Energy East pipeline case suspended

The developed of a proposed C$15.75 billion Canadian oil pipeline has asked Canadian regulators to temporarily suspend their review of the project, following the regulator's decision to consider the project's indirect greenhouse gas emissions and other factors as part of its environmental review.

At issue are the proposed Energy East Pipeline and the related Eastern Maineline Project, proposed by affiliates of TransCanada Corp. to transport "about 1.1 million barrels of oil per day from Alberta and Saskatchewan to the refineries of Eastern Canada and a marine terminal in New Brunswick" and to ensure natural gas supply to utilities in Ontario and Quebec.  In 2014, the developed applied to Canada's National Energy Board for approvals required for the 4,500-kilometer project's development.

That case remains pending, but a recent decision about the scope of environmental review has prompted the developer to ask for a temporary pause of the case. On August 23, 2017, the National Energy Board released its final decision establishing a List of Issues and Environmental Assessment Factors to be considered in its review of the projects.  The factors set for consideration include greenhouse gas emissions.  While the Board's environmental factors typically include only direct greenhouse gas emissions -- those emitted by the project itself -- including indirect emissions -- in this case the Board decided to include indirect greenhouse gas emissions as well:

Given increasing public interest in GHG emissions, together with increasing governmental actions and commitments (including the federal government’s stated interest in assessing upstream GHG emissions associated with major pipelines), the Board is of the view that it should also consider indirect GHG emissions in its NEB Act public interest determination for each of the Projects.

On September 7, the applicants filed a letter requesting a 30-day suspension of the Board's review process to give applicants time to "review the Decision, the resulting implications to the Projects, and the respective Project applications."  The next day, the Board issued a ruling that it "will not issue further decisions or take further process steps relating to the review of the Projects until 8 October 2017."

The case remains suspended until that time. 

Utah oil sands mine slowed

A Canadian company developing an oil sands mining and extraction project in Utah has announced a decision to "reduce the pace of field construction in order to maintain working capital flexibility," based on low oil prices.

Oil sands, also known as bituminous sands or "tar sands", are loose sand or partially consolidated sandstone saturated with a viscous form of petroleum called bitumen.  US Oil Sands Inc. is a Calgary-based company that describes itself as "focused on oil sands exploration and production in Utah."  Its wholly owned United States subsidiary US Oil Sands (Utah) Inc. has bitumen leases covering 32,005 acres of land in Utah’s Uinta Basin.

US Oil Sands' PR Spring Project area consists of 5,930 contiguous acres near the East Tavaputs Plateau in Utah.  According to the company, construction of Phase 1 of the PR Spring Project is approximately 85% complete with costs coming in below budget.  If completed, it would be the first U.S. oil sands mine to enter commercial production.

While the company has not yet entered production, US Oil Sands has described a proprietary extraction process using a citrus-based bio-solvent to extract bitumen from oil sands without the need for tailings ponds.  The company pitched this technique as different from traditional Canadian oil sands production in Alberta, where wastewater management is a controversial environmental challenge.  But the Utah proposal has drawn concern over impacts to groundwater flowing under the Book Cliffs

But the company said it conducted a detailed review of the project "in light of continued low oil prices and the closure of two key contractors’ Utah-based operations."  Specifically, the press release stated, "The low price environment has impacted the Project as two of the Company’s key contractors have closed their operations in Utah and have caused delays to the Project."  Indeed, spot prices for West Texas Intermediate have ranged near $30 per barrel in recent days, with U.S. crude futures falling below $30 earlier this year for the first time since 2003.  The press release also mentions that $10 million in previously-announced royalty financing had not closed, causing the company to explore other options including equity financing.

According to the press release, project work on the PR Spring Phase 1 project will continue at a reduced level, with an expected focus on "critical path items and areas that will lead to the most efficient restart of full construction operations in the future. In spite of delays and increased costs that will occur with restart of full construction operations, the Company is still targeting completion within the original US$60 million approved budget."

How will US Oil Sands survive the low oil price environment?  How will economic, environmental, or other factors affect the fate of Utah oil sands mining?

East coast exports of Western Canadian crude

As Western Canada produces more heavy crude oil, will it be exported from ports on Canada's relatively distant east coast?

Eastern Canadian exports of Western Canadian crude oil may increase, according to Canadian oil producer Suncor Energy Inc.  In its third quarter investor call, company Chief Executive Officer Steve Williams indicated that it could have long-term opportunities to export Cold Lake-grade crude oil by sending it by rail from Alberta to East Coast ports.  According to ExxonMobil, Cold Lake Blend is an asphaltic heavy crude blend of bitumen and condensate.

