Inside the Oil Boom

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

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"There's millions worth of pipe sitting on the ground when it should be in the ground," said John Hoeven, R-N.D., pictured here. He has pushed legislation the past few years to try to go around President Obama, whose State Department has authority to decide the project's fate, and deem it approved.
National Journal
Amy Harder
Aug. 26, 2013, 3:30 p.m.

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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