Everything You Need to Know About Keystone XL: The Debate

By now, you've probably heard about TransCanada's  (NYSE: TRP  )  Keystone XL pipeline. For even the most casual observer of the energy industry, this project has been the spark that has ignited political debates ranging from environmental hazards and emission of greenhouse gases to North American energy independence. In Tuesday's speech on climate change, President Obama made a point to discuss the Keystone XL pipeline and its role in the United States:

Allowing the Keystone XL pipeline to be built requires a finding [from the Department of State] that doing so will be in our nation's interest ... [which] will be served only if this project does not significantly exacerbate the problem of carbon pollution. The net effects of the pipeline's impact on our climate will be absolutely critical to determining whether this project is allowed to go forward.

There are clear environmental concerns that several people have regarding the construction of this pipeline, but the story is so much more than that. Check back at our breakdown of the economic fundamentals of the pipeline here. To help better understand the entire story of the Keystone XL pipeline, we at the Fool want to give investors a better look at what the Keystone XL means for all parties involved. In this part, we'll look at what needs to happen for the pipeline to pass and examine the different sides of the debate. 

Getting approval
The Keystone XL pipeline is an expansive project that travels 1,179 miles and crosses through three states as well as an international border. It has to get approval from a multitude of state and federal governments before it gets built.

Approval of the pipeline has been a long process. It has also required a revision of the original route. The first plan for the Keystone pipeline was to run through Nebraska's Sand Hills region, the largest wetland in the United States. After negotiations with the state of Nebraska, the pipeline route was changed to avoid this environmentally sensitive area. So far, the only pending approval that's required is a presidential permit through the Department of State. 

The State Department is the only body left needed to approve the pipeline, so the president will have the final say. Based on his statements at his most recent speech, a large emphasis will be put on how the pipeline will affect carbon emissions in the United States. 

Opponents of the Keystone XL
For the most part, the argument against the Keystone XL is centered on environmental concerns. One big sticking point for opponents of the pipeline is the potential for spills. Recent spills in both Canada and the U.S. have certainly increased awareness about this possibility. The most visible spill of late was at ExxonMobil's (NYSE: XOM  ) Pegasus pipeline in Arkansas. The pipeline spilled between 5,000 and 7,000 barrels of heavy oil coming from Canada and headed to the Gulf coast. 

These kinds of spills are concerning because of the previous proposed route for the pipeline. The southern leg of the pipeline traverses the Ogallala Aquifer, a massive underground body of water that is close to the surface and is responsible for a large part of the Midwest's groundwater supply. There are large fears that a spill could contaminate an already highly stressed water source and could have a detrimental effect on farming in the region. As part of the route revision to avoid the Sand Hills region, the new proposal will avoid traversing the aquifer as much as possible.

There have also been some fears that Canadian tar sands are more corrosive than other oil types and could increase the risk of oil spills. But a recent study by the National Research Council, part of the National Academy of Sciences, recently released a report stating that oil sands don't pose any greater risk of spill than other types of oil.

The other large argument against the Keystone XL pipeline is that oil sands are a more greenhouse gas-intense oil source than other sources. Unlike traditional oil, which we drill wells for and pump out of the ground, oil sands are exactly that -- oil trapped in sands. To use this resource we need to mine it like other minerals and upgrade it by melting the oil off the sand. Some new techniques are being used that heat the sands in situ, which means the oil can be extracted through wells. Either way, though, the process of extracting these resources does normally require more energy, and hence more CO2 emitted, per barrel extracted. Some of the more difficult to produce can emit up to 2.5 times more CO2 per barrel extracted than the average barrel consumed in the United States. 

Advocates
One of the benefits both TransCanada and its allies have touted for the project is the prospect of jobs in the United States. How many jobs? Estimates from various sources project jobs related to the Keystone XL of between 35 and 553,235! The higher number is 0.3% of the entire American labor force. 

