Keystone XL pipeline threatened by U.S. oil boom

A sudden surge in U.S. oil output could derail plans to build the massive Keystone XL pipeline to ship Canadian oil from Alberta to refineries on the American Gulf Coast, Canada's U.S. ambassador was warned in internal emails.

In a series of emails unearthed by an access to information request from energy think tank Pembina Institute and provided to CBC News,Canadian energy counsellor Paul Connors warned ambassador Gary Doer in thesummer that America's current oil boom could alter the viability of cross-border pipeline plans.

Many options

Keystone XL is a proposed 1,900-kilometrepipeline being pitched by Calgary-based TransCanada that aims to bring Canadian oilsands oil from Hardisty, Alta., south through five U.S. states to oilrefineries on the Gulf Coast in Texas.

The plan is an ambitious one, coming with a price tag of more than $7 billion, andhas faced numerous regulatory hurdles over several yearswhile various governments and companies try to negotiate the final details.

Broadly, Canada lacks the refining capacity to adequately process the billions of barrels of oil that are contained in the Athabasca oilsands. America, meanwhile, has more than enough refineries operating at less than full capacity, so the plan has been pitched as an economic bonanza for both sides.

Our customers remain extremely supportive of Keystone XL.- TransCanada statement

But recent events may have changed thoseeconomics somewhat. A series of oil discoveries in theBakken, Eagle Ford and Permian basins scattered across the continental U.S. have increased America's possible oil output to a far higher level than previously believed.

The U.S. now has so much recoverable oil that it's now expected tosurpass Saudi Arabia as the world's largest oil producer at some point in the next 10 to 20years.

Refineries are configured to process different types of crude heavy crude goes to heavy refineries, light crude to light ones. Currently, heavy oilsands oil from Albertagoes to heavy oil refineries predominantly on the U.S. Gulf Coast.

"The significant increase in U.S. domestic production in recent years is light sweet crude which has lower [greenhouse gases]than heavy crude," Connors wrote in anemail to Doer in June.

The best way for America to profit from its current oil boom couldbe to export its new sources of light crude, because thats whats most in demand internationally and thats what fetches the higher prices.

"However, if reducing U.S. [greenhouse gas] emissions is the goal, the U.S. could decline to export its light sweet crude surplus [and] domestic light sweet crudewould begin to [replace]heavy oil imports."

Environmental concerns

U.S. President Barack Obama has repeatedly said that his government would only approve the Keystone XL project if it would not materially alter America's greenhouse gas emissions. So asuddenly plentiful energy alternative with a smaller environmental footprint could change the lay of the land.

For its part, TransCanadasays it remains fully committed to the planas are its customers.

"TransCanada does not build pipeline projects and then hope we can fill them. Our Keystone XL customers have signed 20-year, binding commercial agreements because they needed to connect oil supplies in Canada and the U.S. to refineries," the company said in an email to CBC News.

"Our customers remain extremely supportive of Keystone XL, and the markets understand that you need to have the right infrastructure in place to move product at the right time."

Natural Resources Minister Joe Oliver agrees with that statement, tellingCBC News that even with the conventional oil boom, "the U.S. Energy Information Administration projects that the U.S. will need to import 7.4 million barrels of oil per day in 2035."

"Therefore, Keystone XL will displace an unstable source of heavy oil from Venezuela, with the same or higher greenhouse gas emissions, with a friendly, stable and reliable source of Canadian oil," Oliver's statement reads.

Indeed, if the project doesn't go ahead, the U.S. State Department acknowledges thatalternative modes of oil transport (such as rail) that emit as much as eightper cent more greenhouse gases will likely deliver the oil that Keystone XL would have.

Ottawa backs plan

"Our government supports the Keystone XL pipeline because it would enhance national security, create tens of thousands of jobs and generate billions of dollars in economic activity in both Canada and the U.S.," the spokesperson said.

Still, any indication that the Americans haveless of an appetite for Keystonecould be bad economic news for Canada, which mainly produces heavy oil, almost all of which currently goes to the U.S.

If America chooses to use more of its ownlighter oil domestically and needs less heavy Canadian oil, there is little Canadian oil producers could do in the short term to maintain a market for their product.

Canadian oil, known as Western Canada Select, already trades at a discount of about $30 compared to the American benchmark, West Texas Intermediate or WTI,mainly because it's heavier and therefore more expensive to refine, which limits the number of refineries willing to take it.

"While this is economically sub-optimal for the heavy oil refineries, it would make the mix of U.S. crude oil lighter and less [greenhouse gas] intensive, Connors wrote.