On his first day in office, President Biden canceled the Keystone XL pipeline, which Canada’s oil sands producers had been counting on to expand export markets. The pipeline has been beset by obstacles and legal challenges since it was proposed in 2008, and environmental advocates cheered the Biden decision. But elected officials in 14 U.S. states doubled down on their determination to bring the pipeline to fruition. In Canada, the premier of the oil-rich province of Alberta urged Ottawa to retaliate against Washington.
Halting construction of the Keystone XL pipeline will by no means kill Canada’s oil sands industry: Production hit a record high in November. But it will make it harder for companies to profit from developing the world’s third-largest proven reserve of crude oil. The oil sands industry produces around a billion barrels of crude each year, making Canada the fourth-largest oil producer globally. Oil sands make up 97% of Canada’s proven oil reserves, and they have been a major economic driver for Canada. But the oil is expensive to extract and process, and it has a lower market value compared to U.S. crude oil. The Keystone XL pipeline would add capacity to transport Canadian oil from sparsely populated Alberta to major consuming centers.
Heavy toll on the environment
Unlike conventional crude oil, which occurs as a liquid within the pore spaces of solid rock, oil sands are a mixture of semi-solid oil, sand, clay, and water. The viscous crude, called bitumen, can’t just be pumped like an oil well; extraction methods use more energy and more water and are much more costly than conventional oil drilling. For deposits near the land surface, the sand-plus-oil mixture is strip-mined, then processed with hot water and solvents to release the bitumen. For deeper deposits, the “in-situ” process too is complex: Steam must be injected underground to allow the bitumen to flow into extraction wells. National Geographic, citing a litany of environmental problems left to be addressed, has called oil sands the “world’s most destructive oil operation.”
Mining bitumen strips away forest cover and topsoil, leaving acre upon acre of barren, black ground. The post-processing tailings are piped into vast ponds, which contain an “acutely toxic” mixture of water, sand, hydrocarbons, ammonia, acids, and heavy metals. The total volume of wastewater currently exceeds 4 billion gallons and counting, with 1.5 gallons of tailings waste produced for each gallon of bitumen. Scientific studies have detected toxins in the aquatic environment downstream from oil sands production, and a 2017 analysis estimated that cleanup costs will exceed the value of oil sands royalties collected by the province of Alberta.
Investors and oil majors flee
Given the high cost, outsized environmental impacts, and financial headwinds, many investors and corporate partners are leaving the industry behind. According to the Institute for Energy Economics and Financial Analysis, 57 major financial institutions have pledged to stop funding or insuring oil sands ventures. Exxon Mobil has declared a loss on the original value of its oil sands assets, and Chevron has pulled out of Canadian oil and gas entirely. Other oil majors like Shell and BP are selling off their oil sands assets, leaving it largely to Canadian oil companies and the Canadian government to forge ahead.
Bucking those trends, Alberta’s government views the oil sands business as vital to the provincial economy. It spent more than $1 billion of taxpayer money to help jump-start Keystone XL, and Alberta Premier Jason Kenney called Biden’s cancellation of the U.S. portion of the project “a gut punch” and “an insult.” He is urging Ottawa to seek billions of dollars in compensation from the U.S. under terms of the old NAFTA trade agreement still remaining in effect.
High carbon intensity
It’s unclear whether the Canadian government will heed Kenney’s call, but Canada has stated its intention to grow its oil sands production even while aiming to lower national greenhouse gas emissions. That won’t be easy, since bitumen production consumes energy in pursuit of more energy. Natural gas is burned to produce steam that’s injected underground to free up bitumen, which then requires more energy to be processed. Long transport distances enlarge the carbon footprint of the product, while chipping away at its profit margins.
Oil sands mining yields four to eight times the energy used to mine it, and in-situ oil sands extraction – which accounts for the majority of production – returns only 3.2 to 5.4 times the energy investment. Those figures don’t include transportation or final refining. By comparison, conventional oil brings a 10- to 20-fold return of the energy invested.
As a result, the carbon intensity of oil sands is troublingly bad: One study found the extraction and processing of oil sands produces more than twice the greenhouse gasses compared to other North American crude oils. Furthermore, recent work that measured greenhouse emissions from oil sand mining via aircraft found emissions to be approximately 30% higher than previously reported.
The industry has taken steps to lower the emissions intensity, but overall emissions continue to rise because oil production has increased.
