Pipelines

Environmentalists, and their cohorts in the media, blast away at the keystone pipeline, because it will transport Canadian tar sands crude into the United States. They repeatedly say producing oil from the tar sands will release CO2 into the atmosphere.

Interestingly, environmentalists and the media don’t rebuke Venezuela for extracting heavy oil from the Orinoco Belt that also releases CO2.

The real story in the United States isn’t the Keystone pipeline, though that’s the issue du jour for environmentalists.

The real story is the lack of pipelines for transporting oil and natural gas from the new oil and gas fields created by fracking, to oil refineries or to where the natural gas can be used.

A few existing pipelines have had their flow reversed to alleviate existing problems, such as getting oil from Cushing Oklahoma to the Gulf. Being able to get the crude from Cushing Oklahoma, to the refineries in the Gulf, significantly reduced the discount of West Texas Intermediate (WTI) to Brent Blend crude that was as high as $20 per barrel.

Because of the lack of pipelines, oil is being transported by rail from isolated fields, such as in North Dakota, to refineries along the Gulf.

The overriding advantage of rail is its flexibility, which has served the industry well as new oilfields were being developed.

In 2008, there were 9,500 carloads of oil shipped by rail, while in 2012, there were 234,000 carloads. As a result in 2012, 460,000 barrels of oil per day, or over 7% of total U.S. production, was transported by rail car.

From Association of American Railroads
From Association of American Railroads

With North American oil production expected to nearly double by 2020, it’s clear that rail cars aren’t the answer for transporting the increased oil production from new oilfields.

A similar problem exists with transporting natural gas, though rail isn’t an alternative.

For example, the Utica and Marcellus formations in Pennsylvania, lack pipelines to carry natural gas to New England, or alternatively, to the Gulf states where new chemical plants are being built. Some new chemical plants will be built near these fields, but excess natural gas will still need to be transported to where it can be used … or exported.

The real story, therefore, is the building of new pipelines.

Today, there are over 80 new pipeline projects, some of which were started in 2012. The bulk of these pipelines are to be completed in 2015.

Their combined capacity is 16 million barrels per day.

These pipelines are intended to reduce the need for rail car shipments, and to rebalance the flow of oil and natural gas to where it’s needed.

But Keystone is still important.

Some have said the increase of domestic production will obviate the need for Keystone, but this isn’t entirely correct. Domestic production is largely light, sweet crude, while many Gulf refineries need heavy crude.

From a strategic perspective, the United States should get the heavy crude from Canada, via Keystone, rather than from Venezuela.

In a perverse way, blocking Keystone helps those in Venezuela who hate America.

 

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