Slumping oil prices have given environmental groups a new line of attack in their fight against the Keystone XL pipeline.
Cheaper prices could halt new development of Canada’s oil sands, which the groups say undermines the environmental approval the State Department gave the pipeline meant to transport that oil to the Gulf Coast.
Oil prices fell to five-year lows below $70 last week after the Organization of Petroleum Exporting Countries announced it would not cut production to boost prices. In June, oil sold for more than $110 a barrel.
The cheap price is putting companies that want to produce oil from the carbon-dense sands in a precarious position. Drilling in western Canada could decline 15 percent next year if prices remain low, according to a Nov. 28 analysis by Scotiabank.
Companies are not likely to invest in new projects at current prices, though they are expected to continue their current projects. The break-even price for current projects is $53 per barrel and $90 per barrel for new ones, Scotiabank said. Smaller businesses with weak finances, however, could face difficult decisions.
That is because extracting oil sands is expensive. It involves mining a mixture of clay and oil-based bitumen that must be heated in an energy-intensive process to coax out the oil. The crude is thicker than other varieties and has to be diluted before it can be shipped by pipeline.
Environmental groups say cheap prices are shooting a hole in the State Department’s determination that the pipeline will not facilitate growth of the oil sands industry.
Since shipping the oil through a pipeline costs $8 less per barrel than shipping it over the railways that producers now rely on, environmentalists say Keystone XL would encourage development of the sands because it would help producers stay profitable even if oil prices continue to fall.
With oil below $75 a barrel, the price at which State said producers would have difficulty making a profit, activists are demanding a second look before the Obama administration decides whether issuing a cross-border permit to complete the pipeline is in the national interest.
“If the price of oil continues to stay down and may even drop further, that calls into question the State Department analysis on low oil prices,” Jamie Henn, a spokesman with climate advocacy group 350.org, told the Washington Examiner. “The [national interest determination] process is a bit of a black box and we’d like to shed a little more light on that.”
Big oil sands producers insist they can survive under current conditions. Suncor Energy, for example, plans to spend up to $8 billion developing oil sands next year, up from $6.8 billion in 2014, even given the current pricing forecast. CEO Steve Williams said the company is in a good position “even in a low oil price environment,” though he knows that could change.
“If it went to levels in the 40s and 50s, of course we’d have to reflect, but right now nothing we see will cause us to change course on that capital budget,” he said in the company’s third-quarter earnings call in late October.
What really matters is the long-term price, said Kevin Book, managing director with energy consulting firm ClearView Energy Partners LLC. Most analysts expect oil prices to bottom out next year.
“Practically speaking, people didn’t stop shipping crude oil out of Canada by rail this month,” Book told the Examiner.
But prices falling to $60 per barrel could create problems for companies with less capital. That price isn’t out of the question, either. Saudi Arabia, the world’s top producer and the pre-eminent OPEC player, expects markets to stabilize at that level.
Still, Prime Minister Stephen Harper’s conservative government has put much stock in developing Canada’s oil sands. The nation is increasingly relying on natural resources to spur economic growth, much as shale oil and natural gas have done in the United States. Getting Keystone XL approved has been a national priority for Canada, as it is viewed as a way to get the oil to markets quickly and cheaply.
Therefore, observers don’t expect big Canadian producers to walk away from the oil sands even in the face of a price crunch.
“There’s been massive investments made in these projects,” said Matt Koch, a vice president at the U.S. Chamber of Commerce’s Institute for 21st Century Energy who focuses on the oil sands. “There’s not going to be an abandonment of these projects. They realize there’s always going to be ups and downs in the price.”
Oil sands projects were some of the hardest hit during the last oil price slump in 2008, noted Sam Ori, executive vice president with energy security group Securing America’s Future Energy. He said the oil sands are still vulnerable this time.
“I wouldn’t be surprised to see over the next six to nine months some projects getting canceled or delayed,” he said.