If long-term opportunities may exist, so too have recent opportunities.  In September 2014, Suncor confirmed that it had sent its first shipment of Western Canadian crude by rail to a storage facility in Sorel-Tracy, Quebec, from which it was loaded onto a tanker ship and sent to Europe.

Many aspects of the Canadian oil industry are regulated, such as the development of new crude oil pipelines from landlocked Alberta to distant refineries, storage facilities and ports.  Several pipelines have been proposed to increase takeaway capacity from the Western Canadian oil sands region, including the Energy East Pipeline in Canada and the Keystone XL Pipeline in the U.S.  But as securing regulatory approvals for pipelines takes time, shipping crude oil by rail has emerged as a quicker alternative.

In its most recent investor presentation, Suncor touted its near-term access to global markets, with over 600,000 barrels a day of sendout capacity.  Its current capacity includes over 80,000 barrels per day by rail, as well as over 70,000 barrels per day via pipeline to the U.S. Gulf Coast.  By 2015, Suncor plans for the 130,000 barrel per day "Line 9" pipeline to be reversed, allowing flows from Sarnia into Montreal.  Beyond then, Suncor is looking at additional pipeline projects including Keystone XL, Energy East, the Trans Mountain Expansion, and the Enbridge Northern Gateway pipeline to British Columbia.

As Suncor and other Western Canadian oil producers eagerly await new pipeline capacity, rail shipments may continue to serve as a temporary measure.  If pipelines can be developed to key market points, they typically offer a lower shipping cost per barrel than railroads can.  At that point, railroads may see a reduction in the volume of oil they ship  -- but until then, Western Canadian oil producers may continue to rely on rail to reach eastern ports.

Canada's Energy East Pipeline Project

A subsidiary of Canadian energy company TransCanada has proposed a crude oil pipeline running 4,600 kilometers from Alberta and Saskatchewan to Saint John, New Brunswick.  The proposed Energy East Pipeline Project would enable Western Canadian crude oil to be shipped east across six Canadian provinces, expanding economic opportunities for refining and export -- but like other major pipeline projects, the Energy East project faces regulatory hurdles.

On March 4, 2014, Energy East Pipeline Ltd., a wholly owned subsidiary of TransCanada Oil Pipelines (Canada) Ltd., proposed the project which entails the conversion of about 3,000 kilometers of existing natural gas pipeline to an oil transportation pipeline, new pipelines in Alberta, Saskatchewan, Manitoba, Ontario, Québec and New Brunswick, and marine facilities that enable access to other markets by ship.  If built, the $12 billion project could carry up to 1.1 million barrels of crude oil per day.

The major motivation behind the line is the relative surplus of Western Canadian crude oil, including fuel produced from the Alberta oil sands.  While Alberta and Saskatchewan produce substantial oil, relatively little capacity to ship that crude to refineries means relatively low prices for producers.  Meanwhile, refineries in Quebec and Atlantic Canada currently receive 86% of their crude oil from foreign sources.  TransCanada pitches the Energy East project as giving these Eastern Canadian refiners access to "reliable, low-cost Western Canadian crude."  The developer also points to positive economic development impacts, including about 10,000 jobs and an estimated $35 billion added to Canada’s gross domestic product over 40 years, as well as the relative safety of shipping oil by pipeline as opposed to by rail or truck.  Notably, the project also allows TransCanada to make better use of its existing natural gas pipeline system, which has excess unused capacity.

Like the Keystone XL pipeline in the U.S., the Energy East project faces opposition from both local siting concerns and global worries about the environmental impacts of "tar sands" crude production.  Some have also expressed concerns that the project would disrupt natural gas flows to Canadian consumers, although TransCanada has said that it has plans to build more lines to meet any increased demand.

Under Canadian law, interprovincial pipelines are federally regulated by Canada's National Energy Board (NEB).  According to its website, TransCanada expects final regulatory approval in the fourth quarter of 2015, with the project commissioned and placed in service in 2018.  How the regulatory process plays out will affect when -- and whether -- the Energy East pipeline project moves forward.

Keystone XL pipeline supplemental Environmental Impact Statement

The proposed Keystone XL pipeline took a step forward this month, as the U.S. State Department released its evaluation of the project's potential environmental impacts.  The draft Supplemental Environmental Impact Statement (EIS) released on March 1, 2013 documents the State Department's analysis of the pipeline's impacts to environmental resources based on the currently proposed route.  The EIS is still preliminary, and is now subject to public comment.  Moreover, even a final EIS would not reach any conclusion as to whether the pipeline serves the national public interest, and the project would still need a presidential permit to ship oil across the US-Canadian border.  Nevertheless the draft EIS does suggest that any environmental impacts from the pipeline would be relatively minor.

