The political and environmental debates swirling around the proposed $7 billion Keystone XL pipeline from Canada to Texas miss a crucial point, energy analysts say: The Canadian oil is needed to replace fast-dwindling production from two other major suppliers of oil — Mexico and Venezuela.
The United States remains the largest consumer of oil in the world, requiring more than 8 million barrels a day of fuel imports to feed its appetite, with nearly half of that coming from oil-rich neighbors in Latin America as recently as 2005.
But oil production south of the border has fallen off dramatically, and Canadian crude in recent years quietly overtook imports from Mexico, Venezuela and even Saudi Arabia to become the most important outside source of oil for the U.S.
The trend toward replacing unstable sources of oil in Latin America and the Middle East with reliable and friendly sources in Canada was heartily welcomed in political circles until the pipeline controversy broke out last year. After trying to delay a decision until after the presidential election, the White House agreed in a compromise with congressional Republicans to determine within the next two months whether to proceed with the pipeline.
Because nearly all of Canada’s production will come from the Alberta tar sands served by the Keystone pipeline, energy analysts say, the pipeline extension will be needed to ensure that promising trend continues and that the U.S. does not go back to relying inordinately on unstable and hostile suppliers.
“As traditional supplies of heavy crude from countries such as Mexico and Venezuela decline, Canadian oil sands become more important,” said Lucian Pugliaresi, an analyst with the Energy Policy Research Foundation Inc. Canada ships about 2.5 million barrels a day of crude to the U.S., more than twice as much as Mexico and Venezuela combined.
He said environmentalists have a false idea that killing the pipeline will ensure the Canadian oil stays in the ground while forcing increased U.S. reliance on alternative fuels and conservation. Canada, he said, would continue to develop its vast oil reserves, but would sell it to another customer — most likely China.
Daniel Yergin, chairman of IHS Cambridge Energy Research Associates, said it is little wonder that Canadian Prime Minister Stephen Harper threatened to open routes to Asia after the Obama administration delayed a decision on approving the Keystone pipeline in November.
“Canada cannot be wholly dependent on the vagaries of U.S. politics,” he said. Rising tensions and instability around the world should “give new urgency to assuring that North America’s oil resources are developed to what is now their much greater potential,” and that will require construction of the XL pipeline, he said.
Expansion of the vast pipeline network between the U.S. and Canada is the most efficient way to funnel the tar sands oil to consumers — generating fewer environmental pollutants than an overseas route to Asia, analysts say. They add that it seems a natural fit, given the historically friendly and beneficial economic ties between the countries.
U.S. refineries along the Gulf Coast, where Canadian oil would be sent in the Keystone plan, are geared up to turn the heavy tar sands crude into gasoline and other essential fuels because of their experience refining heavy crudes from Mexico and Venezuela. The processing of heavy crudes requires costly equipment upgrades not available at all refineries.
Because oil production from Mexico and Venezuela fell drastically in the past decade, the Gulf Coast refineries now have the capacity to process an additional 500,000 barrels per day of Canadian crude that would come through the pipeline. Refineries closer to Canada — in Chicago, for example — are operating at full production and do not have the capacity to handle more crude.
Jobs versus environment
Mr. Obama’s decision on the pipeline often has been portrayed as one pitting jobs versus the environment. Construction of the pipeline would create thousands of construction jobs, at least temporarily. Meanwhile, powerful environmental groups remain fiercely opposed to development of the tar sands because the extraction process releases more carbon dioxide and other greenhouse gases than conventional drilling.
Patrick Moore, a former leader of Greenpeace who dropped out of the environmental movement because he disagreed with its almost single-minded focus on global warming, said Canada has one of the best records of any country on protecting the environment.
Environmental activists “live in a dream world,” he said, where they believe exotic, expensive and intermittent energy sources like wind and solar power will soon replace proven fuels like oil and coal — even though those conventional fuels provide an overwhelming share of the world’s energy and will continue to do so for decades.
“We need oil now and we’ll need it for the foreseeable future, so it matters greatly where the oil comes from,” he said. “Canadian producers must meet some of the toughest environmental and social standards on the planet” — far above the world’s other top oil producers.
Energy analysts say the decision goes far beyond the tension between jobs and the environment. The battle over the pipeline may determine whether the U.S. is able to cultivate reliable sources of oil in its own backyard or will continue to be whipsawed by the vagaries of politics and foreign suppliers.
Beyond the border
Oil production in Venezuela has been on the decline since President Hugo Chavez — who is openly hostile to the U.S. — nationalized the country’s resources in the past decade, making what was once a top source of imported fuel now among the most iffy for U.S. consumers.
Meanwhile, production in Mexico’s huge oil fields — the largest of which was once as prolific and extensive as Saudi Arabia’s — has peaked and is rapidly falling. Mexico lacks the technological expertise to maintain output in its aging wells, and its constitution prohibits teaming with Western oil companies to do so.
The question goes beyond replacing one source of foreign oil with another, energy specialists say. Enormous reserves of oil that are trapped in shale rock have been discovered in the U.S.
Technological advances such as “fracking,” which fractures the rock to release oil, have started to produce significant amounts of fuel.
The biggest shale oil producer, North Dakota, pumps more than 450,000 barrels a day. About 100,000 barrels of North Dakota’s output were slated to be funneled into the Keystone pipeline, a move that would have encouraged further development of such domestic oil reserves.
“The project is an essential piece of new petroleum infrastructure as the midcontinent region of the United States no longer has any water-borne imports,” Mr. Pugliaresi said.
He noted that Ohio may be the next to start producing oil from the shale rock underlying the state.
In Canada, leaders are patiently awaiting Mr. Obama’s decision and remain hopeful, but they have made clear they will continue to exploit their oil resources with or without the U.S. Ottawa has the option of building a pipeline to its west coast, where the oil could be loaded onto tankers and shipped to Asian markets.
China appears to be waiting eagerly. Three of its state-owned oil companies have established stakes and spent $10 billion developing the Canadian tar sands. One has shown interest in helping to build a west coast pipeline.
“It’s a bit naive to think the tar sands would not be developed if they don’t build that pipeline,” Austan Goolsbee, Mr. Obama’s former top economic adviser, told the Economic Club of Canada last month. “Eventually, it’s going to be built. It may go to the Pacific, it may go through Nebraska, but it’s going be built somewhere.”