Keystone XL: So will it finally get built?

Canada is producing oil from its sands with or without the pipeline. The energy is getting to the market via rail, which is more expensive than a pipeline but not costly enough to stop development. And pipeline developers are working on two optional routes through Canada, though both proposals come with major political difficulties.

“The Canadians are moving forward,” said Jack Gerard, chief executive of the American Petroleum Institute, the oil and gas industry’s top trade group. “They are committed to alternatives.”

Keystone XL has become the rallying cry of environmentalists fighting the energy industry. And Republicans, as they prepare to take control of Capitol Hill, view it as a symbol of their agenda against President Obama, who has let the pipeline lag in a six-year approval process.

“As a way of stopping climate change, Keystone is meaningless,” said Kevin Book, managing director with energy consulting firm ClearView Energy Partners LLC. “But as a symbol everyone can understand, Keystone is priceless.”

Sen. Sheldon Whitehouse, D-R.I., one of Congress’ leading green warriors in the battle over climate change, compares the slog over the pipeline to Civil War battles.

“If I knew my Civil War history better I would be able to tell you the actual battles, but there were a number of them where nobody actually drew that line of battle. It’s just the place where the two armies converged,” Whitehouse told the Washington Examiner.

“It might not have been the place either side would have chosen, but it’s where the battle ended up being because that’s where the conflict erupted.”

REPUBLICANS PUSH AHEAD

Republicans say passing legislation to build the pipeline will be a top legislative priority when the GOP takes control of both chambers in January. They see it as a way to present a contrasting agenda to Obama, whose administration has been reviewing and stalling on Keystone XL since 2008.

“It shows the fundamental difference. You’ve got the Obama administration that’s held up the project for six years. That is about a $7.9 billion investment, not one penny of federal government spending. But it creates energy, it creates jobs, it created hundreds of millions in tax revenue,” Sen. John Hoeven said.

“It shows the difference in approach,” the North Dakota Republican said.

Hoeven is leading the charge to put legislation approving the remaining 1,200 miles of pipeline on Obama’s desk early next year.

A bill to approve the pipeline failed by one vote in November, one of the last orders of business for the Democratic-held Senate. GOP lawmakers think that, with support from centrist Democrats, they could get the 67 Senate votes needed to override a veto from Obama.

Republicans and Democrats who support the pipeline say it will create a gusher of construction jobs. The State Department said it would support 42,100 direct and indirect jobs during the two-year construction phase and would boost property tax revenue for communities along the route. It also would strengthen energy security by getting crude from Canada, an ally, rather than less friendly nations such as Venezuela.

Still, even with Republicans in the majority, Hoeven is cautious.

“I know that we’re over 60, but I don’t know that we can get to 67,” he said. “If he vetoes it, then we can try to attach it to other legislation.”

Obama likely would reject any bill that forces his hand on the pipeline, as he has consistently threatened to veto bills that circumvent the State Department’s review. That review is on hold until the Nebraska Supreme Court rules on whether a new pipeline route the state legislature approved was constitutional. That decision is expected any day.

Congress might have the legal authority to authorize pipeline construction as the State Department dallies. A 2012 report by the Congressional Research Service found that doing so “appears likely to be a legitimate exercise of Congress’s constitutional authority to regulate foreign commerce.”

The pipeline has become a political albatross around Obama’s neck.

It has kept centrist Democrats at odds with the president. A clutch of Democratic senators who pleaded with Obama to approve the project lost their seats in last month’s midterm elections, as Republicans tied their opponents to the president and his policies.

Many labor unions, too, have broken ranks with the president over the pipeline because they want the jobs it would provide.

Even environmental groups have largely moved on, at least in the political sense. Several senators who publicly supported Keystone XL netted official endorsements and funding from the same green organizations that are trying to kill the project.

That has some Keystone XL boosters thinking that Obama might want to end the whole episode.

“I don’t expect it’s going to have to be a veto override. I think we can find a way to resolve it with a strong bipartisan vote because there’s a lot of Democrats who would tell the president, ‘You know, enough’s enough. Let’s move on with this issue.’ So I suspect that is what’s going to happen,” Gerard said.

OBAMA KICKS THE CAN

Perhaps that’s wishful thinking, considering the political capital Obama has spent continually punting the project.

In August 2011, the State Department released its first final environmental review of the pipeline, saying it wouldn’t significantly alter the Earth’s climate. The announcement came during two weeks of Washington demonstrations against the pipeline that led to more than 1,200 arrests and elevated Keystone XL into the national conscience.

