Analysis 07-02-2014

America’s New Oil Independence and the Keystone Pipeline

Last Friday, the US State Department released a report that said the Keystone XL pipeline that would move Canadian oil into the US and south towards the Gulf for refining and export, is environmentally safe.  The report was hailed by many who favor creation of this pipeline and the jobs it would create.  However, the report met with criticism from environmental groups.

The issue concerns more than oil independence for the United States.  It is seen as an economic issue and many think it will be an issue in the 2014 mid-term elections and which party will control the US Senate.  “It is very likely that there will be negative consequences for Democrats if Keystone were approved,” said Kate Colarulli, the associate director for the Sierra Club’s Beyond Oil campaign. “This is a tremendous opportunity to protect the climate and build the Democratic base if Obama rejects Keystone XL.”

Vulnerable Democrats think differently.  Sen. Mary Landrieu, D-La., said the time to build the pipeline “is now,” adding that pipelines are safer and more environmentally friendly than oil that is transported by trains or trucks.  Polls show Landrieu continuing to lose ground to her Republican challengers.  Last week, a statewide telephone survey of Likely Louisiana Voters found Cassidy, a Republican congressman, with 44% support to Landrieu’s 40%.

But, it’s more than that.  It is a way for environmental groups to raise money according to Betsy Taylor, a philanthropic adviser on environmental issues.  “The biggest effect right now is that more money is going to flow,” said Ms. Taylor, adding that she had already received an offer from a donor to pay for the buses to bring activists to Washington.  The Sierra Club, for instance, raised $1 million in just six weeks for an anti-pipeline protest in Washington — and “about $100,000 of that came from contributions of less than $1,000.” Similarly, the climate-change organization has seen its e-mail list grow to 530,000 since 2011, more than twice what it was before.

However, many see the economic and security benefits to this pipeline moving Canadian oil.  Although it isn’t produced in the US, it comes from Canada and is seen as more secure than oil from the Middle East.  Along with shale oil, which is being produced in the US, Canadian oil sands promise to keep North America petroleum independent for decades.

As for jobs, the report give the economic benefit of the project, “During construction, proposed Project spending would support approximately 42,100 jobs (direct, indirect, and induced), and approximately $2 billion in earnings throughout the United States.”

No wonder, the project has the majority of Americans supporting it.  A Bloomberg National Poll shows support for the $5.4 billion link between Alberta’s oil sands and U.S. Gulf Coast refineries remains strong, with 56 percent of respondents viewing it as a chance to reduce dependence on oil imports from less reliable trading partners. That compares with the 35 percent who say they see it more as a potential source of damaging oil spills and harmful greenhouse gas emissions.

Since this new oil independence isn’t from traditional oil fields like those seen in the Arabian Gulf, it’s important to understand them and the technology needed to extract the oil.

Canada’s Oil Sands

Canada owes its new oil sands wealth to one company – Suncor.  Suncor had the foresight to invest early on; long before the current oil sands craze.

One reason other oil companies avoided the Canadian oil sands deposits was that they were different from traditional oil deposits and very hard to exploit.  The oil sands are a mixture of bitumen, sand, water, and clay, and if you looked at an individual grain of sand under a microscope, you would see a grain of sand coated with a thin layer of water and a thick coat of bitumen.  Bitumen is a thick, tar-like hydrocarbon that can be processed into crude oil with a lot of effort.

Although the deposits were discovered in 1719, it took two hundred years for scientists to find a process that could separate the oil from the sand.  But the process was difficult and although some companies tried to mine the sand, the region was only producing 450 barrels of oil a day during WW II.  It was Suncor, which opened up its first commercially successful oil sands mine 46 years ago, that has managed to perfect an economical way to mine the oil sands.

The oil sands are crushed and treated with hot water, while the debris is screened off.  After the bitumen and sand mixture is separated from the rest of the mixture, it is diluted with naphtha, which strips the oil from the individual grains of sand.

After the naphtha is removed for recycling, the bitumen is heated and thermally cracked.  The result is coke, which is used to generate energy for the operation, and gases, which are liquefied to become synthetic crude oil.  Since the sulfur has been removed during the process, the resulting crude oil is cleaner, higher grade oil than most natural products.

In order to lower the impact on the environment, Suncor has been developing in situ technology.  Unfortunately, the technology has been harder to develop than had been previously imagined and led to production figures that were lower than original forecasts.

In situ mining uses horizontal wells to reach the oil sands. One well injects steam to heat the reservoir, allowing the bitumen to flow to the lower well where it is collected and piped to upgrading facilities.  This leaves the sand in place and dramatically reduces reclamation costs.

Despite the problems, the Canadian oil sands are a massive oil reserve.  In fact, Canada’s oil sands reserves are second in size only to those found in Saudi Arabia. And, as technology continues to improve, that reserve number could go as high as 300 billion barrels or more.   By 2030, the Canadian oil sands industry could be producing five million barrels per day.

Much of the opposition to the Keystone pipeline is due to the larger carbon footprint of Canadian oil sands.  The State Department report notes the Albertan oil generates about 17 percent more emissions than oil from other sources.  However, the report also acknowledges that the oil will be extracted whether or not the United States approves the pipeline. Meanwhile, other studies have reported that although the Alberta tar sands constitute the third-largest oil reserve in the world, the energy derived contributes only 0.01 percent of the world’s carbon emissions. In other words: Approving the Keystone XL project won’t have much of an effect at all on carbon emissions.

In fact, the new State Department report suggests that the anti-Keystone effort has actually led to an increase in emissions. As of now, Albertan oil can’t be transported by pipeline, so instead it’s sent to refineries by trains and ships — and both of those modes of transit result in significantly higher emissions than Keystone XL would, the report finds.

