Tar Sands Expansion Slows, Causes Pipeline Woes

Back in 2008 when the Keystone XL tar sands pipeline was proposed by TransCanada for the first time, conventional wisdom had it that if Keystone XL wasn’t built, it wouldn’t matter, Alberta’s tar sands would see booming production and other pipelines and rail would do what Keystone XL would have done. What a difference a decade makes.


Over the past few weeks, there has been a flood of news from Alberta’s tar sands that suggests the industry there may have already reached its zenith and that new proposed pipelines like Keystone XL, Kinder Morgan’s Trans Mountain line, and Enbridge’s new Line 3 are unneeded boondoggles. This sense is largely confirmed by Oil Change International (OCI) in a briefing note finding that capital expenditures—financing for future construction—are slated to drop close to zero by 2020 while current expenditures are only being made on projects that were approved and begun before the 2014 oil price crash. Meanwhile, one of the tar sands’ oldest, largest and most successful operators announced that it will not make new investments in its tar sands operations for the foreseeable future. And over the past few years, huge players have pulled out or are considering pulling out of the tar sands including Statoil, Total, Shell, and Conoco Phillips.


Just how bad is the business case for TransCanada’s proposed Keystone XL pipeline amidst this storm of news from Alberta? The tar sands pipeline that would pierce through America’s heartland to provide a more direct path for tar sands oil to get to Gulf Coast refineries faces a growing list of problems that may spell its doom—for the third, and hopefully final, time. First is its timing: Keystone XL is currently “last in line” among the three big tar sands pipeline proposals and while there is little real need for any of them, should one ever get built, the business case for all other lines falls apart given the factors discussed below. Second, the lack of demand for all proposed pipeline space is being exacerbated by oil price realities—when Keystone XL was first proposed in 2008, oil had reach $140/barrel, more than three times the price it fetches today. Which leads, predictably, to TransCanada’s third major obstacle: reports of lagging shipper interest that has meant it hasn’t secured enough interest in the third iteration of Keystone XL to justify building it.


So what does the future of the tar sands and major pipeline proposals like Keystone XL look like today? Few producers have been able to realize profits, but because of sunk capital expenses and the need to constantly finance debt, they also can’t hold back production until things improve. Nonetheless, as (OCI) also points out in their briefing note, the end of production growth is also near at hand as projects under construction near completion and no new construction is currently planned. Surrounding this astonishing turn of events is the dawning reality that low oil prices—once viewed as a momentary correction that would soon go away—are likely here to stay. This reality has become apparent as OPEC’s ability to influence crude oil prices continues to dwindle and producers in shale deposits in the U.S. continue to drive down production prices and flood the global oil supply with a deluge of cheap oil every time there appears to be the slightest rebalancing of supply and demand. It’s hard to imagine a place in this market for low quality oils like the tar sands, which are very expensive to produce, to profitably compete.


As mentioned above, this reality is being recognized and publicly discussed by the few major tar sands players who still remain. Suncor, the company that announced that it would not make new investments in its tar sand operations, has seen the writing on the wall for the past year. As detailed in a post by Greenpeace Canada’s Keith Stewart, the company has even gone so far as to consider a modeled energy scenario where oil demand remains soft, declines, and electrification takes over. In other words, a “climate safe” energy scenario that would force Suncor and all other tar sands operators to stop expansion, produce out what has been built, and leave the rest behind.


The first chapters of this scenario have already been written and confirmed. Over the past year, a parade of oil majors have made hasty retreats from the tar sands, stopping investments, selling assets, writing down reserves, and looking to reserves and alternatives elsewhere. The list is recognizable and should send shivers through anyone still considering the tar sands as a viable resource for future development: Statoil, Marathon Oil, Shell, ConocoPhillips, Total, and even Exxon Mobil. In all, more than $24 billion in drilling rights have been sold off at heavily discounted prices.


Meanwhile, gains in alternative energy continually outstrip analyst projections as cities and states and countries announce increasingly ambitious climate plans that require greenhouse gas emissions to be scaled back dramatically by mid-century. As prime examples, Norway has pledged carbon neutrality by 2030—20 years ahead of schedule—while France announced that it would ban the sale of internal combustion engines by 2040. And automakers are heeding the call, with Volvo announcing that it would stop production of all vehicles with internal combustion-only engines in model year 2019 (i.e., next year).


Despite all of this, while tar sands pipeline proposals are still on the table, threats to the U.S. remain and vigilance is necessary for those communities threatened with the myriad risks these projects pose. Low prices, insufficient oil to fill these proposed pipelines, and shifting global energy priorities erode the business case for major new pieces of tar sands infrastructure like Keystone XL, but the fundamental threats to our shared climate, fresh water, and health must not be forgotten. Meanwhile, there is no question that if current trends hold, Alberta’s tar sands may soon be a thing of the fossil fueled past. Oil prices show no sign of rebounding and significant shifts in the global policy landscape due to climate change are likely to ensure that remains the case. Oil companies are fleeing, profits are hard to come by, and even major remaining players are limiting spending. In the face of this tectonic shift, it is time for a managed decline of the tar sands industry to ensure that Albertans and Canadians are not left on the hook for the economic gambles made by oil-crazed politicians over the past decade.