'New' IHS report dusts off old and inaccurate industry talking points about Keystone XL

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Earlier this week IHS - an oil industry funded research consultancy - released another in a long line of reports promoting the proposed Keystone XL tar sands pipeline. The report makes a number of outlandish and unsubstantiated claims about tar sands by rail, how much tar sands from Keystone XL would be used in the U.S., and the pipeline's impact on tar sands expansion. The truth of the matter is that IHS has been exaggerating tar sands by rail for years, the refineries interested in Keystone XL are exporting as much as 80% of their refined product and the tar sands producers most interested in Keystone XL have cancelled a million barrels per day (bpd) in tar sands expansion over the last year alone. Tar sands lobbysts can't spin the fact that both government and industry data show that Keystone XL is an export pipeline through the United States which would enable substantial tar sands expansion and the significant carbon emissions associated with that expansion.

Let's look at each of these issues in detail.

Fact: Tar sands by rail to the Gulf has not proven to be an alternative to pipelines

In its most recent report, IHS continues a long history of exaggerating the volumes of tar sands moving by rail in order to support the argument that tar sands expansion is inevitable with or without Keystone XL. They have continually proven inaccurate. IHS's prediction that Canadian crude by rail will increase from 200,000 bpd in 2014 to 400,000 bpd in 2015 - with most of it being tar sands going to the Gulf Coast - simply isn't based in reality.

Let's look at the numbers. According to the Canadian government's National Energy Board (NEB), Canada's crude by rail shipments averaged 170,000 bpd during the first three quarters of 2014. These figures include both rail shipments within the country and exports to the U.S., as well as tar sands and conventional crude.

IHS's February 2015 forecast is uncannily similar to a prediction IHS made a year and a half ago. In August 2013, IHS forecast that Canadian crude by rail would average 360,000 bpd in 2014. As NEB figures show, it hasn't reached half that amount. In fact, Canadian crude by rail volumes are little higher than IHS said they were in early 2013 (in part because they were exaggerating those numbers at the time as well).

Table 1. IHS rail forecasts compared to actual volumes as reported by NEB

Actual (NEB)

IHS (August 2013)

IHS (Dec. 2014)

IHS (February 2015)

First quarter, 2013

106,000 bpd

150,000 bpd

Average, 2013

128,000 bpd

140,000 bpd

Average, 2014

170,000 bpd

360,000 bpd

220,000 bpd

200,000 bpd

Average, 2015

400,000 bpd

Thus far, most of Canada's crude by rail traffic has stayed in Canada. While crude by rail export statistics from NEB aren't available for 2014, figures from 2013 show that a large portion of that traffic is not headed to the United States. In 2013, the NEB shows that Canada's crude by rail volumes averaged 128,000 bpd. Of that, only 20,000 bpd went to the United States - and most of those U.S. shipments didn't go to the Gulf Coast.

An Oil Change International (OCI) analysis of Canada's crude by rail volumes shows that only 50,000 bpd to 60,000 bpd of Canadian crude made it to the Gulf Coast by rail in 2014.

Moreover, Canadian's crude by rail volumes include conventional crude as well as tar sands volumes. Most of North America's crude by rail comes from the Bakken formation, which includes both North Dakota and Saskatchewan. Producers of light, Bakken oil have shown a preference for rail - they've actually turned down two major pipeline proposals, including the 200,000 bpd Bakken Crude Express and the 250,000 bpd Dakota Express. North Dakota's oil producers ignored these proposals even as they sent over half a million bpd of crude by rail.

The same can't be said about tar sands producers. Tar sands by rail to the Gulf has not proven to be a viable alternative to Keystone XL or other pipelines. In fact, the first tar sands producer to sign long term crude by rail contracts to the Gulf in 2012 has now declared bankruptcy - in part because of high transportation costs. Rail companies trying to make tar sands by rail work have had similar problems making the economics work. For instance, tar sands by rail operator Canexus, which had expected to be shipping 150,000 bpd from its Bruderhiem terminal in 2014, hasn't reached a tenth of those volumes.

The bottom line is that make tar sands by rail hasn't worked for producers or rail companies. This is why companies like Shell, Total, Statoil and Cenovus have cancelled over a million bpd in expansion projects over the last year.

Fact: Gulf Coast refineries interested in Keystone XL export the majority of their refined product.

IHS makes the unsubstantiated claim that "the vast majority of USGC refined product output - about 70% - is consumed in the United States." Because the consultancy doesn't provide any basis for its assertion, it's difficult to know that where they're getting this number. According to Energy Information Administration (EIA) data, IHS had to go all the way back to 2010, which was the last time it's statement could have been considered accurate.

The Energy Information Administration's (EIA) data shows that the majority of the United States refined product exports come from the Gulf Coast refinery district. Based on EIA's most recent data in November, refineries in the Gulf Coast exported 3.1 million barrels of crude oil and refined product every day.