Three months later, when he was running for re-election, the president said the State Department needed to conduct another environmental review to analyze the new pipeline route that Nebraska’s legislature had just approved.

The review process hasn’t been transparent, and it has faced several delays. When the review finally came out in January, which largely backed the August 2011 findings, many hoped for a quick 90-day inter agency review to determine whether the project was in the national interest. But then the Obama administration said it would wait for the Nebraska Supreme Court decision before resuming the process.

Meanwhile, Obama has made repeated public comments that appear to side with environmental groups. He has made light of the 35 permanent jobs Keystone XL is expected to create. He has said he would kill the pipeline if it “exacerbates the problem of carbon pollution.”

“It’s good for Canada, it could create a couple thousand jobs in the initial construction of the pipeline. But we’ve got to measure that against whether or not it is going to contribute to an overall warming of the planet that could be disastrous,” Obama said last week on “The Colbert Report.”

A recent remark Obama made during a November speech in Burma caught the attention of Charles Ebinger, a senior fellow with the Brookings Institution’s Energy Security Initiative.

The president contended oil sands piped from Alberta would be exported to other nations, echoing attacks from environmental groups such as NextGen Climate Action, the super PAC backed by Tom Steyer, a billionaire former hedge fund manager. But Ebinger said refineries would be the ideal destination for the oil sands. Drillers sending oil to refineries in the upper Midwest had to reduce their crude prices last year because of transportation bottlenecks. And Gulf Coast refineries are equipped to process the heavier crude from the oil sands.

Petroleum products such as gasoline might be exported, Ebinger said, but much of the oil would remain in the country.

“The fact that he made that statement, to me, is that he believes Keystone isn’t important to the U.S.,” Ebinger said.

That comment also caught the attention of Deborah Gordon, director of the Energy and Climate Program with the Carnegie Endowment for International Peace.

“I just don’t know that he’s going to put his guns down on this,” she said.

At this point, it’s not clear how Obama would benefit politically from approving Keystone XL after years of waiting. Congressional Republicans are unlikely to cut a deal to approve one of the administration’s priorities, such as raising the federal minimum wage, just to get the pipeline through.

The same goes for the increasingly liberal Democratic Party. Keystone XL backers in Alaska, Louisiana, North Carolina and Arkansas all pushed Obama to approve the project. All of them lost their elections. A Democrat winning a Senate race in any of those states appears unlikely for some time.

“I’m not sure what the president gains from it at this point, or what the Democratic Party gains in the long term,” Ebinger said. “I think the president would like to punt this indefinitely.”

Delays are starting to annoy even Democrats who have opposed the project. Some are starting to speak out against what they consider disingenuous climate change concerns posed by environmental groups.

Sen. Tom Carper, D-Del., said more progress on climate change is occurring in other arenas. He pointed to a nonbinding agreement between Obama and Chinese President Xi Jinping on reducing greenhouse gas emissions beyond 2020, a move that would get the world’s top two emitters on the same page for the first time.

“That dwarfs the concerns that we’ve heard now for a number of years on Keystone,” Carper said recently. “I think the other factor that’s working here is we have waited for not months, but years, to get a decision on Keystone.”

Hoeven said he thinks the legislative style that incoming Senate Majority Leader Mitch McConnell, R-Ky., hopes to install would smooth passage for a bipartisan Keystone XL bill that includes energy items important to some Democrats.

McConnell has hinted he would operate with an open amendment process, unlike current Majority Leader Harry Reid, D-Nev., who has blocked amendments.

“I fully expect that we will bring the bill to the floor, and there will be an open amendment process,” Hoeven said. “Maybe there will be some amendments offered that have some broad support to get over the 67-vote threshold.”

That could lure other Democrats. Sen. Chris Coons, D-Del., for example, voted against the Keystone XL bill in November. But given the chance to advance one of his top priorities — for years he has advocated extending a tax structure known as “master limited partnerships” to renewable energy — he might vote for building the pipeline.

Ian Koski, a spokesman for Coons, explained that the senator opposed the Keystone XL bill partly because it was a “straight authorization,” leaving the door open to backing it in a different legislative vehicle.

Still, even attracting the three or four additional Democrats needed to override a veto would be a challenge.

“It would take quite a bill,” Whitehouse said, though he doesn’t dismiss the prospect.

THE RISE OF THE KEYSTONE XL MOVEMENT

The death of cap-and-trade legislation in the Senate in 2010 was a low point for the environmental movement. Dialogue with the White House became nonexistent. The Tea Party succeeded in undermining support for cap-and-trade, and several House Republicans who voted for the legislation succumbed to primary defeats from candidates to their right.

