Is Keystone XL dead? Or just resting?

As environmentalists celebrate and the energy sector licks its wounds, here are some likely next steps for Canada and TransCanada.

Rejection of Keystone XL was a blow to TransCanada, but probably not the end of the story

A gathering in front of the White House celebrates U.S. President Barack Obama's rejection of the proposed Keystone XL pipeline. (Alex Brandon/Associated Press)

There was an interesting line in TransCanada's statement on Friday, responding to the U.S. rejection of Keystone XL. The company said that it was keeping its options open, including possibly filing a new application for a cross-border oil pipeline.

That one pipe, nearly a metre wide, is being asked to bear all the sins of the carbon economy.– Naheed   Nenshi , mayor of Calgary

A cross-border oil pipeline that would not be named anything like Keystone XL, I would wager, after that project was loaded with enough symbolism to crush even the strongest steel pipe.  

As Calgary Mayor Naheed Nenshi put it on Friday, "That one pipe, nearly a metre wide, is being asked to bear all the sins of the carbon economy."

No one will be surprised to see TransCanada reapply for a Keystone-like oil pipeline. Getting to tidewater and the refineries of the Gulf Coast remains the fondest hope of the energy industry and the company itself has recently said that it thinks the project is inevitable. But it's not going to be an easy ride.

Canadian oil imports to Gulf Coast. (Energy Information Administration)

Oil is getting to market

The chart above shows how much oil makes its way to the Gulf Coast from Canada. In 2008, when the Keystone XL pipeline was first proposed, roughly 100,000 barrels a day made it to the refineries in Texas. That number has since tripled, as oil producers have found other ways to move oil south, either by rail or less direct pipelines. 

Keystone XL had the advantage of being a fairly straight shot from Alberta to Texas, but in recent years, oil has been taking the more scenic route from Alberta to Chicago, then down to Cushing, Okla., and then to the coast. Is it ideal for the industry? No. Is it workable right now? Yes.

"It is true that oil has been moving to market," said Dave Collyer, the former chief executive of the Canadian Association of Petroleum Producers. "Both through de-bottlenecking of existing pipelines and rail and other ways of getting to market. But we need new pipeline capacity to grow production, so it's problematic."

This clears the decks for Justin  Trudeau  to go to Paris to talk about climate change.- Christopher Sands, Hudson Institute

Whether production will grow is about more than pipelines, though; It's very dependent on the price of oil, which is languishing under $50 US a barrel right now, a price where new oilsands expansion isn't really viable.

Oil prices will one day recover, however, and this lull is an opportunity for Canada to change the optics around our environmental credibility.

Canada's 'dirty oil'

Alberta Premier Rachel Notley says she is disappointed that President Barack Obama called Alberta oil "dirty" while rejecting the Keystone XL pipeline Friday. 2:20

In rejecting Keystone XL, Obama referred to Canadian oil as being "dirtier." You can quibble over that phrase all you want, but this is one of those cases where perception is reality.

"I really believe that one of the stumbling blocks to Keystone XL was really nothing to do with TransCanada, nothing to do with the pipe, per se," said Warren Mabee, assistant professor at the Queen's Institute for Energy and the Environment. "And everything to do with the way that Canada has been developing this oilsands resource and our lack of perceived response toward dealing with the climate change issue."

It is clear, at least to Canadians, that we are now starting to deal with the climate change issue. In Alberta, energy economist Andrew Leach is leading a panel that is writing a new climate change policy for the province.

Canada is taking a large delegation to Paris for the UN climate change conference, and we now have a federal minister with "climate change" in her title.

Next steps

"This clears the decks for Justin Trudeau to go to Paris to talk about climate change … and refocus the discussion and Canada's reputation on being part of the climate change consensus," said Christopher Sands, a fellow with the Hudson Institute in Washington D.C. 
Catherine McKenna is Canada's new minister of environment and climate change. (Giacomo Panico/CBC)

Sands thinks Canada has a year to do something about the "dirty oil" reputation, which could involve a commitment in Paris, followed by a plan at home, possibly hosting a North American leaders' summit in Canada, something we haven't done since 2007, in which a North American energy strategy can be discussed

After 2016

By the time there's a new presidential administration in place, it wouldn't necessarily have to be Republican for a pipeline to be approved.

"Trudeau, by that point, will be able to say, 'Look at all the good things we've done, we deserve a second look.'" said Sands.

Hillary Clinton once supported Keystone XL, but changed her mind under the pressure of the Democratic primary season. If she were to win the presidency, she could shift her thinking again, if she has the political cover of Canada's commitment to climate change.

Of course, if a Republican were to win the presidency, it's much more straightforward, TransCanada could change the date on the cover letter and send in roughly the same application again.

In the meantime, though, Sands thinks it good that Canada and the U.S. can build their relationship based on things other than a pipeline

"In the end, Obama gets what he wants, Trudeau  doesn't suffer too much, and the project can come back to fight another day."


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