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The Shifting Economics of Tar Sands Development

20 Jun 2014  |   Zach Drennen

Tags: Climate Change

This week, the Senate Energy and Natural Resource committee once again voted on approving the Keystone pipeline. While Senator Landrieu (D-LA) may be eager to show she can deliver for the oil and gas industry, the industry itself has become less eager of late to dig into tar sands projects. On May 30th, the Canadian branch of French oil major Total SA put on indefinite hold an $11-billion project that would have extracted 160,000 barrels of tar sands oil per day from Alberta. Total pointed towards rising costs and falling profits as the drivers of the most recent in a series of cancellations that show that tar sands oil isn’t just dirtier and more risky in spills than other sources of fuel – it also makes little economic sense. 

Total cancelled the similarly expensive Voyager upgrader project last year, a decision that caused the firm to take a $1.65 billion loss in the first quarter of 2013. Tar Sands oil is all risk, no reward – and more and more, it’s looking like that risk also applies to the companies extracting it. With the costs of starting new tar sands mining projects at $90-100 per barrel and with producers paying from $15 to as much as $31 per barrel for barge and rail transportation to refineries – much more than the cost of transporting it by pipeline - the case that Alberta’s tar sands reserves will be inevitably developed with or without the Keystone XL pipeline looks increasingly shaky. 

Although the industry has downplayed the reality of rising costs and trouble finding a market for their product, they recently revised down their 2030 production numbers by almost half a million barrels per day.  The Canadian Association of Petroleum Producers’ annual outlook was also significantly less optimistic than the State Department on the alternatives to Keystone XL, reporting that trains will be able to move no more than 700,000 barrels per day of tar sands crude by 2016. It’s unclear that even that number is realistic. As of March 2014, only 57,000 barrels of tar sands oil per day were reaching the Gulf Coast, a trickle compared to the capacity of the proposed pipeline. There is a reason that they are fighting so hard to get Keystone XL and other pipelines approved: they would serve as a desperately-needed lifeline for the ailing tar sands industry. 

Meanwhile, it turns out that the already-built southern leg of Keystone XL, which pipeline operator TransCanada has insisted is the “world’s safest pipeline,” required nearly three quarters of its welds to be redone during a single week last September. This discovery prompted the Pipeline and Hazardous Materials Safety Administration (PHMSA) to slap special conditions on TransCanada requiring that an independent, third-party inspection company verify the safety of their work . But don’t worry – if TransCanada’s plans to build the Keystone XL through America’s most vital aquifer fall apart, tar sands producers can still try a route that runs along the Great Lakes

Canada’s government is pulling out all the stops to persuade the United States to approve another pipeline operated by Enbridge, a company that has displayed an abysmal safety record with Keystone and other pipelines, to run through an area with critical water supplies. This pipeline will carry oil that is dirtier, riskier, and more expensive than anything else we can dig up so that big oil companies can then ship tar sands products to China or India. If that sounds like a good deal, there’s a car in my driveway I’d like to sell you. Keystone XL and tar sands have always been a bad deal for the American people, and it’s becoming less and less clear just who benefits from their development.

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