Why such a large disparity? Well, it's all in the way that you measure it. The Perryman group study with that big jobs number makes the assumption that oil prices will reach the peak from the summer of 2008 at above $140 per barrel. Also, the increased stability in energy prices from the Keystone XL would spur greater economic investment in the United States -- $221 billion, by its estimate -- leading to more jobs in not only the energy sector, but also manufacturing and any ancillary jobs that may be needed to support them.

Projecting out how a single event like a pipeline will affect jobs numbers and economic output can be very suspect to massaging numbers. So of course take these numbers with a grain of salt. Prof. Ellen R. Wald's article in Forbes does a great job of explaining the disparity of jobs for these kinds of projects and compares it to another major project, the Trans-Alaska pipeline.

The assumptions in the Perryman study bring us to the other case for Keystone XL: greater energy security. Oil sands provide heavy oil, a necessary element to keep refiners running at optimal capacity. For oil refineries in the Gulf Coast -- the target market for Keystone XL-- the primary sources for this crude type are Mexico, Venezuela, and Saudi Arabia. The U.S. doesn't have the best relationship with a couple of these countries, and the oil they deliver to us is more expensive than what we could get from Canada. So with a greater supply of heavy oil coming from Canada, we would be less dependent on these regions for our energy needs.  

The decision
Both sides do present legitimate cases as to whether the pipeline will be built, but it looks as though the final decision will rest on the greenhouse gas emissions debate. With so much of the decision based on this metric, then how it is measured will certainly mean something. Just as many opponents have said, several types of oil sands are much more greenhouse gas intense, but in comparison with what?

Sources: IHS CERA, author's calculations

There are some oil sands that are much more GHG intense than the average U.S. barrel consumer, but there are also some forms that are less GHG intense. In aggregate, oil sands are about 15% more greenhouse gas intense than the average barrel consumed in the United States. Also, some crudes that it could potentially replace (Middle Eastern heavy, partially upgraded Venezuela) are less GHG intense and would present a net benefit from what we do today.

Getting oil from the ground to your car takes many more steps than just production, so perhaps we need to look at the lifecycle GHG emissions for oil sands. Two ways to measure this metric are well-to-retail pump emissions and well-to-wheel emissions

 Sources: IHS CERA, author's calculations.

Canadian oil sands improve dramatically when you look at well-to-retail pump metrics, and even better again if you look at the well-to-wheel metric. Of the CO2 emitted from oil, 80% comes from the actual combustion of the fuel. When you consider this metric, the average imported barrel of Canadian oil sands is about 6% more GHG intense than the average barrel consumed in the U.S. and is an 8% improvement on Middle Eastern oil. Now that you have an idea of how CO2 emissions can be evaluated, it will be pretty easy to spot which metrics the president used to make his decision. 
 
What a Fool believes
We've been waiting a long time for the decision on the Keystone XL, and it looks as though a decision will be coming soon. Check back in to Fool.com to see who is most directly affected by the Keystone XL pipeline and what it will mean for them.

Read/Post Comments (4) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 30, 2013, at 3:49 PM, Discretionary1 wrote:

    "Oil sands provide heavy oil, a necessary element to keep refiners running at optimal capacity." - what is optimal capacity? why are oil sands necessary? what products require oil sands?

  • Report this Comment On July 01, 2013, at 9:02 AM, TMFDirtyBird wrote:

    @Discretionary1

    As you know, we get a wide variety of products from crude oil, ranging from gasoline to tar. These heavy oils like from oil sands have a higher concentration of larger molecules that are necessary for products like lubricating oils, home heating oil, parrafin wax, bunker oil for ships, and asphalt for roads

    Hope this helps

  • Report this Comment On July 01, 2013, at 1:08 PM, CluckChicken wrote:

    Why do you again ignore the fact that once the sand oil has the ability to hit a port that it will have more available customers? All of these assumptions don't take into account an greatly increased number of customers which would drive the cost higher.

  • Report this Comment On July 11, 2013, at 5:25 PM, Discretionary1 wrote:
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