Keeping the Cork in the Oil Sands Bottle

Originally posted at Planet 3.0

Are the bitumen deposits in NE Alberta the biggest carbon bomb on the planet or will their exploitation have hardly any effect on the climate? Will the Keystone XL (KXL) pipeline accelerate development of the oil sands or will it make little difference?

I have attempted to answer the first question previously in a Skeptical Science post that discussed the 2012 Nature Climate Change article by Neil Swart and Andrew Weaver. The oil sands, even in the worst case (assuming constant production rates of coal, gas and conventional oil, with accelerated bitumen production), will only contribute a small proportion, about 3%, to fossil-fuel emissions over this century. However, when framed in terms of the steps we need to make to stabilize the climate, the oil sands loom larger, comparable in size to one of the Princeton wedges. In this view, exploiting the oil sands would be like taking a stride closer to the brink, whereas prudence requires us instead to take several steps back.

As for the narrower question of how much difference the KXL decision will make to the production of bitumen, well, there are many ways of framing the problem, with the latest draft report from the State Department calculating very small impacts indeed.

A wonk’s eye view

The simplest way of calculating the emissions attributable to the KXL pipeline is to take the amount of product, let’s say 830,000 barrels per day (the stated capacity of the pipeline), and multiply it by the carbon content of bitumen (0.48 tonnes of CO2 per barrel), which gives emissions of about 7 billion tonnes of CO2 over 50 years. Some allowance must be made for the diluent in the pipe (subtract ~25%) and the emissions involved in extracting the bitumen (add ~17%, estimates vary but that is a consensus number), but let’s go with 6 billion tonnes as a rough estimate for lifetime emissions. This amounts to about two months of global emissions of CO2 at current rates, or one year’s worth of current US emissions. But that’s not the way the wonks would see it.

Alternatively, they might assume that the addition of the pipeline will cause little change in global demand for oil, meaning that any oil flowing through the pipe will mostly be compensated for by market forces reducing oil production somewhere else. All that they would blame on the pipeline is the effect of swapping carbon-intensive bitumen for lighter crude oil, adding, as mentioned above, the additional 17% emissions for bitumen compared to average crude oil.

The EPA wrote a letter in June 2011 that commented on an earlier State Department Supplemental Draft Environmental Impact Statement (SDEIS) prepared for the initial submission of the KXL. The EPA estimated, using an incremental approach, that the extra greenhouse gas emissions related to KXL could be in the range of 0.6 to 1.15 billion tonnes of CO2eq over the 50 years life of the pipeline, about 10-20% of the 6 billion tonne that I estimated earlier, roughly one or two months of emissions at the current US rate.

In the latest report, the State Department now argues that the pipeline decision will barely make any difference to bitumen production, because the bitumen will find its way, KXL or no KXL, to market by rail and through other pipelines. Their estimated incremental rail transport costs (after subtracting savings due to the reduced need to transport diluent) are $5 per barrel extra for rail transport compared to pipelines. However, according to this NRDC blogpost, that estimate is probably low. Actual costs of currently operating small-scale rail-transportation projects are $15 per barrel higher. Even at those higher transportation cost levels, there is still good money to be made at current product prices.

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From a January 2012 presentation by one of the leading oil sands producers.
Source

The logistics of moving millions of barrels per day are daunting: each million barrels per day capacity requires over 300 continuously running trains, every train having 100 tanker cars. Oil producers greatly prefer the lower costs, capacity and greater scheduling dependability of pipelines to rail. Rail is a second-best option and is only on the agenda now because of the threat to the approval of the pipeline.

Elementary economics dictates that increasing the production or delivery cost of a product will limit its supply for any given price. The State Department consultants estimated that, in 2030, bitumen production would be just 90,000 to 210,000 barrels per day less if KXL were not built, other things being equal. That’s about one-ninth to one-quarter of the oil scheduled to flow through the pipeline. Applying that factor to the EPA’s 2011 estimates of incremental emissions would amount to savings, over 50 years, equivalent to just a few days of current US emissions. Promoters of the pipeline were overjoyed; they could now switch their argument from claiming that the pipeline was an essential element in developing the oil sands to one in which the pipeline would make negligible difference to the development of the oil sands and therefore have little or no effect on climate change.

Leaving Flatland

Entering Wonk World is a little like visiting Flatland, the two-dimensional world imagined by the Victorian schoolmaster Edwin Abbott Abbott. For quantitative analysts, everything that can be expressed in a spreadsheet entry may be considered and factors that don’t fit this frame of reference are neglected. The incremental effect of one variable is estimated by holding the other variables constant. In Wonk World, paraphrasing Einstein, what can’t be counted doesn’t count.

