New pipe disaster is ammunition for Keystone XL foes
NEW YORK: Thousands of barrels of oil sands crude dumped into a small town in Arkansas is hardly good publicity for Canadian producers seeking greater market access to the US.
The long-delayed Keystone XL pipeline looked to be on the verge of winning US government approval, even if the goal of wrapping up work by 2015 looked too optimistic given the tortured regulatory history of the project.
But the big Easter weekend spill from Exxon Mobil’s 96,000-barrel-per-day Pegasus pipeline in Arkansas will galvanize Keystone’s opponents and push concerns about more risky modes of transport like rail to the side.
Oil traders have seized on the spill as an excuse to take profits on earlier bets that the spread between Brent crude oil futures and West Texas Intermediate crude would keep narrowing.
Early indications are that shipments on the existing Keystone pipeline have been diverted to Cushing, Oklahoma, the delivery point for WTI futures, amid uncertainty over how long Pegasus will remain out of action. That is bearish for WTI, at least in the short term.
Even if Pegasus is shut for a long time, the impact on the overall North American market will be limited for a while. Deliveries into Cushing cannot significantly increase beyond where they are today, and takeaway capacity is set to soar by the end of the year.
The bad news is largely restricted to Canadian oil producers that were the most in need of Keystone XL to keep pace with expected production growth and to reach new markets to avoid further saturating the US Midwest.
But increased uncertainty about Keystone XL will soon start to affect Canadian oil producers. Do they risk a glut in Alberta if the pipeline is further delayed, or do they postpone capital spending to see what the pipeline picture looks like?
The fact is that oil sands have an image problem, and Canadian producers are now facing the consequences of their complacency about US market access.
Canada’s oil industry assumed for far too long that the US appetite for its crude would always rise and that the light regulatory approach of the George W. Bush years would continue.
Instead, demand is on the wane, and regulatory scrutiny is on the rise. And while Canadian politicians have talked up alternatives to the US market, the awkward truth is that every one of these ideas is only a paper pipeline.
For now, the market is waiting to find out what caused the Pegasus spill. A final determination could take months, but regulators may permit the line to resume pumping at a lower pressure relatively soon.
The real issue is that the accident will almost certainly force another review of pipeline safety policy that could easily affect Keystone XL.
Forget that the part of Pegasus that leaked was installed in the late 1940s. And forget that the amount of oil spilled from hazardous liquids pipelines in the US has been relatively stable over the last 20 years, according to data compiled by the US Transportation Department.
The problem for Keystone XL is that it faces a skeptical audience that wants to see no oil spilled. Already the battle lines are being drawn.
Consider the environmental groups’ claim that diluted bitumen, or dilbit, a catch-all term for oil sands crude that has not been upgraded, is more corrosive than other types of oil.
In one sense, this is true. Oil sands crudes are more acidic and contain more potentially corrosive contaminants than other types of crude oil.
The industry says these concerns are misplaced; corrosion in pipelines is largely due to water and sediment precipitation.
Modern lines can minimize these problems. Keystone XL would require dilbit shippers to ensure their crude contains less water and sediment than normal to reduce corrosion risks.
Yet clearly the issue is not settled. The US National Academies of Science’s study of the corrosiveness of oil sands crude and whether current regulations are strong enough is not due to be completed until early 2014.
Already environmental activists have seized on the latest spill to argue that today’s laws cannot guarantee that Keystone XL will be safe.
This claim looks overblown in light of the lack of a noticeable increase in oil spills from US pipelines in recent years despite several high-profile accidents, but may resonate with key decision-makers in the Obama administration. Even though Keystone XL has already signed up for a more stringent-than-normal corrosion regime, critics will be able to use the latest incident to implant doubt.
Even if these claims do not sway administration officials, the likelihood of court action to force additional study of the corrosion issue cannot be discounted.
Altogether, this is not good news for Canadian oil producers and calls into question, perhaps, the medium-term optimism about their output growth.
Keystone XL is not the only pipeline that will be challenged by this spill. For all of Canada’s bluster about forcing new pipelines into service, opponents of the oil sands will seize on these incidents to fight new pipelines, such as the conversion of part of TransCanada’s west-to-east Canadian gas network to oil service.
The Arkansas spill may well prove to be the biggest challenge yet for the oil sands industry.
— Robert Campbell is a Reuters market
analyst. The views expressed are his own.
