Overview of the project
The Keystone pipeline project is a petroleum pipeline system linking the Canadian Crude oil to the U.S refineries, especially in the Gulf Coast. Canada is renowned for its massive crude oil reserves. The pipeline runs from Western Canada to the US Gulf Coast. Besides transporting artificial crude oil and thinned bitumen from bituminous sands of Canada, the pipeline also transports diluted crude oil from East Montana to North Dakota (TransCanada Corporation 1).
The project has four phases. The first three phases have already been completed. The last phase is still awaiting state approval. On completion, the Keystone project would consist of 3460 kilometres pipeline for phase one and two, 2673 kilometres for phase three (Gulf Coast extension), and the planned 1897 kilometres for phase four (TransCanada Corporation 1).
Phase one connects Hardisty terminal to the US Midwest markets. It started its commercial operations in 2010. The Canadian section of phase one involved the reconstruction of the TransCanada pipeline to accommodate crude oil transmission. It also involved construction of 17 new pump stations, three operational tanks and renovation of the existing pipeline systems in Hardisty.
The U.S section runs from Hardisty to Patoka, Illinois. It involved the construction of 1700 kilometres of 30 inch pipeline and over 20 pump stations. The second phase extended the pipeline from Steele City to Cushing. It entailed the construction of 36 inch diameter pipeline, four pump stations and over 20 pumping units. The Canadian section involved the construction of seven pump stations and extra pumping units to boost the initial phase (TransCanada Corporation 2).
Phase three and four are Gulf Coast expansion projects. Phase three extends from Cushing to Port Arthur and is aimed at serving the Texas Market. Last but not least, the proposed Phase four will run from Hardisty to Still City. It will involve the construction of additional facilities at the Hardisty terminal. This will incorporate three operational storage tanks, pump station and pipeline system that connects phase 4 with the existing systems. In addition, phase four will involve the construction of 38 additional pump stations in the US and Canada (TransCanada Corporation 3). This paper will examine the economics of the Keystone project, especially its benefits and impact on the US and Canadian economy.
Economic Benefit and Impact of the Keystone Pipeline Project
The U.S. energy security is not linked directly to its level of dependence on petroleum imports. Instead, the energy security threat facing the U.S. is directly linked to its focus on low cost reserves in the volatile regions across the globe. This presents two significant costs to the American economy. First, the price of oil from these regions is relatively high, causing a massive capital flight from the US economy.
Second, supply disruption due to conflict could have a major impact on the US economy. Therefore, minimising imports from these regions provide some form of energy security. Alternatively, the US could bring on new and diversified supplies from oil markets free of turmoil and instability. The plenteous production from Canada comes in handy. This is because Canada is one of the most stable countries in the world and the sound investment model between the US and Canada offers massive economic gain to both economies (EPRINC 3).
According to the US Energy Information Administration, the United States is the greatest consumer of oil in the globe and it relies mainly on imports. The US imports are estimated to be about 10 million barrels per a day (bpd). The US importation is projected to continue for the next five decades. Therefore, the Keystone pipeline project will help the US to meet its energy demands (EPRINC 3). Some experts believe that some of the Canadian oil exported overseas will find their way back to the US due to high demand, which is ridiculous. It makes more sense for the US to use the inexpensive crude oil from Canada as a feedstock to refine and consume in the local market than to be exported and later imported as finished product (Gray 2).
Besides providing direct employment during the construction, Keystone project also provides the fundamental transport infrastructure. The Keystone pipeline shifts the model of upstream production by adding 100000 barrels of crude oil per day to the existing system. According to the Energy Policy Research Foundation (EPRF), the Keystone project offers net economic benefits for enhanced efficiency in terms of haulage and processing of crude oil, which is estimated to be around 600 million dollars per year (EPRINC 3).
A 2009 report by the Canadian Energy Research Institute concluded that the Keystone project will increase the pace of economic activities in Canada and enhance demand for the American commodities. As a result, more than 40 thousand jobs will be created between 2009 and 2015. The demand for the US products is estimated to increase by over 35 billion dollars in 2015, 40 billion dollars in, 2021 and 43 billion dollars in 2025. The Canadian Energy Research Institute’s estimates affect to the entire Keystone project, including the proposed Phase 4. The estimates are derived from a proprietary analysis that has not been reviewed by other experts (EPRINC 5).
Oil and Gas industry are the main drivers of the Canadian economy, accounting for approximately a third of the exports and thousands of jobs. However, Canada has not realized its full potential in the oil and gas sector. This is largely attributed to lack of infrastructure to transport crude oil and natural gas from Western Canada to refineries in the US and other destinations.
