Low Oil Prices Make Keystone XL a Risky Bet for Investors

Financial media skepticism about TransCanada Corporation’s Keystone XL pipeline continued last week, with geologist and Forbes contributor Art Berman weighing in with the reminder that “it will take at least $85 oil prices to develop the new oil sands projects needed to fill the pipeline.”

And Berman adds a second risky bet to the Keystone equation: that continuing growth in U.S. tight oil production will produce sufficient demand for the heavy oil that Canada’s tar sands/oil sands can offer to refiners.

Berman notes that tar sands/oil sands production only began to accelerate when oil prices exceeded US$70 per barrel in 2005 (his calculations are all in December 2016 dollars). At that price, their cumulative output of 10 billion barrels dwarfs U.S. tight oil production of 2.4 billion barrels from the Bakken formation, 2.4 billion from the Eagle Ford field, and 0.8 from the Permian basin.

With global oil prices likely to stabilize in the $50 to $60 per barrel range, Berman notes, the Canadian Association of Petroleum Producers foresees the tar sands/oil sands adding 128,000 barrels per day of output until 2021, then another 59,000 barrels per day after that. [Climate and energy analysts can cite multiple factors that could make those figures an over-estimate.] But “if all of that new oil were going to KXL, it would not reach capacity for about 10 years.” Moreover, “other pipelines are already approved for expansion and will probably get much of the oil before KXL is completed,” he writes.

“TransCanada’s bet, therefore, is that oil prices will move much higher and more quickly than most forecasts anticipate, and that the volumes will be there by the time the pipeline is built.”

The other shaky assumption behind Keystone 2.0 is that the tight oil fields in the U.S. will continue producing for several decades. They create demand for the heavier product from Alberta, Berman explains, since most of the ultra-light crude they produce is too light for U.S. refineries. That physical reality—not the rhetoric about securing America’s oil supply or dealing with less hostile trading partners—explains why the U.S. imports three times as much oil from Canada as it does from Saudi Arabia, or as much from Canada as it receives from Saudi Arabia, Venezuela, Mexico, Colombia, and Iraq combined.

But as Berman and other shale boom critics have been warning for some time, “production from the Bakken and Eagle Ford plays is in marked decline and Permian tight oil production growth has slowed,” Berman writes. “This is despite record high numbers of producing wells in all three plays.” He figures Bakken and Eagle Ford production have already peaked, while the Permian can look ahead to “several years” of growth—but future growth forecasts are all based on the broad assumption that oil prices will gradually climb.

Which may be a stretch, given Donald Trump’s apparent determination to clear regulatory “hurdles” and unleash an increase in U.S. oil production despite weak demand for the product. In late January, Reuters reported that earlier price increases were faltering, based on reports that U.S. oil drilling was ramping up, with the country’s active rig count hitting its highest number since November 2015. “We’re in a holding pattern at this point in time,” said investment manager Mark Watkins. “Supply is a big factor right now, and you have the U.S. really filling that gap that OPEC has left open.”

(But even when analysts believed that OPEC production cuts would drive a steady increase in oil prices, fossil analysts were measuring and publications were headlining day-to-day change in pennies, not the multiples of dollars that would be needed to sustain production increases in the tar sands/oil sands.)

Two other small, momentary measures of how American oil output could defeat global efforts to drive up prices (and, in the end, drive down prices across the board): Bloomberg reported last week that U.S. exports are expected to exceed the production of four OPEC nations in 2017. And the oversupply of gasoline on the country’s east coast is so severe that tankers en route to New York are being redirected, rather than adding their cargoes to the glut.