How large a percentage of the Gulf Coast's overall production is that? According to EIA, the entire Gulf Coast refinery district - which include refineries in New Mexico, west Texas and Arkansas which don't have access to export markets or interest in Keystone XL - produced 6.5 million bpd of refined product in November. Now if we exclude the 800,000 bpd produced by refineries in West Texas, New Mexico, Northern Louisiana and Arkansas, places too far inland to have access to the water for loading tankers or interest in Keystone XL, we see that coastal refineries in Texas and Louisiana produced about 5.7 million bpd of refined product, of which they exported 3.1 million bpd - or over half of their production.

Drafts of the State Department environmental review of Keystone XL in early 2013 acknowledged that the majority of refined product in Gulf Coast refineries was exported internationally - and this trend has increased significantly since then. (State Department DSEIS, March 2013, pg. 1.4-15).

However, a close look at the specific refinery companies interested in tar sands from Keystone XL suggest that even higher percentages of the tar sands from that pipeline will be exported internationally after it is refined. For instance, the refining company Valero - which has contracted for the largest share of Keystone XL's capacity - is also exporting a disproportionate amount of its refined product. In a February 2015 presentation, Valero told investors that it intended to increase its exports of premium refined products (gasoline and diesel) from the Gulf Coast from 667,000 bpd to 780,000 bpd.

By all measures, this represents the majority of Valero's production. Less than 60% of Gulf Coast refinery output is in the form of diesel and gasoline. Valero has about 1.6 million bpd of capacity in the Gulf Coast, which means that even if its refineries are operating at full capacity (which refineries rarely do), the company's Gulf Coast gasoline and diesel production does not exceed 960,000 bpd. Based on that, Valero's Gulf Coast diesel and gasoline exports likely exceed 80% of its production.

This is in the context of U.S. petroleum product exports that have nearly quadrupled over the past decade, rising from one million barrels per day, on average, in 2004, to four million barrels per day in 2014, with the lion's share coming, as noted above, from the refineries the KXL pipeline would serve (EIA, pg. 37).

FACT: Raw, unrefined tar sands crude is being exported from the Gulf Coast.

While only small volumes of Canadian tar sands are making it to the Gulf Coast now, the tar sands industry is already exporting increasing volumes of it to Europe and Asia. Tidal Energy Marketing, a subsidiary of the tar sands shipping company Enbridge, has received and used a license to re-export Canadian crude from the Gulf Coast. Platts reports that between 500,000 to 600,000 barrels of raw tar sands was loaded onto tankers from Freeport, Texas to go to refineries in Spain. According to the Globe and Mail, over 1.2 million barrels of raw tar sands were shipped from ports in Houston, Galveston and New Orleans to Spain, Italy, Singapore and Switzerland in July and August alone. As Marin King, an analyst with FirstEnergy Capital in Calgary observed about growing volumes of raw tar sands exports from the Gulf Coast:

"This is a viable opportunity for Canadian barrels to get out into the wider world. It's another source of revenue other than big brother United States." Martin King, FirstEnergy Capital analyst, April 2014

While it's true that much of the tar sands from Keystone XL is likely to be refined in the Gulf Coast before being exported, IHS seriously overstates the case by saying "We think this is highly improbable, at least in volumes beyond the occasional test cargo sent to international refiners." Test cargos are sent to allow refinery configurations to optimize future imports. Moreover, there is a reason the tar sands industry has spent so much time lobbying the European Union to allow tar sands imports.

Fact: Tar sands expansion is not inevitable - industry has scrapped over one million bpd of expansion projects over the last year
In 2014, when oil prices were still about $90 a barrel, Shell announced it was pulling away from its 200,000 bpd Pierre River Mine, Total pulled the plug on its 160,000 bpd Josyln Mine and Statoil cancelled its 40,000 bpd Corner project. These companies all noted a lack of pipelines and market access as a major factor in their decision to cancel these projects. Since the drop in oil prices, Cenovus and MEG announced the deferrals of 550,000 bpd in additional expansion - including MEG's 150,000 bpd Christina Lake expansion, Cenovus's 130,000 bpd Narrows Lake, 180,000 bpd Grand Rapids and 90,000 bpd Telephone Lake projects. CNRL recently announced it was postponing its 40,000 bpd Kirby South project.

It's worth noting that the companies responsible for the majority of these cancellations - Cenovus, Total, Shell and CNRL - all signed on for capacity on Keystone XL. At the same time, many of these companies are shipping conventional oil by rail in other parts of their operation. It's telling that given the delays surrounding Keystone XL, these companies have decided to cancel their expansion projects rather than shift to rail. If Keystone XL were to materialize we would likely see these companies resurrect their planned expansion projects.

The tar sands industry itself recognizes that a lack of pipeline capacity is the most critical obstacle in its expansion plans - with Canadian Association of Petroleum Producers President Tim McMillian observing earlier this year, "No question, the effects on the industry are sharp but we continue to need all forms of transportation in all directions - pipelines in particular - as our industry continues to grow in the years ahead."

In conclusion, IHS's most recent report simply dusts off outdated arguments that the tar sands industry using for the Keystone XL when pitching the project in Washington DC and U.S. media. As government and industry data continue to confirm, Keystone XL would enable significant tar sands expansion, undermining our efforts to address climate change, putting our farms and water resources at risk in order to provide the tar sands industry with access to international markets.

About the Authors

Anthony Swift

Director, Canada Project, International program

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