It’s hard to imagine, but Obama administration officials rarely uttered the words “climate change” after the cap-and-trade effort failed. Many of the White House staffers who worked on the bill departed. There was a “credibility gap,” Whitehouse said, and lawmakers didn’t know where to turn. There was no help coming from Washington, so those who cared about climate change had to look elsewhere.

“We had dropped the ball with the carbon legislation that the House sent over and failed to bring it up in the Senate. And the White House had gone into radio silence on climate change. And I think that turned activists and people who are very concerned about this issue to something very visible where there had to be a decision made,” Whitehouse said.

That was Keystone XL.

“At some point we made a joke, ‘What do 1,500 unemployed climate lobbyists do now?’ And at some point that might be where Keystone came from,” Book said.

In 2012, Nebraska lawmakers fast-tracked approval of a new route for Keystone XL.

“Nebraska became the stand for the national environmentalist influence on the pipeline,” said Nebraska state Sen. Jim Smith, who introduced the bill that fast-tracked approval of the project. The state Supreme Court now is weighing whether the legislature had the authority to do so, as the state utility regulator usually makes infrastructure decisions.

The pipeline route pitted Nebraska ranchers concerned about their property rights against a foreign company. At first, the discussion was about preserving property rights, as well as protecting the environmentally sensitive Sandhills region and the massive Ogallala Aquifer from a potential spill. The conflict modeled what was happening in Canada, where the advocates were native tribes defending their land against TransCanada Corp. and a conservative government they didn’t support.

Now, however, much of the national attention is centered on climate change, though local groups continue to explain the issue through a more local lens.

“It wasn’t so much that we were surprised. We understood where our citizens fell on this issue. But we were not prepared probably for the outside influence and the misinformation on what we were doing here in Nebraska,” Smith said.

The August 2011 demonstrations were a turning point, said Jamie Henn, a spokesman for climate advocacy group 350.org. Environmental groups had come together to forge action on something that had a point of decision, a timeline, something tangible and visible to rally the movement.

Keystone XL had generated press coverage in Canada, where native tribes were resisting it. But little attention was being paid to it in the United States. Even Whitehouse, a sort of superhero to the environmental movement, had only heard about it in late 2010 from a friend at the Natural Resources Defense Council, a major environmental organization that led lobbying efforts on cap-and-trade.

“That was the key moment that said, ‘Wow, this is a political issue, not just an environmental issue,’ ” Henn said. “That said, we did not expect it to become such a high-profile national fight for so long.”

Added Whitehouse: “I think people wanted to find a place we could plant the flag in the ground and rally and fight, and not just roll over, and not just be rolled backwards. I mean, I think people felt that we were kind of in a bit of a rout, and at some point somebody has to stop, jam down a flag and say, ‘No, this is where we stand, and this is where we hold.’ And the Keystone thing was in the environment at that time.”

THE GREENS’ FIGHT

Liberal Democrats and like-minded environmental groups contend the Keystone XL pipeline is a linchpin for developing the oil sands and therefore would increase the greenhouse gas emissions that scientists blame for driving man-made climate change. But that argument challenges the State Department’s findings in an environmental analysis that said the oil sands would come out of the ground regardless of whether the pipeline is built. And if Keystone XL is built, the oil from the sands likely would replace heavy sour crude shipped from Venezuela.

“It’s very minor,” Ebinger said of Keystone XL’s potential emissions. “And I think we’ve certainly argued that none of these individual projects like Keystone should be the focus of climate change policy.”

Environmentalists and some lawmakers, however, keep trying to poke holes in the State Department’s review. Whitehouse alluded to “mischief” by the independent contractors hired to assess the pipeline’s potential impact on greenhouse gas emissions. Even the Environmental Protection Agency found fault with the review, calling it “inadequate.”

A pair of reviews by State’s internal watchdog have cleared the agency and its outside contractors of wrongdoing. But that doesn’t mean environmentalists’ concerns about the agency’s evaluation are unwarranted, Gordon said.

The State Department, for example, didn’t measure the greenhouse gas emissions from petroleum coke because it is stripped from the oil sands in Canada, not the United States. Including petcoke in the review would show that the oil sands are far worse for the climate than State estimated, said Gordon, who is developing an “oil-climate index” that now includes 28 test oils. Canada’s oil sands are over 80 percent more carbon intensive than the lowest carbon oil in the index when accounting for petcoke.

“If you’re looking at the full range of all emissions, they become less environmentally friendly,” Gordon said of oil sands.

For environmental groups and politicians who view climate change as a zero-sum game — that every carbon molecule thrown into the atmosphere brings the world another step closer to its doom — blocking Keystone XL and all the other infrastructure projects that would bring fossil fuels out of the ground is important.

