2. KEYSTONE XL:

With its long U.S. oil relationship on the rocks, Canada goes looking for other suitors

Published:

In the United States, the proposed Keystone XL pipeline is the daily fare of heated presidential politics, congressional debate and talk radio, in which President Obama is often accused of irresponsibly holding up the line.

But the intensity does not appear to extend into Canada, where preparations for the line's construction seem to be pushing ahead despite the official lack of a permit.

After six decades of exporting oil almost exclusively to the United States, Canadians are reacting to the squabbling south of the border with knowing irritation: They figure that the feuding will end with a green light for Keystone early next year regardless of who wins the U.S. elections. Yet, experiencing uncertainty in this key dimension of the bilateral relationship for the first time -- oil and gas are Canada's No. 1 exports -- they have also determined to provide themselves an alternate export route so that U.S. politics affect them less.

TransCanada, the pipeline company that has proposed 1,700-mile Keystone, says it is proceeding with a $275 million expansion of its 2-million-barrel terminal at Hardisty, the line's Alberta starting point, raising its capacity to 2.6 million barrels a day. This comes after the company's March announcement that it is starting construction of Keystone's southern leg -- from Cushing, Okla., to a Gulf of Mexico terminal in Texas. Earlier this month, the company reapplied for federal and state permission to carry out the entire 700,000-barrel-a-day expansion, including a section in Nebraska that environmental groups say would threaten the Ogallala Aquifer.

This activity comes against the backdrop of a possible fundamental shift in Canadian export strategy: Rather than aiming virtually all of its export oil at the nearby U.S. market, Canada may divert a considerable volume of Alberta's bitumen to Asia. Canadian regulators are considering an application by Enbridge Inc. to build a $5.5 billion, 730-mile pipeline from Alberta to British Columbia, and by Kinder Morgan for a $5 billion expansion of an existing line from Alberta to Vancouver, British Columbia.

"There is a case for optimism that [Keystone] will be approved," said David Collyer, president of the Canadian Association of Petroleum Producers. "Having said that, we've also said that it never makes sense for a supplier of anything to be dependent solely on one market. And I would say the Keystone decision has been a wake-up call about the vulnerability in being exposed to only one market."

Energy pipelines typically are built absent any fanfare, since it usually is a stretch to attract excitement over a length of welded steel tubes. Within that context, the Keystone expansion has assumed a large and contentious place in big politics like few pipelines anywhere in the world. Movie stars such as Daryl Hannah have proactively undergone arrest in front of the White House, and serious scientists, notably NASA's James Hansen, have predicted "game over" on controlling climate change should the Keystone expansion proceed.

Keystone has also attracted critics who simply wish to see fossil fuel consumption curtailed, and others who perceive an opportunity to strike back at lobbyists who helped to defeat cap-and-trade climate change legislation proposed by the Obama administration in 2009.

Against this, Canadians say that critics opposed to their oil are a bit late, as Canada has been exporting oil to the United States since 1950, when the 1,125-mile-long Mainline began to deliver crude oil from Alberta to Wisconsin. Since then, numerous additional pipelines have opened, including the Trans Mountain, which in the 1960s began shipping oil to California, Washington state and elsewhere in the western United States.

Alberta oil sands are more polluting than the conventional crudes that the region has historically shipped, but Canada says companies have seriously narrowed the difference and continue to work to clean it up.

Shifting production, politics

Last year, the decision on whether to allow the expansion drifted into the U.S. presidential campaign cycle. In November, Obama, under pressure from his environmentalist political base, announced a postponement of the decision until after the presidential election. When Republicans in Congress pushed through a mandate for a decision by February, Obama officially rejected the expansion, while inviting TransCanada to reapply.

TransCanada's apparent optimism that its permit will ultimately be approved appears to be widely held in Canada. In a February survey, 73 percent of Canadian CEOs polled forecast that the decision will be reversed once the election is decided. Just 14 percent of those polled expected a permanent blow to Canadian oil exports to the United States, according to the poll, conducted by Toronto-based polling firm COMPAS. Presumptive GOP nominee Mitt Romney has said he would approve Keystone his first day in office should he win election.

Still, Canadian officials say that even in the context of politics, the delay has broadened political acceptance of previously existing plans to diversify oil sands exports with pipelines to the Canadian West Coast, said Gary Doer, Canada's ambassador to the United States. Much environmental opposition has been raised within Canada to the two proposed inter-Canadian lines, but Doer predicted that Canadian regulators will ultimately approve "one or both" of them. "We do not stand still," he said.

Yet politics are not the sole factor that may have influenced Canada's strategic shift to export diversity. Another is a reversal in U.S. domestic production, especially a surge in shale oil supplies from North Dakota, Texas and elsewhere. Another is that oil prices outside the United States -- Brent crude -- are higher than the U.S.-traded West Texas Intermediate.

If the Canadians are correct about Keystone's future, any exports to Asia will still leave the great majority of the oil sands for the U.S. market, according to industry officials in both Canada and the United States. Yet the logic of diversification will buttress the argument within Canada for the Asian pipelines.

"This taught them a lesson," said David Pumphrey, deputy director of the energy and security program at the Center for Strategic and International Studies. "So they are looking for where else they can send their oil."