State Department's Real Errors in Keystone XL Review

Last month, the State Department published an errata sheet for the Final Supplemental Environmental Impact Statement (FSEIS) of the Keystone XL tar sands pipeline project.  State Department's error sheet, and much of the coverage of it, clearly points out that railing tar sands is potentially even more dangerous than pipelines.

Why?  Because moving tar sands crude by rail isn't happening much, isn't very profitable, and it isn't likely to be anytime in the near future.  The reality is using rail to transport tar sands crude to Gulf refineries is in fact very, very expensive - at least $15 per barrel more than pipeline, according to RBN Energy.  Tar sands crude has the double disadvantage of both remote location and poor quality - so adding additional cost for rail transport simply destroys the already slim profit margin of the product.

The State Department has in fact consistently overestimated rail's potential role in moving tar sands crude.  Less than two years ago, the Department was confidently predicting more than 200,000 barrels per day of tar sands crude would reach the Gulf Coast by rail by the end of 2013.  Instead, the Energy Information Administration recorded a high volume of just 57,000 barrels per day in March of 2014.  That is less than 7% of the capacity of Keystone XL.

[T]he flawed analysis of rail's costs [is] only one of the many errors that the State Department made in its FSEIS for the Keystone XL pipeline, as pointed out by a coalition of environmental organizations Thursday.

Why is the State Department seemingly so convinced of the inevitability of tar sands by rail when oil traders themselves are much more cautious?  One answer can be found deep in the State Department's FSEIS.  Their entire analysis rests on a single figure for tar sands production costs, which State describes as a "(h)ypothetical supply cost of a barrel of bitumen at the producing facility."  The figure that State chose as its "hypothetical" is $45 per barrel.

The problem is that this "hypothetical" figure is in fact totally wrong, and doesn't match mainstream predictions from mainstream analysts such as Goldman Sachs, Citi, and Rystad Energy.  It is much more likely that the supply cost will climb to $60 per barrel or more over the expected lifetime of the Keystone XL pipeline.

This is the biggest error that the State Department made in this report, and once you understand it you can't help but wonder why it happened.  High costs of production combined with the higher costs of crude-by-rail means that tar sands producers will not be able to profit from shipping tar sands crude to Gulf Coast refineries by rail, which means that it is not at all inevitable that the tar sands will be produced.

However, because of the low projected costs of Keystone XL transport, constructing the pipeline would enable producers to ship tar sands at a profit even with higher production costs, thereby virtually guaranteeing that more tar sands will come out of the ground.  In short, the well-named Keystone XL pipeline is the key to unlocking more growth in the tar sands.

State Department's Real Errors in Keystone XL Review