“Let’s be very clear about what the Keystone fight has done,” ClearView Energy’s Book said. “Every project is going to be a fight.”

FINANCING THE INVESTMENT

It’s a fight that investors are increasingly wary of waging, said Matt Letourneau, a spokesman with the U.S. Chamber of Commerce’s Institute for 21st Century Energy.

“For private capital overseas and even in the U.S. we’ve become a rather unattractive destination for certain projects,” Letourneau said. “It really depresses the interest in investment and it has a chilling effect on those who are seeking investment.”

Letourneau couldn’t quantify any downturn in investment in energy projects. Still, the fights over energy infrastructure have been public. Environmentalists have protested permits for facilities to export natural gas abroad, with little success. They have been more effective at making it difficult for terminals to ship coal overseas from the West Coast.

A network of local groups across the country, including the farmers and ranchers of Bold Nebraska who spearheaded protests against Keystone XL, has come to rely on the financial and logistical support of national environmental organizations.

Book said the United States is being viewed as a more difficult place to build in light of Keystone XL. A Wall Street Journal report found that protests have delayed six North American oil and natural-gas pipeline projects that cost $15 billion and span a total of 3,400 miles. Four other projects totaling $25 billion across 5,100 miles of pipeline have faced opposition but haven’t encountered delays.

But with interest rates low and energy infrastructure projects paying off handsomely, the United States is an attractive destination since it suddenly has a lot of energy to move in and out of the country thanks to all the oil and gas being produced by hydraulic fracturing, or fracking.

“Energy infrastructure projects, even if you have to fight for them, are a good investment in this environment,” Book said.

Ebinger, too, said the nation’s investment climate remains largely unchanged.

“I don’t think anything dramatically has shifted since Keystone,” he said.

The Interstate Natural Gas Association of America even felt compelled to update its midstream — namely, pipeline — infrastructure projections through 2035 because activity had grown even more “robust” since its last report in 2011.

“Current expectations are that the next decade holds much promise for ongoing midstream development,” the report said. It projected oil pipeline capacity in Canada and the United States would grow by an average of 500,000 barrels per day annually over the next 20 years, drawing nearly $272 billion of investment. In 2011, the group had estimated $32.6 billion of midstream oil investment through 2035.

SHIPPING THE OIL ELSEWHERE

Keystone XL supporters on and off Capitol Hill are making the case that the business environment is so bad in the United States that TransCanada and the Canadian government are looking at other routes to ship the oil sands. Those routes would go through Canada, eliminating potential construction jobs and property tax revenue in the United States.

“Are we going to produce jobs in the United States … or are we going to allow it to be outsourced elsewhere?” Gerard asked. “The Keystone pipeline is significant here because we’re either going to put 42,000 people to work building a domestic infrastructure project for the good of our nation, Canada, etcetera, or we’re going to allow the Canadians to build infrastructure in their own nation to ship that elsewhere.”

The two other options Canada is weighing are Enbridge’s Northern Gateway, which would run west to the Pacific Ocean, and TransCanada’s Energy East Pipeline, which would head east to the Atlantic Ocean.

They’re not great options.

“Neither of them looks easy,” said Book, adding that getting Northern Gateway approved “would probably make Keystone look expeditious by comparison.”

The Northern Gateway Project would need to cut through tribal areas that don’t want the pipeline. Canada’s First Nations, as native tribes are called, have extraordinary rights over their property. Overcoming opposition there would be difficult if not impossible.

Energy East has its own set of problems. The pipeline would need to go through Quebec’s rocky political terrain. The French-Canadian province is no friend of Conservative Prime Minister Stephen Harper and is not keen on doing his government any favors.

“If that project is not wanted by the area — the region that you’re going through — operating becomes harder than getting the permit was. So you have to be careful for what you wish for,” Gordon said.

But Canada has made its wishes clear and the Harper government can withstand a political fracas or two, said Matt Koch, vice president of the Institute for 21st Century Energy, who takes a lead role on oil sands policy.

“They’re a country that has done very well at prioritizing projects that have a national interest and working through processes that help to get those projects completed,” he said.

Canada’s rail companies see a windfall. They have already benefited greatly from the lack of pipeline infrastructure as oil sands producers have turned to the tracks to carry their product to market.

“I don’t see any chance of those pipelines being built anytime soon, whether it be Energy East or the Enbridge pipeline out to the West Coast,” Bart Demosky, chief financial officer at Canadian Pacific Railway, told a Goldman Sachs conference in November, according to Toronto’s Financial Post.

