Nebraska Regulators Approve Keystone Pipeline Route Days After South Dakota Leak, Shutdown

TransCanada received its final required pipeline route approval, winning Nebraska’s permission to build its long-delayed Keystone XL crude oil pipeline across the state... just days after a 5,000 barrel spill in South Dakota shut the pipeline.

The decision will almost certainly be challenged in court.

Just a few short days after 210,000 gallons of crude oil spilled in South Dakota, Bloomberg reports that Nebraska"s Public Service Commission voted three to two Monday, removing one of the last hurdles to the Calgary-based company’s construction of the $8 billion, 1,179-mile conduit (1,897-kilometer), which has been on its drawing boards since 2008.

For those who aren"t familiar with the project, the pipeline links Canada’s Alberta oil sands to U.S. refineries.  While a portion of the pipeline has been operating, part of it had still not been approved by state regulators... until today"s decision by Nebraska.

However, as Bloomberg notes, the commission approved an alternative route.

Jane Kleeb, president of the environmental advocacy group Bold Alliance, said green-lighting an alternative route may have helped the commission reach a "middle ground solution.”

 

At the same time it opens new questions that she said her group would explore in federal court. She argued the secondary route wasn’t adequately vetted.

 

That view mirrored a dissenting opinion filed by Commissioner Crystal Rhoades. She wrote that TransCanada didn’t meet "the burden of proof” in proving that the pipeline is in the state’s public interest, and she said the alternative route needed more study on both the state and federal level. For example, she said, Nebraska’s Department of Environmental Quality didn’t analyze the alternative route at all in its 2013 report.

 

"It is clear” TransCanada “never intended it to be considered," Rhoades said.

 

In its post-hearing brief, TransCanada told the panel its "preferred route was the product of literally years of study, analysis and refinement by Keystone, federal agencies and Nebraska agencies," and that no alternate route, even one paralleling the Keystone mainline as the approved path does, was truly comparable.

TransCanada"s share price is up on the news...

Notably, with Nebraska’s go-ahead in hand, TransCanada still must formally decide whether to proceed with construction on the line, which would send crude from Hardisty, Alberta, through Montana and South Dakota to Nebraska, where it will connect to pipelines leading to U.S. Gulf Coast refineries. The company’s open season for gauging producers’ interest closed late last month, and TransCanada executives have indicated that they’ve secured enough shipping commitments to make the project commercially worthwhile.

Keystone XL Pipeline Shut Down After 5,000-Barrel Spill In South Dakota

Well this is awkward.  After months/years of protests targeting the Keystone XL pipeline from environmentalists worried about oil spills, TransCanada has now been forced to shut down the pipeline following...drum roll please...a 5,000 barrel oil spill in South Dakota.  According to The Hill, the pipeline was taken offline at 6am this morning following a leak that was discovered about 35 miles south of a pumping station in Marshall County, South Dakota.

Workers took the Keystone oil pipeline offline on Thursday after it spilled 5,000 barrels of oil in rural South Dakota, officials said.

 

A TransCanada crew shut down the pipeline at 6 a.m. Thursday morning after detecting an oil leak along the line, the company said. The leak was detected along a stretch of the pipeline about 35 miles south of a pumping station in Marshall County, South Dakota.

 

TransCanada estimates the pipeline leaked 5,000 barrels of oil, or about 210,000 gallons, before going offline. The company said it"s working with state regulators and the Pipelines and Hazardous Materials Safety Administration to assess the situation.

 

The South Dakota Department of Environment and Natural Resources heard about the leak at about 10:30 a.m. Thursday, ABC affiliate KSFY reported.

For those who aren"t familiar with the project, the 1,179 mile Keystone XL pipeline links Canada’s Alberta oil sands to U.S. refineries.  While a portion of the pipeline has been operating, part of it has still not been approved by state regulators.

Here is the statement on the incident posted by TransCanada earlier this morning:

At approximately 6 a.m. CST (5 a.m. MST) today, we safely shut down the Keystone pipeline after we detected a pressure drop in our operating system resulting from an oil leak that is under investigation.