The real world doesn’t always cooperate. The figure below shows forecasts of oil sands production made by the Canadian Association of Petroleum Producers (CAPP) every year from 2006 to 2012 (except 2009). Note how the projections were revised drastically every year. Over this time period, events swamped the orderly growth predictions. These events were, for example: the United States went from being the world’s largest oil importer to what some pundits hail as “Saudi America”; decisions on pipelines once seen as “no-brainers” were deferred and the plans became subject to strong public protest; and the world went through a giant spasm of chaos, greed and fear known as the Great Recession.

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Source.
Added in the top right-hand side is the State Department’s maximum calculated effect of a KXL decision (210,000 barrels/day) in 2030. Compare this to the drastic year-to-year production forecast revisions made by the Canadian Association of Petroleum Producers.

Staggering amounts of capital are required to develop the oil sands, perhaps $250 billion in initial capital, spent mostly over the next ten years. The decision makers who allocate capital are certainly informed by the best wonkery that money can buy. But they know also that, over the decades needed to provide a return on this capital, other influences beyond calculable market trends will determine the profitability of their investments. For example, one of the most closely guarded secrets of any oil company is the product price forecast that they use in their internal economic analyses; this not only reflects the results of quantitative analysis, but also the subjective judgement of senior executives. And it is a truth universally acknowledged that long-term price forecasts need to revised at short-term intervals.

Investors are obliged to weigh any number of unknowns: will Venezuela increase production and keep heavy oil differentials high; will the price of natural gas rapidly rise; will climate change suddenly force governments to introduce carbon taxes; can the companies control their labour and construction costs; will global demand continue to rise? In this world, a decision by their only export market to refuse a new pipeline will weigh very heavily indeed. Capitalists always have other projects to invest in elsewhere.

In the even more real world outside the corporate boardroom, the logic and the arithmetic are simpler. We know how much carbon we can safely burn. We know also that once we have sunk capital into infrastructure and into developing the resources, it will be harder to stop ourselves from consuming them, because the go-forward production economics will then be largely determined by marginal operating costs. The reason that the Alberta and Canadian governments, along with the oil companies, desperately want the Keystone XL pipeline is because it will encourage more capital investment in new oil sands projects, effectively locking in a revenue stream for decades. This is not a secret.

The Keystone XL decision is a symbol, as some have pointed out, but it is no mere token. The decision will provide a strong signal, one way or the other, about the resolve of the US government to reverse direction on fossil fuel consumption. Everyone from oilmen to activists is watching anxiously.

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Modified from the Pembina Institute’s Beneath the Surface: A review of key facts in the oilsands debate. Note the expansion to over 9 million barrels per day.

As Bill McKibben pointed out in his Rolling Stone article, the global fossil fuel reserves that are already on the corporate books, for which the development capital has largely been sunk, greatly exceed, by a factor of five, what we can safely burn to be assured of keeping warming below two degrees Celsius. He wrote:

Which is exactly why this new number, 2,795 gigatons [the CO2eq potential of the fossil fuel reserves], is such a big deal. Think of two degrees Celsius as the legal drinking limit – equivalent to the 0.08 blood-alcohol level below which you might get away with driving home. The 565 gigatons is how many drinks you could have and still stay below that limit – the six beers, say, you might consume in an evening. And the 2,795 gigatons? That’s the three 12-packs the fossil-fuel industry has on the table, already opened and ready to pour.

Keystone XL will bring up more bottles out of the ice box and up from the cellar, uncork them and put them on the kitchen table. The State Department wonks tell us that simply opening more bottles won’t make our thirst any bigger or our hangovers any worse. They really should get out more.

We don’t have to view the question of whether or not to build the Keystone XL pipeline solely thorough the wonk’s reductionist lens, simplifying the issue until it becomes susceptible to quantitative analysis. If the bitumen is to stay in the ground—and it must if the climate is to be stabilized—then we have to make our best efforts to stop, or at least slow down, the investment in the infrastructure that will lock-in its exploitation.

Ultimately, we have to reduce global fossil fuel demand, not only for bitumen, but also for oil, gas and, most importantly, coal, through carbon pricing. However, introducing effective carbon pricing at the required global level is not a realistic option today and may not be for decades. A decision against Keystone XL won’t reduce demand and its direct, calculable effects won’t reduce emissions very much either, but it is a decision that one man, Barack Obama, can make —and can make now—and which might one day be seen as marking the turning point in the struggle against climate change.

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