The infrastructure problem has led to refineries in other parts of the country depending mainly on imported crude oil and natural gas instead of exploiting crude oil from Alberta (Western Canada). For that reason, the Keystone pipeline project is envisaged to bring a significant economic benefit to the Canadian economy, which is estimated to be about 36 billion dollars over the next five decades. The proposed Phase 4 is expected to convert sections of the existing natural gas pipeline to transport crude oil to the Gulf Coast of Texas for export (Gray 5; Minardi 6).
According to an independent study conducted by Deloitte, the Canadian economy will gain 10 billion dollars and 25 billion dollars during the six year development and construction phase and half a decade operation phase in that order. Ontario, Alberta and Quebec will benefit the most. The pipeline construction will provide 23498 direct full time jobs during 2013-2015 and 78000 full time jobs during 2016-2018.
In addition, during the six year development and construction and half a decade operation phase, the pipeline will provide the federal and county governments with a total of 3 billion dollars and 7 billion dollars respectively. Last but not least, the Keystone project is expected to result in an annual feedstock cost saving of 11.5 dollars per barrel based on the prevailing refining composition and establishments (Minardi 8).
The Keystone pipeline project will also benefit the oil producers in both Canada and US by taking away the capacity, market diversity and discount reduction regardless of the target market. Discount reduction will enhance profitability for producers and, therefore, increase their capacity to inject more funds in the operations.
Furthermore, it will increase the viability of the Canadian oil sands by reducing the economically feasible energy production break-even price. The Keystone project will also involve the conversion of underutilized segments of the main pipelines. For that reason, it will increase the general pipeline utilization in the two countries, which may plausibly reduce pipeline tolls. This will subsequently decrease the producers’ shipping costs (EPRINC 6).
The consumers will benefit from supplementary spending, job creation, labour income and tax estimates. The Keystone project provides Canada with increased energy security. This is because crude oil is supplied from dependable local sources. The consumers may also benefit from a decrease in petroleum prices because of eliminating capital in the rate base of petroleum products, which may minimise the toll rates. In addition, the Keystone project will boost both the US and Canadian shipping industry due to increase in export (Minardi 9).
The Perryman Group, a financial analysis company based in the Gulf Coast of Texas touts the positive impact of the project to the US economy. The group projects nearly 20000 jobs for the US workers and seven billion dollars capital spending that will help to boost the US economy. The project is expected to reduce the escalating oil prices in the Midwest. It will also increase the availability of gasoline to the North and expand the refining industry in the Gulf Coast (Gray 3).
A number of experts argue that the project may have unplanned economic consequences on both the US and Canadian economy. For example, the proposed phase four of the project may increase the prices received by the producers in the oil sands. Increased prices may lead to the blooming of the oil and gas sector in the Western region. Subsequently, the higher revenue accrued from the oil industry may strengthen the Canadian dollar against the US dollar. Based on the past trend, the strong Canadian currency could reduce the competitiveness of the local industries, leading to massive loss of jobs (Energy Facts 1).
Some Canadian engineers had warned that the proposed Phase four may suffer from construction overruns, which may lead to high cost of shipping. In other words, after completion of phase four, the pipeline’s capacity may not be fully utilized, hence lack of volume and high cost overruns. This is because Canada does not produce sufficient tar sands oil that can fully utilize the pipeline’s capacity. There will be a significant empty space that will not be exploited. The pipeline capacity will not be exceeded until 2025. In addition, some politicians are worried that the project may not offer products for local use, but basically promote products that are aimed for export through the Gulf Coast. This is true to a certain extent due to high demand for petroleum products in the global market (Energy Facts 1).
The proponents of the project emphasize that the economic benefits will be felt for a long time, while the opponents feel that the benefits will only be temporary and will only be realized during the construction phase. The US Environmental Impact Statement released in January 2014 predicts that 42000 jobs would be created by the project, totalling over 10 billion dollars in the next one decade. In addition, the Keystone project will inject 3.5 billion dollars to the US economy in terms of the GDP (Gross Domestic Product).
Even though most of the jobs created by the project will be temporary, the Keystone project will support numerous industries in the pipeline supply chain, which will offer permanent jobs. The US Environmental Impact Statement of 2014 states that more than 20000 permanent jobs will be created in the manufacturing sector and over 400000 jobs in the supply chain. These include jobs from the pipe manufactures, manufacturers of motor pumps, and manufacturers of transformers among others (Minardi 12).
On the other hand, opponents of the project argue that the project is basically part of the larger strategy meant to redirect oil from Western Canada to global buyers, for instance, the US and China. These buyers have an abnormal appetite for oil, thus are ready to pay higher prices for it. Therefore, the project will generate billions of dollars in terms of revenue to the Canadian economy. To sweeten the deal between the US and Canada, most of the US refineries are now relocating to Foreign Trade Zones where they can export refined petroleum products tax free (Energy Facts 2).
