Energy Q&A With low oil, gasoline prices, is Keystone still necessary?

By Dina Cappiello and Jonathan Fahey Associated Press WASHINGTON (AP) - A 50-percent plunge in the price of crude oil, resulting from abundant global oil supplies, and cheaper gasoline at the pump raise critical questions about whether the Keystone XL oil pipeline is still needed or even makes financial sense. Oil prices always have been volatile, and both the pipeline company and the oil refiners and producers that would use the pipeline expect prices to rise and plunge throughout the project's life. When Keystone XL was first proposed in the fall of 2008, for example, oil was in the midst of an even bigger plunge, from nearly $150 a barrel to below $35, and the global economy was collapsing into recession. Opponents will use lower prices to argue that the pipeline now could pose a greater threat to the environment than originally thought. Low oil prices could make the pipeline more important to the development of new oil sands projects in Canada than anticipated by the State Department, which is conducting the environmental review, and therefore is more likely to increase emissions of carbon dioxide and other gases linked to global warming. The review found the pipeline was not likely to exacerbate global warming, but it based that conclusion on higher oil prices. At such prices, producers can afford the higher cost of transporting oil by rail or other means and still make a profit. At low oil prices, they might decide only to expand drilling if they have an inexpensive way of getting the oil to market. The price of oil closed at $48 a barrel on Friday. Proponents say that during periods of low oil prices, the pipeline is more important because oil companies would otherwise have less incentive to deliver what they say is important oil from a reliable source to U.S. refiners on the Gulf Coast. But they say the current price decline is not enough to change the long-term prospects for oil exploration in Canada, global demand for crude, or prices. Oil prices will have little impact on the politics. The Republican-controlled Congress has made passing a bill approving the pipeline a priority, despite a presidential veto threat. ----- Q: Will Keystone XL lower gasoline prices? A: Probably not, but that has not changed. The price of crude oil does affect the price of gasoline, and refiners set up to use heavy crude would enjoy lower priced-oil. That would make those refiners more profitable, but it would not necessarily lower the price of gasoline. Wholesale gasoline prices are based on market benchmarks, which are more closely correlated to the highest-price crude oil on the market, not the lowest price crude. ----- Q: Do lower oil prices mean a pipeline would have a bigger effect on oil sands development and emissions of the pollution linked to global warming? A: Possibly. How much the pipeline could increase production in the oil sands depends on an array of assumptions about global oil demand, prices and regulation. In theory, by increasing the price that oil sands producers could get for their oil, the pipeline encourages more development. But that's true at low and high prices, too, according to Michael Levi, senior fellow for energy and the environment at the Council on Foreign Relations. It could be, though, that at low oil prices the cheap transport provided by a pipeline would be just enough to make some new projects profitable enough to develop, and that concerns environmentalists. In either case, however, the Canadian producers would have to assume low prices will linger for years. Oil sands projects have long lives, so companies based decisions on whether to build them based on assumptions over oil prices over the long term, not based on current prices. ----- Q: Does Keystone XL still make sense for TransCanada? A: It makes more sense than ever. TransCanada stands to make more money from the project now than it did when it was first proposed. That's because the cost of the project has increased from $5.4 billion to $8 billion, and most of the cost will be borne by TransCanada's customers, according to Carl Kirst, an analyst at BMO Capital Markets. Oil producers and refiners have agreed to pay 75 percent of the cost overruns up to $8 billion; anything over that will be split evenly. ----- Q: Does it still make sense for oil companies operating in Canada? A: Probably. Periods of low prices are to be expected over the life of the pipeline, but to producers in Canada the lower the price, the more important it is to have additional low-cost ways to get oil to market. That way they can fetch a higher price for it where it is produced. Many have already started investing in expansion projects that would benefit from low-cost market access. If oil prices fall further or stay low for a long period, however, producers will have no choice but to delay or cancel new projects. If they do not think they would be able to fill the pipeline they would back out of the project because they have to pay for capacity on the line whether they use it or not. ----- Q: Does it still make sense for refiners on the U.S. Gulf Coast? A: Yes. To refiners, more oil is better, and more of the type of oil they need is better still. Many complex Gulf Coast refineries are geared to process the heavy crudes that come out of Canada, Venezuela and Mexico. Because that crude is harder to process, it is cheaper than light sweet crude. If there is more heavy crude available, the price drops, lowering the price for refiners. Venezuelan and Mexican crude production has been falling, so refiners would like another reliable source. "We still want that crude," said Bill Day, a spokesman for the refining company Valero, which would be a Keystone XL customer. "Canadian heavy crude is some of the lowest-priced crude on the planet. Published: Wed, Jan 14, 2015