THE DANGER OF RAIL

Keystone XL backers say the dangers of shipping crude over the rails far outweigh the environmental risks of the pipeline.

Even the State Department has acknowledged continued reliance on rail could be deadly. In June, the agency issued a correction to its final environmental impact statement that said moving crude by rail in absence of Keystone XL would contribute to 28 deaths and 189 injuries over a decade. The department had previously put those figures at six deaths and 49 injuries.

“People are very concerned about that, about the impact of increased rail traffic that’s carrying oil from the Bakken,” Koch said. “I think that’s certainly going to have some pressure on members of Congress as well.”

American rail companies have increasingly hauled crude from well sites to refineries since existing pipelines, where they exist, are over capacity. The Transportation Department said shipments of crude by rail from the Bakken shale formation in North Dakota and Montana have jumped from 10,800 carloads in 2009 to more than 400,000 last year.

Concerns began mounting in July 2013 when a train carrying crude ran off the rails and exploded in Lac-Megantic, Quebec, killing 47 people and leveling the town center. In December 2013, a train carrying crude exploded near Casselton, N.D., heightening worries. A series of other derailments followed, putting cities and towns all over the country on high alert.

Fears stretch far beyond where the oil is produced. Lawmakers in Oregon and Washington have echoed constituents’ concerns about oil tankers sailing past their communities en route to refineries in the Pacific Northwest.

The Obama administration has tried making rail transport safer, with the Transportation Department in July proposing rules for the tankers that carry crude. Safety experts and the oil industry also want the Obama administration to take a look at improving railways.

THE PRICE FACTOR

Environmentalists say the Keystone XL isn’t about pipeline vs. rail, and they say the development of oil sands is not as inevitable as energy advocates claim.

“Tar sands crude-by-rail will not make up for missing pipeline capacity, and that is why stopping pipelines matters for keeping tar sands in the ground,” Lorne Stockman, research director with Oil Change International, said in a recent op-ed in The Hill.

New investment in Canada’s tar sands requires a higher oil price than most types of crude, $90 per barrel to break even, according to ScotiaBank estimates.

But with oil dropping to five-year lows below $70, the anti-Keystone XL faction is rolling out a new line of attack.

The State Department had considered the effect the pipeline would have on producers if oil fell below $75, which it had said was unlikely. Green groups are using that to pressure the agency to take another look.

“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,” Henn said.

But the price plunge is likely to be a short-term trend.

Prices have plummeted largely due to global oversupply caused by soaring U.S. production and OPEC’s decision late last month not to cut output.

Analysts expect prices to rebound next year. A Reuters survey of 31 experts and analysts expected Brent crude prices to average above $78 per barrel in 2015. While new projects in the oil sands may not be attractive at that price, projects already in progress will continue.

The U.S. Energy Information Administration is less bullish. The Energy Department’s statistics arm predicted Brent crude would sell for an average of $68.08 per barrel through next year. It said big shale regions in North Dakota and Texas wouldn’t take much of a production hit, but the agency still reduced its forecast for U.S. output by 200,000 barrels to 9.3 million barrels per day.

WILL HE OR WON’T HE?

Like the problems that investors and policymakers have trying to predict oil prices, figuring out how Obama will decide the fate of the pipeline is maddening for those who have tracked the issue.

Republicans will try to force the issue when they send a bill approving the pipeline to his desk next year. The GOP will need to find 67 Senate votes to override a veto if Obama goes that route, and it’s not clear whether enough Democrats would cross the aisle.

But some think the president might give Keystone XL the thumbs up.

“I frankly look for the Keystone pipeline to be approved,” former Democratic Louisiana Sen. Bennett Johnston said in a recent interview with the Examiner. Referring to comments made after an Oct. 28 meeting between Secretary of State John Kerry and Canadian Foreign Minister John Baird, Johnston said Kerry “was sending signals when he said he wants to ‘act sooner rather than later.’ To me, that was a clear signal.”

Environmentalists think the president is on their side. They note that Obama has few areas where he can leave a legacy and that climate is one of them. Rejecting Keystone XL, they say, would signal a new direction in energy use.

“The president continues to build on his climate change legacy, and we’re extremely confident that he will not let this dangerous, dirty pipeline go through,” said Gene Karpinski, president of the League of Conservation Voters.

But given Keystone XL pipeline’s tortuous history, the outcome is always too soon and too ambiguous to predict.

“It’s hard to believe that the administration would hold up a meritorious project for six years and not make a decision on approval or denial,” Hoeven said. “It is something that nobody could have guessed or anticipated.”