The Keystone XL project is a proposed extension of an existing crude oil pipeline.  The $7 billion project would run from the Canadian province of Alberta to Texas, delivering Canadian crude to refineries on the U.S. Gulf Coast.  The oil shipped on the pipeline would likely include so-called synthetic crude derived from Canada's oil sands or "tar sands" resources.

The draft EIS (available from the State Department's website) makes a series of findings about the project's potential environmental impacts, ranging from direct impacts along the pipeline's route to indirect impacts like further development of the Alberta oil sands.  As the State Department found in its earlier environmental review, the supplemental EIS found that the pipeline would not have significant impacts to any resources along the proposed project route.

Notably, the draft EIS found that Keystone XL would not be likely to substantially increase the rate of development of the oil sands, nor would it likely increase the volume of crude oil refined in the Gulf Coast.  For example, the draft found that denial of the pipeline's presidential permit would not mean a reduction in oil production in Western Canada or from the Bakken formation; rather, oil producers would resort to other transportation modes such as pipelines to British Columbia or even rail shipment of crude.  For similar reasons, the draft EIS found that the Keystone XL pipeline would not substantively change global greenhouse gas emissions.

Next steps for the Keystone XL project include a 45-day public comment period, after which the State Department will issue a final EIS.  Later this year, the State Department is expected to issue a so-called national interest determination, considering factors including foreign policy, economics, environmental concerns, and national security. This determination will involve consultation with other agencies, including the U.S. Departments of Defense, Justice, Interior, Commerce, Transportation, Energy, Homeland Security and the Environmental Protection Agency.  The final decision whether to allow the pipeline falls to President Obama.

Oil sands: an "unconventional" oil resource

New technologies enable the production of petroleum from unconventional oil resources such as "tar sands" and oil shale.  While traditional oil wells have been drilled for over 2,000 years, unconventional resources offer the opportunity to develop new petroleum sources - and by extension, to shift the balance of power and economics away from traditional sources.  At the same time, producing oil from oil sands may have environmental impacts that are different from traditional wells.  What are tar sands or oil sands?

Oil sands, also known as bituminous sands, are loose sand or partially consolidated sandstone saturated with a dense and viscous form of petroleum technically referred to as bitumen.  Oil sands are often called "tar sands" due to bitumen's sticky, dark nature.  ("Tar" technically refers to a product made by distilling pitch from the wood and roots of pine trees, and was historically used to describe the sticky black residue left behind when distilling coal gas.) 

Bitumen is so viscous that it cannot be pumped directly from the ground through traditional wells.  Oil sand deposits are typically mined using open pits or strip mining.  The mined material is mixed with water at an extraction plant, where the bitumen can be separated from the remaining minerals, sand, and water.  The bitumen can then be transported for upgrading or conversion into synthetic crude oil.

Alternatively, bitumen can be extracted by heating the raw sands in place.  In-situ production methods include injecting steam or solvents, or piping in oxygen and igniting some of the bitumen.  These methods rely on the use of large amounts of water and energy.

According to the U.S. government's 2012 oil shale and tar sands programmatic environmental impact statement, about two tons of tar sands can produce one barrel of oil.  Extraction and processing typically require several barrels of water for each barrel of oil produced.  Some of this water can be recycled.
About three-quarters of the bitumen can be extracted from the raw material.  Spent sand and other materials are typically returned to the mine after processing.

Producing oil from bitumen derived from tar sands can have significant environmental impacts.  The mining and upgrading processes are energy-intensive and result in emissions of greenhouse gases and air pollutants.  Mine sites are typically significantly disturbed, and impacts to water may be both local and throughout the downriver watershed.  The association between the proposed Keystone XL pipeline and oil sand resources in Alberta, Canada led to environmental opposition to that pipeline.

Producing oil from oil sands may be controversial, but Canada possesses the world's largest known resources and is developing them rapidly.  Canada points to environmental regulations and controls, as well as economic development benefits.  Developing oil sand resources creates jobs and economic growth, and mine sites are typically in rural areas eager for opportunity.  If the U.S. does not approve the Keystone XL pipeline, Canadian producers may push for an alternative route to refineries or export terminals in British Columbia, obviating the need for U.S. approval.

Economically, synthetic crude oil produced from oil sands bitumen can be cost-effective if the price of oil produced from traditional wells is high.  On the other hand, if oil from wells or other unconventional resources like oil shales can be produced cheaply, oil sands may not be economically competitive.  The significant capital investment required to produce bitumen from oil sands means that producers must often make long-term investments that risk losing money in some years.  Producers may also face the risk of tighter environmental standards, the cost of compliance, and any penalties for noncompliance.