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.