California, February 28, 2013 – In an article today, the Christian Science Monitor gets into the real economics of the Keystone XL tar sands pipeline—a topic that has failed to get the attention it deserves. In “Is the Keystone XL pipeline worth it,” David Unger pulls out a calculator and finds that Keystone XL is only profitable in a specific oil market.
California, February 28, 2013 – In an article today, the Christian Science Monitor gets into the real economics of the Keystone XL tar sands pipeline—a topic that has failed to get the attention it deserves. In “Is the Keystone XL pipeline worth it,” David Unger pulls out a calculator and finds that Keystone XL is only profitable in a specific oil market.
His math gives credence to the oft-ignored argument that the Keystone XL pipeline is the linchpin for all future tar sands expansion: “If the Keystone pipeline is not completed, energy experts say, weak prices will make the economics of future oil sands projects questionable.”
If the numbers don’t add up, there won’t be a market for tar sands. Even in China.
Industry experts agree:
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Gordon Houlden, director of the China Institute at the University of Alberta
“If Keystone’s export capacity does not materialize, “that changes valuations, and that changes calculations.” – Alberta oil discount raises investing alarms for Chinese firms, Globe and Mail, February 12, 2013
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Chris Feltin, Analyst, Macquarie Research.
“The shortfall in take-away capacity is absolutely going to weigh on realized prices for the Canadian producers over the near term on both heavy and light oil… But especially heavy oil, which is at a pretty substantial discount to WTI right now … It’s a challenging market for Canadian upstream crude producers.” – Full pipelines to cut into Canadian oil producers’ profits, Reuters, January 14, 2013
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Wood Mackenzie international energy research firm
“The oil sands region is one of the costliest in the world to develop. And as oil prices tumble, it is vulnerable. ‘Oil sands projects display some of the highest break-evens of all global upstream projects,’ the firm said. ‘The potential for wide and volatile differentials could result in operators delaying or cancelling unsanctioned projects.’” – Crude glut, price plunge put oil sands projects at risk, The Globe and Mail, June 2, 2012
From the Christian Science Monitor:
Although major business leaders support the pipeline, it's not so clear that they would invest in it. The Keystone XL pipeline, which would carry synthetic oil from Canada's tar sands to Texas refineries, is vulnerable to a downturn in oil prices. The crude it carries has smaller profit margins than conventional oil or even so-called tight oil from shale formations.
So while those tar sands (also known as oil sands) make money at current prices, it's outlook is more iffy if oil prices fell – or if a big carbon tax was enacted.
The reason is that tar sands projects have to consume a lot of energy to create energy. Using an energy accounting method called "energy return on energy invested" or EROEI, economist Robert Rapier at Consumer Energy Report has calculated that tar sands have an EROEI of 2.9/1. That means it takes a gallon of gasoline to create 2.9 gallons of gasoline. By contrast, a conventional light, sweet oil well can create about 6 gallons of gasoline for every 1 gallon of gasoline is uses.
Their break-even point is somewhere between $60 and $100 a barrel, according to Wood Mackenzie, an Edinburgh-based energy consultancy. The range is so wide because it depends on the extraction method and scope of the tar sands project.
With West Texas Intermediate crude trading above $90 a barrel so far this year, the prospects look encouraging. But when prices briefly tumbled below $80 a barrel last summer, it tested the resolve of investors backing tar sands projects and put the future of some projects in question. It was a reminder of the uncertain economics of tar sands production.
"Canada is still a very strong market, with plenty of potential," Duffy wrote. "However, these are real risks that should be monitored, and investors must be careful banking on an industry that isn't as straightforward as perhaps it has been in the past."
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For more information, contact Eddie Scher at 415.815.7027 or eddie.scher@sierraclub.org