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Keystone XL Traded For Arctic Drilling Rights?

keystone and drilling

Few debates in energy have been more contentious than Keystone XL (KXL). Environmental groups opposed the pipeline and turned out a grass roots movement that astonished even battle weary Enviros. It also caused serious problems for the industry as their assets became stranded and they were forced to ship crude by rail and barge. It is estimated that this amounted to approximately $17B over the past few years in lost revenue due to public accountability campaigns. But it looks as though the Obama Administration and Big Oil merely traded KXL for Arctic drilling rights.

An announcement was made, rather quietly, this week which did not seem to receive much attention. It came from the Department of Energy’s Oil Council which is made up largely of energy company executives, some government officials, analysis firms and nonprofit organizations. The Council released a study which was produced by the National Petroleum Council at the request of Energy Secretary Ernest Moniz. It claims that the U.S. should begin Arctic drilling immediately.

Then another announcement was made a day later.

The Obama Administration granted access to Shell for Arctic drilling. According to FuelFix:

“The Obama administration reaffirmed a 2008 government auction of Arctic drilling rights on Tuesday, delivering a major victory to Shell Oil Co. as it aims to resume exploratory drilling in the Chukchi Sea this summer.”

When politics works properly, everyone gets something. Each side trades perceived value to get to an end result. But Keystone XL (KXL) was always a curious fight. Republicans rallied vociferously behind the oil and gas industry while Enviros and common citizens turned out by the tens of thousands, literally, marching to oppose the planned route. In the end, President Obama vetoed the bill. Senate majority leader Mitch McConnell, Republican from Kentucky, stated:

“The President’s veto of the bipartisan Keystone bill represents a victory for partisanship and for powerful special interests.”

And he may have been right. Just not the special interests to which Senator McConnell was presumably alluding.

Everyone was in agreement that the project would only support about 35 permanent jobs so it was not about job creation potential. Nor was it about extracting US resources for the benefit of the US economy. These are Canadian resources which, incidentally, was one of the primary arguments used by the opposition. Why should a foreign company have the right of eminent domain in the US? I have to admit that I never heard a good explanation. Further, oil sand extraction is one of the most expensive activities in hydrocarbons and needs a very high oil price to justify the capital expenditure.

So was this merely a choice between the lesser of two evils: oil sands vs. Arctic?

Arctic drilling, Big Oil would presumably argue, benefits the US. KXL would primarily benefit Canada. Oil sands are also one of the most vulnerable of all oil projects due to its GHG profile, one of the highest among hydrocarbons. It is estimated that oil sands produce about 17% more carbon emissions than conventional crude. So it stands to reason that oil sands may potentially have less of a future than crude coming from conventional drilling projects. And the Arctic happens to be a conventional drilling project. This fact would certainly not be lost on industry executives.

Moreover, in DOE’s sleepy report there was yet another bombshell. According to AP:

“The U.S. has drastically cut imports and transformed itself into the world’s biggest producer of oil and natural gas by tapping huge reserves in shale rock formations. But the government predicts that the shale boom won’t last much beyond the next decade.”

In spite of EIA’s once overtly optimistic forecast that shales would be here for decades, they have now changed course and expect shales to peak about 2020 and apparently not last much beyond that. Other independent analysts expect it to peak even earlier around 2017-2018. It doesn’t really matter. Shales obviously aren’t going to provide energy independence or be the next great energy panacea.

But the Arctic could be. At least according to this oil industry study. The authors wrote:

“To remain globally competitive and to be positioned to provide global leadership and influence in the Arctic, the U.S. should facilitate exploration in the offshore Alaskan Arctic now.”

One day later, the door was opened for them to do just that.

So each side won something. The Enviros got their cancellation of KXL. The truth remains, however, that the economics and political “hot potato” of oil sands will likely cancel most projects anyway. And Big Oil got drilling rights in the Arctic which they probably need more than we suspect given that crude is harder and harder to find and shales have now been outed.

From a Washington perspective, however, this deal would appear a win-win. Because both the Administration and Big Oil had very little to lose from such a compromise.

The post Keystone XL Traded For Arctic Drilling Rights? appeared first on Energy Policy Forum.

Photo Credit: Keystone and Artic Drilling/shutterstock

Discussions

Bob Meinetz's picture
Bob Meinetz on Apr 6, 2015

Very interesting, Deborah. It certainly seems like a credible explanation, although environmentalists – and the environment – are the big winners. Minus a spill in the Arctic Ocean, the extractive and refining footprint will be a fraction of that left by tar sands operations.

