Lower crude prices challenge Keystone pipeline

Backers of the Keystone XL pipeline became emboldened recently by the prospect of a Republican-led Congress finally pushing the project through.

But can dropping crude prices punch a hole in the controversial project?

The cost of benchmark West Texas Intermediate oil dropped to $74.42 a barrel on Thursday — a 25% drop from the triple-digit highs it reached this summer. Federal analysts have warned that producers in the Canadian oil sands — slated to be a top consumer of the pipeline — will need oil prices to stay between $65 and $75 a barrel to make production there economically feasible.

"Assuming prices fell in this range, higher transportation costs could have a substantial impact on oil sands production levels — possibly in excess of the capacity of the proposed project," said a U.S. State Department report on the pipeline released in January.

The 1,179-mile pipeline extension would carry tar sand oil from Canada to Nebraska, then be transported to refineries in Texas. It could carry some 830,000 barrels each day. President Obama has said he'll approve the project only if it doesn't "significantly exacerbate" the problem of carbon pollution. His administration is still studying the project.

But some members of Congress, led by Sen. Mary Landrieu, D-La., are moving ahead with efforts to immediately authorize Canadian firm TransCanada to build the pipeline. Lawmakers could vote on the issue as early as next week.

"We're in this interesting place where we have this push by Congress for the project at a time when the marketplace is telling us we don't need this new oil," said Anthony Swift, a staff attorney for the National Resources Defense Council, who has opposed the project. "The reality is tar sands crude only makes sense in the world of expensive oil. That's not the world we're likely to be in in the near or immediate future."

Needed or not, the sands-oil reserves in Alberta in Western Canada will likely continue producing crude into the foreseeable future, said Dinara Millington, vice president of research at Canadian Energy Research Institute, a Calgary-based independent, not-for-profit research group.

The break-even price to develop new greenfield projects at the reserves is at around $85 per barrel, so current crude prices could deter new projects, she said. But existing producers can continue pumping oil there at relatively low costs, Millington said. The oil-sands produce around 2.1 million barrels a day.

Also, conventional producers farther west in British Columbia and Saskatchewan will also be able to use the pipeline, bolstering its demand, she said.

"There's enough demand and supply fundamentals to make the economic case for the pipeline to be built," Millington said.

Customers to the pipeline have long-term contracts in place — some as high as 25 years — and its construction or use will not be impacted by the rise and fall of crude prices, Shawn Howard, a TransCanada spokesman, said in an email. He points out that customers did not shy away from the project when crude hit lows of $33 and $37 a barrel in 2009.

"Interest from customers to ship and receive oil through both Keystone XL remains strong and we continue to have a waiting list if space on Keystone XL becomes available," Howard said.

Still, the fact that crude is relatively cheap and there's more of it today than in recent years should shelve the project altogether, Swift said.

"We are in a dramatically different environment than we were in when Keystone was proposed in 2008," he said. "We don't need to consider paying that (environmental) cost."