 

The estimated volume of the leak is approximately 5,000 barrels. The section of pipe along a right-of-way approximately 35 miles (56 kilometres) south of the Ludden pump station in Marshall County, South Dakota was completely isolated within 15 minutes and emergency response procedures were activated.

 

The safety of the public and environment are our top priorities and we will continue to provide updates as they become available.

As you may recall, former President Barack Obama opposed the completion of the pipeline, but the Trump administration granted a permit for it in March. That said, Nebraska state regulators still need to approve the project in their state and a decision was expected from the Nebraska Public Service Commission next week....somehow we suspect that decision might be delayed.

The five members of the Nebraska Public Service Commission will vote on a proposed order for the Keystone XL pipeline on Nov. 20, the agency announced on Monday, though it didn’t detail what that decision might be.

 

Approval from the Nebraska commission is one of several tasks facing Keystone XL developer TransCanada, which hopes to build the pipeline and deliver oil from Alberta, Canada, to the Gulf of Mexico.

 

TransCanada reapplied for its Nebraska permit in February, putting the decision in the hands of the Public Service Commission. It applied to follow the same route bisecting Nebraska that the state’s governor approved in 2013, before President Obama rejected federal permits for the pipeline.

Ironically, Trump touted the Keystone XL pipeline as "the greatest technology known to man or woman" when he approved it back in March...oops.

Today, I was pleased to announce the official approval of the presidential permit for the #KeystonePipeline. A great day for American jobs! pic.twitter.com/5ga6XmpStG

— Donald J. Trump (@realDonaldTrump) March 24, 2017

BREAKING: Keystone Pipeline Shut down After Leaking 210,000 Gallons of Oil

(ANTIMEDIA) — The contentious Keystone Pipeline has been temporarily shut down after a 210,000-gallon oil leak was discovered in South Dakota.

According to local ABC News affiliate KSFY:

“Brian Walsh with the Department of Environment and Natural Resources tells KSFY News they were alerted to the leak at 10:30 a.m. Thursday morning by TransCanada.

“The leak was in the Keystone Pipeline located in an agricultural area in Marshall County. There have been no reports of the oil entering any waterways or water systems at this time.

“Walsh said 5,000 barrels of oil have leaked, and at 42 gallons a barrel, that totals 210,000 gallons of oil.

“The pipeline has been shut off and the leak has been covered. An emergency response plan has been activated to get more staff and contractors to the site for clean up.”

The Keystone Pipeline, which carries crude oil from Canada’s tar sands to American refineries, has been a source of contention for years and was suspended under the Obama administration. One of President Trump’s first acts in office was authorizing the construction of both the Keystone and Dakota Access pipelines.

Environmentalists and Native American groups in the U.S. and Canada opposed both projects. The recently completed Dakota Access Pipeline also experienced a leak, albeit a smaller one, earlier this year, joining numerous other pipelines across the country that have had spills in 2017.

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US Oil Rig Count Drops For First Time In 24 Weeks As Trump Unveils US-Mexico Petroleum Pipeline

Last week saw US crude production decline by the most since Aug 2016 (perhaps affected by "Cindy") and given the lagged response to WTI prices, many expected the oil rig count to drop this week. As WTI heads for its 7th up-day in a row - the longest streak in 6 months - it is supported as the US oil rig count dropped 2 to 756, the first drop in almost 6 months.

“Is it possible we’d have our first negative number in 24 reports? Unlikely but it’s possible” when you see production down 3 of the past 7 weeks,  Bob Yawger, director of the futures division at Mizuho Securities USA in New York, says by telephone

• *U.S. GAS RIG COUNT UP 1 TO 184 , BAKER HUGHES SAYS :BHI US


• *U.S. OIL RIG COUNT DOWN 2 TO 756 , BAKER HUGHES SAYS :BHI US

WTI lifted modestly on the print holding earlier gains...

Lower 48 Production fell 55k b/d last week - the biggest drop since Aug 2016...

Total U.S. crude output dropped 100k b/d to 9.25m b/d last week, biggest drop in almost a year and 3rd decrease in the last 7 weeks, according to EIA report Wednesday

We suspect the drop is related to shut-ins from tropical depression Cindy and will recover quickly. It appears President Trump is confident that the Lower 48 will keep pumping as OilPrice.com"s Tsvetana Paraskova reports, to boost American energy exports, the administration of U.S. President Donald Trump has approved the construction of a new petroleum pipeline from the U.S. to Mexico that “will go right under the wall,” President Trump said on Thursday.