High cost and low value
Oil sands are among the world’s most expensive hydrocarbon resources, and the heavy, sulfur-rich crude fetches a lower price than the “light sweet” crude that sets the benchmark for the value of oil. In mid-February, a barrel of Western Canadian Select was selling at $12/barrel less than the U.S. benchmark, West Texas International (WTI crude). (See real-time prices.)
The oil sands industry has been walking a difficult balance between the high cost of production and its value on the open market. In 2014, the cost to produce oil sands crude was more than $60 per barrel (expressed in WTI terms), but improvements and efficiencies have brought costs down to $46 to $53 per barrel, according to one estimate, and the mid $40s, by another. Nevertheless, the margins are thin in the best of times, and the industry incurred billions in debt in 2020 when a barrel of Canadian crude was worth less than a bottle of inexpensive wine.
The pipeline problem
A persistent obstacle for Alberta oil production has been the transportation of oil from interior Canada to major markets. Lack of capacity in existing pipelines has bottlenecked production, and presently 500,000 barrels per day enter the U.S. by rail, adding $15 to $22 per barrel to the price tag.
The current suite of pipelines – the Enbridge Mainline, Keystone, and Trans Mountain – were 98% full in late 2018, and plans for additional pipelines have been in the works for more than a decade.
But as U.S. pipeline projects encounter numerous obstacles, one option would be to construct pipelines within Canada, thus keeping the infrastructure within its national borders.
TransCanada’s Energy East project had proposed to do exactly that, pledging to carry 1.1 million barrels per day from Alberta to Canada’s east coast. But the plan was scrapped in 2017 amid strong opposition from indigenous communities, environmental advocates, and communities through which the pipeline would have passed. Furthermore, the economic prospects of the pipeline were far from assured.
The Northern Gateway pipeline, proposed by Enbridge in 2008, would have taken the westward route, ending up in Kitimat, British Columbia. It was cancelled in 2016, largely for environmental reasons.
That left three pipelines potentially in play: Enbridge Line 3, Keystone XL, and the Trans Mountain Expansion.
The Enbridge Line 3 upgrade is in the process of replacing an existing pipeline with one with larger capacity, increasing oil sands export by 370,000 barrels per day. Like every other pipeline, it faces vocal pushback, though at present, construction is proceeding.
U.S. oil market has transformed since Keystone XL was proposed
The Keystone XL pipeline would have added 830,000 barrels per day of export capacity, carrying oil from Alberta to Nebraska where the pipeline would have linked into existing segments of the Keystone pipeline system.
The Keystone XL section of the pipeline was proposed initially in 2008, under different circumstances than exist now. At that time, the U.S. imported over 11 million barrels of oil per day, and adding a Canadian supply of oil was a strategy that proponents said would help both nations.
While the Keystone XL pipeline became mired in turmoil, the oil industry was undergoing a historic transformation as the U.S. began producing oil from shale deposits as a result of the technological advances of horizontal drilling and hydraulic fracking. From 2008 to the end of 2020, U.S. oil production increased by 143%, and by 2020 the U.S. became a net oil exporter and the world’s largest oil producer.
The pipeline project no longer serves the dual purposes of both countries. In some ways, importing Canadian oil adds competition to domestic oil producers. Furthermore, there is a certain amount of irony that Canadians rejected two of their own pipelines while the Keystone XL project places similar burdens on Native American communities, waterways, agricultural land, and ecosystems.
Fate of oil sands export could rest with Trans Mountain Expansion
With Keystone XL now off the table at least for a few years, hopes to profit on oil sands production turn to the Trans Mountain Expansion pipeline project, which aims to build a second pipe roughly parallel to an existing one, running 700 miles from Alberta to Vancouver, British Columbia. It would add 590,000 barrels per day to its existing capacity of 300,000 barrels per day. From Vancouver, the oil could be shipped on tankers to Asia or elsewhere.
With the Trans Mountain Expansion also facing environmental and political hurdles, the Canadian government purchased the pipeline and is continuing construction, a process expected to cost about $12 billion. Ultimately, Ottawa hopes to sell the project to indigenous groups. The project was 22% complete as of January 2021, with estimated completion in December 2022. Some analysts expect this pipeline to satisfy oil sands export capacity in the near term, even without Keystone XL.
For now, the future of the Canadian oil sands industry may be as murky as water in a tailings pond. While private investors and major oil companies have soured on the massive industry, it does have the backing of the province of Alberta and the Canadian government. But it is hard to predict how long the world will continue to support one of the most polluting and least economical sectors of the fossil fuel industry.