The environmental impact of the Keystone project
The Keystone pipeline is major project since it covers thousand kilometres. Given its enormity, it has risks and benefits. The contentious debate surrounding the project is very common to most manufacturing plants utilizing carbon fuels as a raw material and a source of energy, that is, the emission of the greenhouse gases. The traditional energy sources, especially the fossil fuels can emit greenhouse gases, which ultimately lead to global warming. In other words, they accelerate heating up of the earth’s surface (Minardi 4).
Global warming poses serious environmental threats, for example, global climatic changes, famines, melting of polar ice, and deaths to both flora and fauna among others. Scientists, governments and nongovernmental organizations have been actively advocating for the use of green energy, which is an alternative to fossil fuels and are viewed as clean energy. This is because they have limited environmental impact. Green energy includes solar, wind, geothermal and hydroelectric power, and nuclear energy among others (Grant 2).
A number of individuals and environmental groups have raised their voices with regard to the environmental impact of the Keystone project. Some of them have strongly condemned the project. They argue that it facilitates the development of tar sand oil, which will have a catastrophic effect on the global climate. The main fear is based on the risks of oil spills along the pipeline, which is traversing an extremely sensitive landscape. In addition, the oil spills and the extraction of crude oil may contribute to increased emission of greenhouse gases. Environmental scientists also argue that full exploitation of the Canadian oil sands would enhance carbon emission by more than 70 percent (Grant 3).
Another concern is the pollution of land and water. The oil spills have been made worse by the recent spills in Kalamazoo and the Gulf of Mexico. The latest spill was experienced in the Galveston Bay, which is off the Texas coast. This has caused a lot of anxiety in the US, especially among the environmentalist (Grant 4). The pipeline will also cross huge water towers and wetlands.
The wetlands support more than 2 million individuals and thousand acres of farm land. Therefore, a major leak will negatively affect the water towers and agricultural lands. However, hydrologists argue that the spill will have a negligible impact on the aquifers. If the penetration happens, it would only affect a certain locality. Therefore, the Keystone project only poses a minimal danger to the environment (Minardi 4).
According to TransCanada Corporation, both Canada and U.S. have gone to a great extent to analyse and assess the environmental impact of the project. Therefore, they have put in place all the necessary safety measures to ensure that the environment is totally protected from leaks and spills. In fact, large volume of crude oil and associated products has been transported over the Ogallala aquifers without any incident. Therefore, the proposed phase four will not threaten any aquifer. The pipeline’s hazardous materials safety administration ensures compliance with the project’s safety regulations (Minardi 5).
The proponents of the Keystone project stress that its implementation programs would limit greenhouse emission as much as possible. The overall impact of the first three phases will determine if the fourth phase is viable. Therefore, the project will not worsen the problem of greenhouse gas emission. As a matter of fact, the general greenhouse gas emission from the project is estimated to be less than 0.25 mmtco2e. The emission will mainly take place during the construction phase. This will represent an increase of 0.004 percent of the total domestic greenhouse gas emissions (Grant 6).
In actual fact, oil sands only emit less than a third of the total greenhouse gases. Therefore, its impact is negligible. Even though the US Environmental Impact Statement released in January 2014 acknowledges the emission of greenhouse gases, especially with the increase in the exploitation of Canadian oil sands, the extraction process does not depend on the length of the pipeline.
In other words, even if the project was not initiated, the exploitation of the Canadian oil sands would still take place. Therefore, greenhouse gases would be emitted sooner than later since the oil sands would have to be marketed. The Canadian oil sands would find their way to the US Gulf Coast by any means possible given the current global trend in energy consumption, for example, by rail or truck (Minardi 4).
Conclusion
Keystone pipeline is a colossal project whose impact is not only felt in the US and Canada alone, but also in the rest of the world. The project opens the oil sands of Alberta to the global market. Proponents of the Keystone project argue that the project will considerably benefit the two economies in terms of job creation, energy security and infrastructural development. However, the opponents feel that it will lead to massive loss of revenue and jobs. In addition, it will have a negative impact on the environment. Therefore, the economic impact of the project is still a subject of debate.
Works Cited
Energy Facts. Keystone XL Pipeline: Undermining US Energy Security and Sending Tar Sands Overseas. Web.
EPRINC. Exports, Imports and Energy Security: Keystone Pipeline and the Role of Canadian Oil Sands, Washington, D.C.: Energy Policy Research Foundation, Inc., 2011. Print.
Grant, Jenifer. Climate Impact of the Keystone XL Tar Sands Pipeline. Web.
Gray, Stephen. “Keystone XL to Benefit US Manufacturing and Economy for the Long-Term”. The Great Pipeline Debate 35. 2 (2014): 1-7. Print.
Minardi, Jean-Francois. The Economic Benefits of Pipeline Project to Eastern Canada, Montreal: Montreal Economic Institute, 2013. Print.
TransCanada Corporation. Keystone Pipeline System. Web.