As part of the ‘energy week’, which promotes U.S. global leadership and dominance in energy, President Trump announced six initiatives “to propel this new era of American energy dominance,” he said.

The first initiative is the U.S. to start reviving and expanding its nuclear energy sector. Next, the Department of the Treasury will address barriers to the financing of highly efficient, overseas coal energy plants, President Trump said, mentioning Ukraine as one of the countries that need coal. The third initiative is the petroleum pipeline to Mexico. The fourth step to growing American relevance in global energy is U.S. Sempra Energy signing a deal to start negotiating sales of more American natural gas to South Korea.

The U.S. also approved two long-term applications to export additional natural gas from the Lake Charles LNG terminal in Louisiana, President Trump said, pointing out the fifth initiative. As a sixth initiative, the U.S. is “creating a new offshore oil and gas leasing program” to open up more areas for offshore development, President Trump said.

“We will be dominant. We will export American energy all over the world, all around the globe. These energy exports will create countless jobs for our people, and provide true energy security to our friends, partners, and allies all across the globe,” President Trump said in his speech.

The U.S. Department of State issued on Thursday three pipeline presidential permits for U.S.-Mexico pipelines. The permit for the New Burgos Pipeline authorizes construction, connection, operation, and maintenance of a new pipeline that has the capacity to deliver up to 108,000 bpd of certain refined petroleum products. The pipeline will cross the U.S.-Mexico border near Peñitas, Texas.

“New permits for the existing Dos Laredos and existing Burgos pipelines, which cross the border in Texas near Laredo and Peñitas, respectively, reflect a change in the name of the permit holder and authorize transport of a broader range of petroleum products than under the previous Presidential permits,” the Department of State said.

The U.S. Department of Energy announced on Thursday the approval of the two long-term applications to export additional LNG from the Lake Charles LNG Liquefaction Project in Lake Charles, LA.

Keystone XL Needs Much Higher Oil Prices To Be Viable

Submitted by Arthur Berman via OilPrice.com,

The Keystone XL Pipeline (KXL) is a bet on much higher oil prices several years from now. It will take at least $85 oil prices to develop the new oil sand projects needed to fill the pipeline.

It is also a bet that U.S. tight oil output will continue to grow and will need heavy oil to blend for refining. Both bets are risky.

A Bet On Higher Oil Prices

KXL would add about 830,000 barrels per day (b/d) to the 1.3 million b/d already moving through the base Keystone Pipeline system completed in 3 phases between 2010 and 2014 (Figure 1) when oil prices were more than $90 per barrel.

(Click to enlarge)

Figure 1. Location map of Keystone XL and Base Keystone pipeline systems. Source: TransCanada and Labyrinth Consulting Services, Inc.

It was not until prices exceeded $70 per barrel in 2005 (December 2016 dollars) that oil sands expansion began to accelerate (Figure 2). Since then, production has almost doubled from 1.3 to 2.4 mmb/d and cumulative production has increased from 5.4 to 10 billion barrels.

(Click to enlarge)

Figure 2. Oil Sands Production Nearly Doubled After Oil Prices Exceeded $70 Per Barrel. Source: Statistics Canada and Labyrinth Consulting Services, Inc.

By comparison, the Bakken and Eagle Ford tight oil plays have each produced 2.4 billion barrels. The Permian horizontal tight oil plays–Spraberry, Wolfcamp and Bone Spring–have produced less than 1 billion barrels.*

Table 1. Comparison of Oil Sands and U.S. tight oil plays. Source: Statistics Canada, EIA, Drilling Info and Labyrinth Consulting Services, Inc.

In 2015, oil prices averaged only $43 per barrel. No new oil sand projects have been sanctioned since oil prices collapsed in 2014 although 3 pilot projects have been approved since prices moved into the $50 per barrel range. Approval is not the same as sanctioning and these 3 projects together would add only 35,000 b/d.

