neighbor with shared values.

2. Modeling results from the scenarios indicate that severe pipeline constraints reduce the prices received by oil sands producers by up to $8/bbl, but not enough to curtail most future oil sands development plans or to shut­in existing production (based on expected oil prices, oil sands supply costs, transport costs, and supply­demand scenarios). Moreover, the report stresses that new data and analysis indicate that rail will likely be able to accommodate new production if new pipelines are delayed or not constructed.

The graph below shows that the rail alternative is already in place. However, bear in mind that this chart does not distinguish between Canadian crude oil and Bakken oil from North Dakota and that this transport system will hit maximum capacity at some point in the medium term if rising U.S. shale oil production predictions are accurate.

The next graphic has to be viewed together with the rail chart above. According to the Pembina Institute, “regardless of the rate at which production increases, all oil sands production is contingent upon a transportation plan to get the bitumen to market.” Here, I tend to disagree. This statement is definitely true for already approved oil sands development projects, for projects where applications have been submitted as well as announced new projects. The transportation capacity and economic profitability is there for already producing open pit mining oil sands producers as well as in-situ producers, both enjoying significant first-mover advantages. The projects currently under construction should also stay economically feasible  – at least marginally depending primarily on WTI oil prices – with increased rail capacity.

Planned Expansion of Canadian Oil Sands Production

3. The primary assumptions required to create conditions under which production growth would slow due to transportation constraints include: 1) that prices persist below current or most projected levels in the long run; and 2) that all new and expanded Canadian and cross­border pipeline capacity, beyond just the proposed Project, is not constructed. That means that denying the Presidential permit for the Keystone XL pipeline alone is not a sufficient factor to slow down Canadian oil sands production growth. Just take a look at the number of other potential projects to improve global market access for Canadian oil sands. Canada would be able to fetch higher oil prices by exporting from British Columbia to Asian markets and by transporting its heavy crude oil from Alberta to Eastern Canada improve its own energy security by reducing oil imports from abroad.

Proposals to Increase Pipeline Capacity

4. Above approximately $75 per barrel for WTI ­ equivalent oil, revenues to oil sands producers are likely to remain above the long­term supply costs of most projects responsible for expected levels of oil sands production growth. In this respect, the report expects oil sands production to be most sensitive to increased transport costs in a range of prices around $65 to $75 per barrel. Moreover, it points out that the dominant drivers of oil sands development are more global – such as oil price trends, regulations, and technological developments – than any single infrastructure project.

5. The report also evaluates the relationship between the proposed project with respect to GHG emissions and climate change from the following perspectives: The proposed pipeline project would emit approximately 0.24 million metric tons of carbon dioxide (CO2) equivalents (MMTCO2e) per year during the construction period. These emissions would be emitted directly through fuel use in construction vehicles and equipment and indirectly from electricity usage. During operations, approximately 1.44 MMTCO2e would be emitted per year, largely attributable to electricity use for pump station power, fuel for vehicles and aircraft for maintenance and inspections, and fugitive methane emissions at connections. Regarding the latter, the New York Times has recently reported the following on North Dakota’s Bakken field: “The gas being flared as a byproduct of a rush of oil drilling releases roughly six million tons of carbon dioxide into the atmosphere every year, roughly equivalent to three medium-sized coal plants. (…) Energy experts expect a 40 percent increase in the gas produced from the Bakken field by the end of 2015.” Further, Breaking Energy also addressed in a recent article the problem with methane emissions. Consequently, the ‘big picture’ on carbon dioxide emissions needs to be much bigger than the focus on Canadian oil sands production and the Keystone XL pipeline project.

In sum, given the above-cited conclusions from the State Department’s report, the key finding is that the Keystone XL pipeline is “unlikely to significantly impact the rate of extraction in the oil sands or the continued demand for heavy crude oil at refineries in the United States based on expected oil prices, oil sands supply costs, transport costs, and supply­/demand scenarios.” The problem with this statement are the words ‘unlikely to significantly impact’ because this is the backdoor for President Obama to deny the Presidential permit. Why? In a way, these words need to be ‘legally’ construed by the decision-maker himself. Given that much depends on oil price volatility, this decision can go either way. Thus, a Keystone XL Presidential permit is not a foregone conclusion. The standard for President Obama’s decision – to “only approve Keystone XL if it does not significantly worsen carbon pollution” – is an amazing standard for someone with a law degree. What does ‘significantly’ actually mean in this respect? Remember, carbon pollution is not static and oil sands are not the only source. Let’s just call it what it is – a political decision – which can go either way because the decision-maker simply has the discretion to decide as he pleases. And this is fine. That, however, may come with a political cost for the President’s party due to the fact that he himself cannot be reelected. Therefore, we continue discussing new study findings – some might view them as a smoke screen for the real underlying issue – and still have no decision. Do not expect a decision before the 2014 U.S. Midterm elections.