A monumental clash of wills, or possibly just political theater, between the Republican House of Representatives, the Senate and the Obama administration played out immediately before Christmas.  The end result was a bill that extends for two months the payroll tax holiday that has been in effect for all of 2012.  One by-product of the legislation is a provision that mandates the Obama administration make a final determination about whether to build the Keystone XL Pipeline designed to move 700,000 barrels per day from Alberta to the Gulf Coast refining center of the United States. 

The problem for the president was that this pipeline has become a target of anti-fossil fuels, or at least anti-oil sands, environmentalists who were staunch supporters of his in 2008

This high-profile pipeline project has been the center of attention since President Obama announced to an Omaha, Nebraska television reporter that he would be making the final decision once the State Department ruled on it.  Because the line will cross the nation’s border, responsibility for approving the line was given to the diplomats, a 40-year policy that the Obama administration continued to follow.  The problem for the president was that this pipeline has become a target of anti-fossil fuels, or at least anti-oil sands, environmentalists who were staunch supporters of his in 2008, the year the pipeline project was initially filed for approval.  For a long time the environmental movement was not focused on the pipeline as they were helping marshal the “green” agenda of the Obama administration including subsidizing electric vehicles (EVs), battery technology for EVs, solar power, offshore wind development and Environmental Protection Administration (EPA) air and water rules designed to shut down coal power plants, impose stricter vehicle air quality and fuel-efficiency standards and limit the use of hydraulic fracturing to develop natural gas in populated areas. 

Since each of these policies would impact both current and future activity of domestic industries, their impact on the pace of economic growth became a high-profile target of the business community and the public who has grown less supportive of job-killing rules in the name of nebulous environmental goals.  For the past six months, the pressure for President Obama to find a coalition of citizens who will support him in sufficient numbers to ensure his re-election in 2012 has forced him to engage in the classical political maneuvering of stiffing your most loyal supporters in favor of winning support from larger numbers of currently less-committed voters.  In the case of the Keystone XL Pipeline, it meant abandoning the unions who see the construction of the line as a job-creator in favor of gaining the support of environmentalists who are fighting “dirty” oil in the form of oil sands output. 

In the case of the Keystone XL Pipeline, it meant abandoning the unions who see the construction of the line as a job-creator in favor of gaining the support of environmentalists who are fighting "dirty" oil in the form of oil sands output

President Obama’s gambit was to suggest that the approval of the Keystone project was premature because the State of Nebraska wanted to get TransCanada Ltd. (TRP-NYSE), the pipeline’s owner, to move the line to avoid the Sand Hill area and the Ogallala Aquifer.  Since this shift would require additional environmental analysis of the 153 miles of pipeline detour, it could not be completed until the first quarter of 2013, conveniently after next fall’s presidential election.  President Obama said he would await that review before making a final decision. 

While TransCanada agreed to the detour, in order to keep the project alive, it is important to note that the pipeline route the State Department was satisfied with was the result of examining 13 possible routes.  This was the route with the least environmental damage and consistent with the 25,000 miles of pipeline that already cross the Ogallala Aquifer.  We wondered whether there was any significance to the Baker’s Dozen pipeline routes studied.  For those who may not remember the evolution of the Baker’s Dozen, it comes from the days when governments harshly punished merchants who short-changed customers.  In those days, most of the bakers were not educated meaning they were not necessarily good at counting.  Therefore, to protect against short-changing their customers, they threw in an extra – the 13th – roll when a customer purchased a dozen.  So here we have a Baker’s Dozen pipeline routes to ensure that the least environmentally damaging route was included. 

This was the route with the least environmental damage and consistent with the 25,000 miles of pipeline that already cross the Ogallala Aquifer

Lots of charges and counter-charges have been hurled about the significance of the Keystone line for the U.S. economy and our nation’s energy position.  Will there be 20,000 construction jobs or only 5,000 generated?  What about the supposed 120,000 additional jobs?  Will the U.S. be less dependent on unfriendly energy suppliers?  These and other questions have been debated, argued and demagogued. 

TransCanada presented an economic analysis prepared by Dr. Ray Perryman, a respected economic consultant in West Texas.  Using an input-output model, he came up with the 20,000 construction jobs and 120,000 associated jobs.  His report was prepared in 2009.  Recently, an economic consulting group at Cornell University prepared a report claiming that there would only be 5,000-6,000 construction jobs created, and that these would be short-time positions.  They estimate that only 50 permanent positions will be created.  They also questioned the 120,000 associated jobs based on spending associated with the project. 