It seems unlikely that new greenfield projects will be sanctioned until oil prices move much higher (Canadian heavy oil (WCS) trades at a 25% discount to WTI). Assuming that prices stabilize in the $50 to $60 range, it is reasonable that pilots may evolve into brownfield expansion projects over the next year or two.

The Canadian Association of Petroleum Producers estimates that annual oil sand production will grow 128,000 b/d until 2021 and then, grow more slowly at 59,000 b/d. If all of that new oil were going to KXL, it would not reach capacity for about 10 years. But other pipelines are already approved for expansion and will probably get much of the oil before KXL is completed.

TransCanada’s bet, therefore, is that oil prices will move much higher and more quickly than most forecasts anticipate and that the volumes will be there by the time that the pipeline is built.

Light Oil and Heavy Oil

U.S. tight oil plays produce ultra-light oil. Almost all of it is too light for refinery specifications. That means that it must be blended with heavy oil in order to be refined and that is why there is demand for Canadian heavy oil.

The Keystone XL Pipeline is, therefore, a bet that tight oil plays will continue for several decades. Related: Oil Prices Up On Prospect Of New Iranian Sanctions

Similarly, Canadian viscous, heavy oil must be diluted with ultra-light oil to move through pipelines. Because of that, Canada is the biggest importer of U.S. light oil.

The U.S. imports almost 3 times more oil from Canada than from Saudi Arabia (Figure 3). Imports from Canada are roughly equal to the amount from Saudi Arabia, Venezuela, Mexico, Colombia and Iraq combined.

(Click to enlarge)

Figure 3. The U.S. imports almost 3 times more oil from Canada than from Saudi Arabia. Source: EIA and Labyrinth Consulting Services, Inc.

The average U.S. refinery is designed for 31° API gravity oil but 80% of domestic crude oil is more than 30° and 70% is more than 35° API gravity so it must be blended with heavier oil before it can be refined (Figure 4). The Keystone Pipeline carries oil that is approximately 22° API so the fit with lighter U.S. oil is perfect.

(Click to enlarge)

Figure 4. 80% of U.S. Crude Oil is greater than 30° API and 70% is greater than 35° API. Source: Drilling Info, EIA, Labyrinth Consulting Services, Inc. and Crude Oil Peak.

The increasing percentage of ultra-light oil (>40° API) after 2011 shown in Figure 4 is because of the growth of tight oil plays. More than 95% of tight oil is greater than 30° API and these plays now account for more than half (52%) of U.S. output.

It is, therefore, no surprise that 98% of the oil imported by the U.S. is heavy that is, less than 35° API gravity (Figure 5). The biggest sources of heavy oil other than Canada are Saudi Arabia, Venezuela and Mexico.

(Click to enlarge)

Figure 5. 98% of U.S. Imports Less Than 35° API Gravity. Source: Drilling Info, Labyrinth Consulting Services, Inc. and Crude Oil Peak.

Production from Venezuela and Mexico is declining (Figure 6). Canada, Iraq and Saudi Arabia have strong production histories and are, therefore, more reliable long-term providers of heavy oil to the U.S. Canada has many advantages over other providers because of geographic proximity, supply security and price.

(Click to enlarge)

Figure 6. Mexico, Venezuela, Nigeria and Angola Have Declining Incremental Production. Source: EIA and Labyrinth Consulting Services, Inc.

Venezuela has enormous reserves of heavy oil and declining production is mostly because of political and social instability. This could change but it is more likely that Venezuela’s problems will continue. Mexico’s production decline is more systemic because the country has not made a significant new discovery since 1980.

A Bet on Tight Oil

So far, so good for the Keystone XL Pipeline but what about the longevity of the tight oil plays?

Production from the Bakken and Eagle Ford plays is in marked decline and Permian tight oil production growth has slowed (Figure 7). This is despite record high numbers of producing wells in all 3 plays.

(Click to enlarge)

Figure 7. Bakken and Eagle Ford production are declining and Permian basin tight oil production growth has slowed. Source: Drilling Info, Labyrinth Consulting Services, Inc. and Crude Oil Peak.

