3 Myths About Keystone XL

It's only January, and already TransCanada's (NYSE: TRP  ) Keystone XL pipeline is shaping up to be a major election issue. The project, which President Obama rejected last week, would carry oil from Alberta's tar sands to a storage hub in Cushing, Okla., and then onto Gulf Coast refineries.

With all the partisan bickering, it's hard to figure out what the facts of the matter are. Here are a few myths being advanced by various parties.

1.  The pipeline's only for Canadian oil
Drillers in North Dakota, which is experiencing an oil and gas boom from the Bakken shale, would be among several beneficiaries of Keystone XL. The state hit its pipeline capacity in 2008 and has since needed to ship the crude out by train, which now accounts for about one-quarter of outgoing oil shipments. Berkshire Hathaway subsidiary Burlington North Santa Fe carries about 75% of the oil exiting the state by train. Shipping by pipeline in North Dakota can add up to $1.50 per barrel, while rail transportation costs $2 or more. As for environmental concerns in that regard, even a Sierra Club spokesman, Wayde Schafer, acknowledged that shipping "oil by rail or truck is much more dangerous than a pipeline."

2.  Stopping Keystone XL will end development of the tar sands oil
Environmentalists opposed to Keystone XL cite the more emissions-intensive extraction of the tar sands as part of their reason for opposing it, but TransCanada plans to develop the oil sands with or without the XL pipeline. In 2010, after 49 members of Congress sent a letter to Secretary of State Hillary Clinton urging the State Department to reject the pipeline, TransCanada executive Robert Jones responded by saying that the fate of Keystone XL will have "no impact on oil sands production," and "there are two projects under consideration to take oil sands to the West Coast." Rivals Enbridge (NYSE: ENB  ) and Kinder Morgan Energy Partners (NYSE: KMP  ) are heading up those other pipelines. Currently, Canada exports 800,000 barrels of tar sands oil to the U.S. a day. Despite the noise protesters have made about the environmental impact of getting that fuel out of the ground, in actuality the greenhouse gas intensity of the average oil sands imports are only 6% higher than the average crude oil consumed in the U.S.

3.  The oil will not stay in the U.S.
Among other claims, activists have said that the oil brought to the Gulf by Keystone XL would be destined for international markets, but about 10% of our oil imports already come from the Canadian tar sands. Midwestern refineries, which currently process that crude, are likely to run out of capacity by 2015. According to IHS CERA, an independent energy research group, Keystone XL "would foster higher production and greater use of North American oil in the U.S. market." Without access, "Canadian oil sands producers would likely turn to Asia as a new export market, and U.S. Gulf Coast refiners would continue to draw on current suppliers." Those suppliers include Mexico, Venezuela, and the Middle East, and IHS CERA's report notes that some of those suppliers are struggling to maintain production and new ones are needed. The influx of additional oil should help keep crude prices down as the laws of economic logic deem that, all other things being equal, an increase in supply will lower prices.

Foolish bottom line
Though TransCanada encountered a roadblock with Obama's decision to reject Keystone XL, I expect the pipeline to eventually be approved, most likely in 2013, after the election. The company has announced that it will reapply for a permit, and plans to work with Nebraska's Department of Environmental Quality to determine the safest route away from the environmentally sensitive Sand Hills and Ogallala aquifer, which had concerned environmentalists. TransCanada expects that process to be completed in September or October.

Worldwide demand for oil continues to grow, and TransCanada's access to the Alberta oil sands gives it a resource that will provide benefits for years to come. Shippers have already entered into contracts for an average term of 17 years; they are just waiting for the pipeline to be built. The operational part of the Keystone pipeline now carries 591,000 barrels per day, and TransCanada expects the XL extension to add a capacity of 600,000 barrels a day.

Considering the benefits of Keystone XL outlined above and the windfall the company stands to reap from its approval, I recently made a CAPScall on TransCanada, giving it a thumbs-up.

With the dramatic growth of China and other emerging markets, a bet on oil prices increasing seems like one of the safer plays in the market. One Oppenheimer analyst even said that certain specialized oil companies "basically start printing money once oil is above $90 a barrel." Fortunately, our experts at the Fool can help you take advantage of this trend with their free report "3 Stocks for $100 Oil." Find out the names of these three companies rich in black gold by clicking right here.

Fool contributor Jeremy Bowman holds no positions in the companies named above. The Motley Fool owns shares of Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of TransCanada and Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On January 25, 2012, at 4:07 PM, SooperNoob wrote:

    While we're clearing up myths, there is no tar in the oilsands. To call it tar sands is bad-foolish. The correct term would be bitumen.

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