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Is Keystone Still Needed to Transport U.S. Oil? Is Keystone Still Needed to Transport U.S. Oil?

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NJ Daily / Inside the Oil Boom

Is Keystone Still Needed to Transport U.S. Oil?

Sen. John Hoeven, R-N.D., surveys miles of pipe slated for use in the Keystone XL pipeline.(Amy Harder)

photo of Amy Harder
August 26, 2013

WILLISTON, N.D.—One of the earliest and biggest political selling points of the Keystone XL pipeline was that it would not just bring Canadian oil sands to market but also oil from North Dakota and Montana.

But that was back in 2010, and things are moving fast in the heart of America's oil boom—fast enough that some question whether the Keystone XL pipeline is necessary at all around here.

At least one key oil executive says the pipeline is no longer needed to bring to market crude oil from the region's Bakken shale formation, where oil output has exploded in the past five years, thanks to the combination of hydraulic fracturing and horizontal drilling.

 

"It's not critical any longer," said Harold Hamm, founder and CEO of Continental Resources, an independent oil company that had the earliest—and still largest—footprint in the Bakken at 11 percent. "They just waited too long. The industry is very innovative, and it finds other ways of doing it and other routes."

TransCanada, the company seeking to build the 1,700-mile, Alberta-to-Texas pipeline, first applied for the necessary presidential permit in September 2008. In 2010, the company announced it was going to add an on-ramp to pick up Bakken oil in Eastern Montana. Over the past three years, growing environmental and climate-change concerns have delayed the project.

Hamm said two years ago was the turning point when the pipeline became unnecessary to get oil out of the Bakken and Three Forks region of Western North Dakota and Eastern Montana. These formations have produced a record 756,980 barrels of oil a day, up from fewer than 70,000 barrels of oil a day in June 2008. Oil production records are being broken both monthly and yearly.

The Keystone XL pipeline would take 730,000 barrels of oil daily from Canada to Texas, with up to 100,000 of that coming from the Bakken formation.

"There are other ways. There are other people who want to build pipes and don't have to go across the border, and it doesn't have to involve bitumen from Canada," Hamm said, referring to the oil sands from Alberta, which have a higher greenhouse-gas profile and a greater environmental impact than most conventional oil.

The "other people" building pipes that Hamm is referring to is chiefly Enbridge, another Canadian oil company that's making a killing expanding its oil-transportation system in North Dakota while TransCanada remains stuck in political limbo over Keystone XL.

With recently completed pipeline and rail expansions, Enbridge has almost doubled its capacity to send Bakken oil out of the region and into markets around the country, from 250,000 barrels of oil per day in 2011 to 475,000 barrels per day today, with most of that going by pipe. It also recently announced another pipeline that would add another 225,000 barrels a day in 2016, according to Peter Holran, director of U.S. public and government affairs for Enbridge.

"Enbridge is hauling oil from almost every company out here," Hamm said. Indeed, massive storage tanks with Enbridge's name and logo are seen along the highways around Williston.

Hamm is not withdrawing his commitment to haul 35,000 barrels of a day of his company's oil through Keystone XL. He said he would do so if President Obama approves it. But he's doubtful about that. "I don't think he will, because his environmental base of support is against it," Hamm said.

Obama is expected to make a decision by year's end, but it could slip into 2014.

Shawn Howard, a spokesman for TransCanada, said in response to Hamm's comments that his company's customers "continue to strongly support Keystone XL because it provides them with access to diverse markets in the U.S. Midwest and Gulf Coast refining areas." Howard added that he appreciates "the continued support of people like Harold Hamm and others in the industry who have signed agreements to move oil through Keystone XL to U.S. refineries."

But as oil production keeps increasing in the region and pipeline growth lags, rail transportation has made up much of the difference. Right now, 68 percent of the region's oil is moved by rail, while 32 percent goes to market via pipelines. In January 2012, these numbers were almost the opposite. Three-quarters of the oil then was carried by pipelines, and most of the remaining 25 percent was shipped by rail, according to Justin Kringstad, director of the North Dakota Pipeline Authority.

TransCanada's Howard dismissed the notion that rail could strip away Keystone XL's potential.

"While rail has been increasingly utilized to connect Bakken producers to markets, the current infrastructure does not allow Bakken crude oil to get to the right market, and certainly not as competitive a price as pipelines offer," Howard said in an e-mailed statement to National Journal Daily.

As an oil executive, Hamm's perspective on the importance of the Keystone XL pipeline differs from others, such as policymakers in North Dakota, who have their own concerns to address. For example, many hope more pipelines—including Keystone XL—can help alleviate the traffic that plagues two-lane roads built for sleepy farm towns and not massive trucks hauling oil and the equipment that facilitates fracking for oil and natural gas miles beneath the ground.

"We need all the infrastructure," said Sen. John Hoeven, R-N.D., while touring a field in the southwestern part of the state containing 218 miles of pipes meant for Keystone XL.

He referenced Highway 85, which cuts north-south across Western North Dakota, as one of the state thoroughfares being pounded by the oil boom. "If this pipe gets put into the ground, 500 trucks a day come off that road," Hoeven said.

Independent analysts downplay the debate in terms of how much actual oil is getting out of the region and stress that politics in Washington and in the oil industry are really at play.

Some say that Hamm, a self-made oil billionaire, is being savvy with how he's negotiating, and that his comments are a signal he's not willing to pay just any price to transport his oil.

"We think he is an oil company negotiating a contract," said Kevin Book, managing director of ClearView Energy Partners. "The number volumetrically speaking was never premised on the idea that Keystone was going to be the conduit for the Bakken. Keystone was a nice-to-have, not a must-have."

Politically, it was more of a must-have.

"TransCanada's plan to ship Bakken oil was important because it went along with domestic production story that the president was telling," Book said.

When a train carrying Bakken crude to Canada wrecked and exploded in a Quebec town killing 47 people earlier this summer, it highlighted the difference between transporting oil via train and via pipeline. Christi Tezak, a managing director at ClearView Energy Partners, says that Hamm may be capitalizing on that.

"These guys have dirty, knock-down drag-out fights on [delivery] rates," Tezak said. "So using one mode against the other is smart business."

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