The Bakken and Eagle Ford plays have probably peaked based on remaining core area locations, generally poorer performance from recently drilled wells compared to older wells, and current rig activity. Assuming that oil prices recover to the $70 range in coming years, production should increase as more marginal locations become economically viable–just not to peak levels reached in 2015.

The Permian basin, on the other hand, should continue to grow for several years for all of the reasons that the Bakken and Eagle Ford will not. There are substantial areas in the Permian core that have not been fully developed. Well performance continues to improve and the horizontal rig count has increased 70% since mid-August to 243.

Most forecasts are optimistic about tight oil output. The EIA Annual Energy Outlook 2017 anticipates that tight oil production will decline in 2017 but recover to 2015 peak levels by 2019 (Figure 8). WTI oil prices are expected to be $64 per barrel then and slowly increase to $80 by 2025. Tight oil production will rise to 6 mmb/d by 2026.

(Click to enlarge)

Figure 8. EIA Forecast: Tight Oil Will Not Recover to 2015 Levels Until 2019 and Then Increase to 6 mmb/d by 2026. Source: EIA AEO 2017 and Labyrinth Consulting Services, Inc.

Although the forecast seems reasonable, it assumes that 2016 was the oil-price floor and that prices will continue to increase. It also suggests that prices will not reach the $70 threshold for new oil sand projects for 5 years. Other forecasts like HSBC are more aggressive and anticipate mid-$70 WTI prices as early as 2018.

The Big Long

If the last few years since the oil-price collapse have taught us anything it is that prices are unlikely to move in one direction. Nor are they likely to conform to mainstream analyst views.

Markets have been driven partly by an expectation that prices must inevitably return to levels of at least $70 to $80 per barrel sooner than later. This belief has endured despite a persistent global supply surplus and outsized inventories. The long-anticipated OPEC deus ex machina was lowered onto the stage in late 2016 and markets responded enthusiastically. Yet WTI prices have not crossed $55 per barrel so far.

It is difficult to find supply-demand fundamentals support even for the limited price rally that began with the OPEC announcement. There may already be an expectation premium of $10-12 per barrel built into current prices. Yet markets don"t always follow fundamentals in the short term although they return to them eventually. Related: The Oil War Is Only Just Getting Started

U.S. ultra-light oil production is a central component of the global supply dilemma. Permian basin companies are adding rigs like the boom days of 2011 to 2014 have already returned. When tight oil output is high, some fraction can neither be refined nor exported and simply adds to inventories. This occurs despite the best efforts of Canadian oil sand producers to bring as much heavy oil to the party as they can.

Oil consumption remains relatively weak in the U.S. This is disturbing against the backdrop of surging tight oil rig counts.

Consumption increased with very low oil prices in 2015 and early 2016 but not to the levels before the Financial Collapse of 2007-2008 (Figure 9). Most of the increase was from greater gasoline use and more refined products exports. Modestly increasing prices in 2016 dampened consumption suggesting that demand is highly price-sensitive.

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Figure 9. Consumption fell >2 mmb/d after 2005 but recovered 1 mmb/d with increased refined product exports, lower oil prices & increased gasoline use. Source: EIA and Labyrinth Consulting Services, Inc.

This does not represent peak demand. All credible forecast anticipate oil-demand growth over the next decade or so, albeit at a slower rate. Instead, it reflects an economy weakened by excessive debt and changes in Federal Reserve Bank monetary policy after mid-2014.

These rather gloomy observations may explain TransCanada"s motivation to complete the Keystone XL Pipeline now. I"m talking about a long bet on oil prices.

Future supply constraints will become greater the longer new E&P project investments are deferred. At the same time, the decline of production from developed fields will be more pronounced. Improved production efficiency will further accelerate reserve depletion. Meanwhile, new field discoveries are at the lowest level in decades and the average reserve size of those discoveries has gotten smaller.

Oil prices will increase dramatically at some time in the next several years. That should lead to the next oil boom and the Keystone XL Pipeline will be there to provide heavy oil to U.S. tight oil plays.

There is little doubt that a supply crunch lurks in the future. The risk for the Keystone XL Pipeline is that much higher prices will collapse the global economy before new projects can fill the pipeline and pay out the investment.