Since the Cornell study was prepared in 2011, nearly two years after the company study, it had additional information to use in its examination.  We believe they have done a respectable analysis, but we haven’t checked all their numbers.  They took great pleasure in attacking the 120,000 job estimate, but demonstrated their very clear bias by comparing this number to other studies such as the Brookings Institution study of green jobs.  That study is almost farcical in its counting of green jobs, such as when it determined that because one driver was driving a natural gas-powered bus, then all metropolitan bus drivers were “green” employees.  The bigger problem with their criticism is that this same model was used to estimate the employment impact of wind farms in Texas and has been used to project the employment impact of many “green” energy projects around the country.  So if it has to do with fossil fuels, you can’t use this model because it overstates the employment impact, but if it’s for “green” energy projects then the model is acceptable and the overstatement of jobs is not a problem.  It would seem to us that you can’t have it both ways, but then again clean energy operates in a world akin to Alice in Wonderland.

With respect to the question about energy security, there are cases being proposed that the growth of the oil shale production in the U.S. will be sufficient over time to wipe out the country’s need for imported oil.  This assumes that the federal and state governments will make available all the acreage the oil industry desires and will not restrict their use of hydraulic fracturing.  Other studies say this scenario is not probable, or even likely.  Rather they believe that there will be some erosion of imports from growth of domestic production, but more of the erosion will come from a decline in oil usage.  The key point is that of our roughly 9 million barrels per day of imports, the largest supplier is Canada, followed closely by Mexico.  After that, our next three top suppliers are Saudi Arabia, Venezuela and Nigeria.  Collectively, these five suppliers account for over two-thirds of our current import volumes.  Regardless of what happens to U.S. oil demand, it is hard to see that our principal oil suppliers will change, and these five are certainly friendly suppliers.

When President Obama’s decision was announced, there was strong negative reaction from politicians on the right, many citizens and the oil industry.  But some of the criticism came from Canadian politicians and the citizens of our northern neighbor.  Canada’s Prime Minister Stephen Harper came out and said that the country would begin to explore markets outside of the United States.  In an interview with CTV National News after his most recent trip to the United States, Mr. Harper said, "I am very serious about selling our oil off this continent, selling our energy products off to Asia. I think we have to do that."  He went on to say, "When I was down in the United States recently, it was interesting. I ran into several senior Americans who all said, ‘Don't worry, we'll get Keystone [pipeline] done.  You can sell all of your oil to us.'  I said, ‘Yeah we'd love to,' but I think the problem is now that we're on a different track." 

There have been proposals to build new pipelines from the Alberta oil sands to the west coast of Canada where the output could be shipped to Asia or the U.S. West Coast.  Other export ideas include using idle pipeline capacity in the eastern half of Canada and reversing the flow to allow Western Canadian oil to be exported to Europe, the U.S. or elsewhere in the world.  The most desirable course for both Canada and the U.S. would be to send more oil south where there is substantial capacity to refine heavy oil.

A new study by the University of Calgary’s School of Public Policy shows that Canada’s GDP could benefit by up to $131 billion between 2016 and 2030, adding about 1% per year to economic growth.  Moreover, Canadian governments would receive an additional $27 billion in taxes and there would be 649,000 person-

years of employment added.  Each of three market accesses was studied with the U.S. providing the greatest economic benefit to Canada because of the very depressed price at which Canadian oil is being sold into that market.  Assuming the construction of the Keystone line and the debottlenecking of the shipping point in Cushing, Oklahoma, more oil will be able to get to the Gulf Coast refining center and Canada’s economy would gain about $114 billion over 2016-2030 with an additional $22 billion in taxes.  However, if the line were built to ship additional oil to California, Canada would only gain an additional $6.7 billion in GDP and $1 billion in taxes.  If the export line was designed to move the oil to Asian markets, Canada’s economy would gain an additional $10 billion in GDP and $2 billion in taxes. 

The challenge for the Canadian government is to figure out how to maximize it benefits from exploiting the oil sands deposits.  A recent poll by Forum Research Inc. showed that half of Canadians are opposed to the Keystone Pipeline project.  Just as many Canadians are opposed to the Northern Gateway pipeline to haul oil sands output to the Pacific West Coast.  The opposition to both pipelines is strongest among the people of Quebec, Ontario and British Columbia.  Presumably only in the Northern Gateway project would people from British Columbia be impacted directly.  So it is quite interesting to note that 60% of Canadians view the oil sands as providing more ethical oil than comes from the Middle East.  This suggests that there is an educational effort needed to win over those opposed to exporting oil sands output and displacing less ethical oil supplies./p>

While we haven’t heard the last of the Keystone XL Pipeline debate, one has to wonder whether the Republican strategy of forcing President Obama to possibly reject the line in early 2012 as a campaign issue may backfire.  These Canadian poll results plus 60-days of strategy planning-time provides the Obama administration sufficient room to develop a plan to address the pipeline issue while not jeopardizing the support of the environmental lobby.  We are sure the plan will be ingenious as it will demonstrate that what we thought was up was really down, and what we believed to be good for us was really bad.  So goes the world of politics and energy!