It’s doubtful many companies will be rushing to exercise those rights. Arctic drilling has its own set of challenges which, in conjunction with Saudi Arabia’s market manipulation, may make it even less profitable, in the short term, than shipping dirty Albertan crude by rail. From Feb. 5:

If sanctions were lifted tomorrow, Rosneft and Exxon would proceed. They’ve already spent a lot of money, drilled a hole and enjoyed success. But I don’t think anyone else, if sanctions were lifted, is going to want to chase after barrels in what is now a very different environment,” says an industry analyst of the remote Russian Arctic.

http://www.ft.com/intl/cms/s/0/ae302d22-ad1b-11e4-a5c1-00144feab7de.html

Deborah Lawrence's picture
Deborah Lawrence on Apr 6, 2015

I tend to agree with you, Bob. These are going to be very expensive hydrocarbons to extract and will only be viable if prices rise considerably from here. But if you look at XOM et al, their replacement ratios are becoming troubling to say the least. They put a good face on it in press releases but when you look deeper, they are truly struggling. And costs are rising considerably. CAPEX has exploded fir the Majors since 2000 though production has been falling since 2006.

Hops Gegangen's picture
Hops Gegangen on Apr 6, 2015

 

I recall reading a few years ago that if they can’t get more oil to put in the Alaska pipeline, the flow won’t be fast enough to keep the oil moving at Arctic winter temperatures (although, those are warmer than they used to be.) So the Alaskan oil wouldn’t just slow down, at some point it would drop to zero.

 

 

Grace Adams's picture
Grace Adams on Apr 10, 2015

I suspect the most constructive thing federal government could do at this point would be to scrape up enough money for R&D leading to a cost-competitive renewable replacement for petroleum, BUY the PATENTS as important for national defense (good constitutional excuse for exercise of right of eminent domain). and get our too big to fail oil firms started on mass producing said replacement.  Counting social cost of carbon as more like $50/metric ton of CO2 than the $35/metric ton it was about 2 years ago, there is room to subsidize getting too big to fail oil firms started on mass production. Take enough time on getting through the infant industry stage to allow the learning curve to work.

Pieter Siegers's picture
Pieter Siegers on Apr 19, 2015

This is truly worrying news if true!

I mean, if you really want to lower your carbon footprint what is the first thing you should make sure of? That fossil fuels be left in the ground!

Again, if true, this is devastating news. And not a word about the concequences for climate change from the author. And the other comments are on the same dry comercial tone. Ah yes one commented a possible spill. One? Did we already forgot the endless of spills that happened under much milder conditions? Must we continue to be stupid and put a next chapter after the Deepwater Horizon? Or the Exxon Mobile disaster in Equador? Or the many pipeline spills and plant fires that occured until now?

Is it so difficult for you all to stop looking at the business side of these desicions and investigate the impact this has on climate change? Why always measure economic needs and benefits?

Yes, I agree that tar sands are REALLY not the way to go. But neither is Arctic drilling. Both are not the way to go, also not for a bridge towards cleaner energies. They are NOT. And fracking is the same bad news. Even biofuels are in a way because they need lots of dedicated land!

The future is for clean energies, you see it advances all around us. There are already emerging countries that run their economy on 100% clean energy, like Costa Rica. That is more like it!

The Arctic drilling is all about maintaining business as usual especially for the 1% that still has control together with so many politicians from so many governments, and in many cases they are not even aware of being part of the same fossil fuel assets card house. I really do hope for the sake of all of us this cardhouse will soon collapse, so that we finally can breath better air and help the planet to return to previous more stable state.

I fully support the Greenpeace action against Shell and it’s rig moving ahead, and I really do hope everybody will see that this dangerous project must be stopped also, just like all other fossil fuel extraction projects like KXL and tar sands, whether running or being planned.

Coal is already dying and so must gas and oil. Because we don’t have a choice! Continue extracting fossil fuels is a dangerous game and could put us in a situation of a point-of-no-return situation. We don’t know yet if that will be true but well I wouldn’t want to wait for that moment, simply because there is nobody who can garantee we’re not already past it!

Let’s hope when Paris comes closer countries will favor towards clean energies and act accordingly. That working towards clean energies will give them economic advance in the near and far future. And that fossil fuels are short sighted and should be avoided at all cost. Now is the time!

 

Deborah Lawrence's picture

Thank Deborah for the Post!

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