Shale Oil and Fracking

A second petroleum source has become available thanks to new technology.  That is oil shale and it has become a major industry in the Dakotas.  Many American oil producers are hoping that the Keystone pipeline can be used to move their product to refineries too.

The use of oil shale can be traced back to ancient times.  By the seventeenth century, oil shales were being exploited in several countries.  The Scottish oil shale industry began about 1859, the year that Colonel Drake drilled his pioneer well at Titusville, Pennsylvania.  As many as 20 beds of oil shale were mined at different times.  Mining continued during the 1800s and by 1881 oil shale production had reached one million metric tons per year.  With the exception of the World War II years, between 1 and 4 million metric tons of oil shale were mined yearly in Scotland from 1881 to 1955 when production began to decline, then ceased in 1962.  Canada produced some shale oil from deposits in New Brunswick and Ontario in the mid-1800s.  Currently several countries use some oil shale, with Estonia being the major producer and consumer.

Oil shale production wasn’t always successful in the United States.  Settlers found oil shale in Colorado in the 19th Century and even named a creek Stinking Water Creek because of the mixture of oil and water found in it.  In the 20th Century many oil companies were interested in the oil shale in what was called the Green River Formation in Colorado, but only pilot plants were built.  Unocal operated the last large-scale experimental mining and retorting facility in western United States from 1980 until its closure in 1991.  Unocal produced 4.5 million barrels of oil from oil shale averaging 34 gallons of shale oil per ton of rock over the life of the project.

There are two methods for extracting the oil from the shale, mining or in situ methods.  In the case of mining, the shale is mined, usually from an open pit operation, and the oil shale is transported to a crusher and retorting facility for processing.  After crushing, it is heated in the absence of oxygen to remove gases and the condensable oil.  The oil is then refined.

Processing the oil underground without mining (in situ) is also an option, although much depends on the porosity of the shale and recovery rates.  The most popular method is called Hydraulic Fracturing – “Fracking.”  Fracking breaks up the rock and then “scrubs the shale with slurry of frack sand.  Some environmentalists have claimed that fracking can damage the ground water, but the nature of shale deposits prevents that.  The shale rock is more brittle than most rock layers in the mantel that covers the earth’s surface. Because of this, they are easier to fracture which allows for less pressure to be used in the fracking technique. This reduced pressure causes less of an impact on the surrounding rock layers so they are more likely to stay intact while the shale layer is broken up.  In addition, the average in situ shale formation is thousands of feet underground, while the average drinking well or aquifer is a few hundred feet deep.

The safety of fracking was confirmed by a former Obama cabinet member.  Former U.S. Secretary of Interior Ken Salazar said Wednesday that he believes hydraulic fracturing is safe, and the energy industry should work to convince the public that it doesn’t pose a safety threat.

The US has 62% of the world’s shale oil reserves, which equates to over 600 billion barrels of oil in recoverable shale oil reserves.  This compares to conventional world oil reserves of one trillion barrels – which would make the US a major oil producer for the foreseeable future.

Coal Based Petroleum

America’s potential oil production is also enhanced by its massive coal reserves, which can easily be turned into oil.

Making fuel from coal isn’t new or that complicated.  The original process was discovered by German scientists Franz Fischer and Hans Tropsch in the 1920s (hence the name Fischer-Tropsch Process).  They discovered that carbon monoxide and hydrogen could be converted into liquid hydrocarbons through a chemical reaction.  These feedstocks could be provided from coal.  And, since Germany had rich coal reserves, it proved to be practical for them.

This synthetic fuel was critical for Germany in World War II.  During the war, synthetic fuel production reached more than 124,000 barrels per day from 25 plants.  It was also the source for lubricants.

American officials were impressed with the German synthetic fuel program during the war and were determined to duplicate it in order to reduce American dependency on foreign petroleum sources.  With the help of Germans experts, a synthetic fuel plant was using North Dakota lignite to product diesel fuel in 1949.  During the next four years, 1.5 million gallons were produced, most of which was used in testing by the armed forces.  It was closed when major oil discoveries in Texas made petroleum a cheaper option.

Although there are pilot plants turning coal into fuel, this technology hasn’t been fully exploited by the Americans.  However, it promises another way to extend its oil independence.

America’s Energy Future

Given the technology and the natural resources, North America will be a major oil producer despite the Keystone pipeline controversy.

However, there are some energy losers that are trying to limit these new energy sources.  They consist of oil companies who are heavily invested in Middle Eastern oil reserves and who failed to seize the shale oil and oil sands reserves when they were available.

Another opponent to the Keystone pipeline is not opposed to the idea of oil sands.  Warren Buffett’s Berkshire Hathaway spent $34 billion to acquire Burlington Northern Santa Fe Railroad in 2009.  This railroad is currently carrying the oil from Canada and the Dakotas.  Buffett, a close Obama ally, doesn’t want Keystone to cut into the lucrative oil transport business.

However, polls show Americans to favor the pipeline.  And, they have more votes than the environmentalists.

In the long run, the issue is more about American energy than one single pipeline.  As America produces more of its own oil and relies more on Canada to fill its import needs, Saudi Arabia, America’s second largest oil supplier, will need to seek new markets.  The Asian giants of India and China are the most logical customers, which will make Saudi Arabia and the other GCC nations more focused on maintaining relations with the East rather than the West.

The US, on the other hand, will find its interest in the Middle East declining.  Obviously, the US will remain focused on Iran and its nuclear intentions.  It will also remain committed to keeping the Gulf and Strait of Hormuz clear for shipping.

US interests and goals will become more generalized.  There will remain a commitment to keeping peace in the region since war could destabilize energy prices and bring about a worldwide recession.  However, there will not be the urgency brought about by a heavy reliance on Middle Eastern oil.



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