There’s a lot of misinformation in the Canadian twitter-sphere about Keystone XL cancellation — which just happened. I talked to an oil analyst recently, and he assured me on a few points and also raised a few concerns. I’ll share them here:
- Keystone XL is one-half of the bargain. When Trudeau and the Liberal team settled on their oil strategy a few years back, the decision was taken to permanently axe Northern Gateway (the then-proposed pipeline to Kitimat, B.C.) and let Trans-Mountain twinning (referred hereafter as TMX) and Keystone XL go ahead. This way, of the three “realistic” options (Energy East, which needed to go through Quebec, was not deemed as such), they picked one on the Pacific and one southwards — to the US.
- This made sense at the time (and generally): the primary market for Canadian oil is the U.S.
- As we know, the U.S. has an oil surplus (due largely to the fracking boom).
- However — and this is extremely important — this largely doesn’t apply to Canadian oil.
- Why? The reason is Canada mostly exports heavy oil. Fracking produces light crude.
- A refresher on terminology: “heavy” and “light” are based on specific gravity (density) and can be observed in terms of viscosity.
- “Heavy”: more suitable for plastics, diesel, jet fuel, somewhat less suitable for gasoline.
- “Light”: much more suitable for gasoline, less suitable for other uses.
- Specifically, “light” oil has a 32% gasoline yield, “heavy” a 15% yield — so more than double (if gasoline is what you want)
- This is important because the electric vehicle (EV) revolution and Elon Musk and all that — that’s gasoline, not diesel or jet fuel, or indeed plastics — for which there’s increasing demand.
- Basically, we are transitioning away from the products more produced by light oils, and toward those produced by heavy oil. (I have to phrase this very carefully: they both produce a range of products, but in different proportions, and the demand for each category is shifting.)
- Anyways, to get back to topic — US has a surplus of light oil supply, but an undersupply of heavy. This is why Canadian producers have long sought to access US market despite what seems like a existing glut.
- Economically, this has some complications. Basically, it’s not at all clear whether the “actual” demand is there when this will be built (this is my own analysis) — oil refineries for light oil (yes, it’s specialized) can produce all these categories, just less effectively or efficiently
- It might seem like the abstract that the “heavy” oil is perfect for US market — which has an excess of light crude, but economics rarely line up with mechanical interpretations of ideal that way.
- Basically, Canada has to export the heavy oil internationally. That means India and (in practice) China. That will require heavy oil refineries at destination — but they’re coming online. (I’m ignoring the fact that one of the proposed pipelines would refine it to light crude before shipping it because it’s uneconomic, even relatively speaking)
- To export to India and China, you need to ship it overseas. This means tankers. Canada has banned tankers in the upper Pacific Coast (ie. near Queen Charlotte Sound) due to effect on whales and potential environmental damage due to possible spills. This has ruled out (for the time being) pipelines terminating at Prince Rupert or Kitimat (referenced above) because they’re within the banned zone.
- This leaves, for the time being, TMX (Trans-Mountain expansion) which terminates in Burnaby (a suburb of Vancouver, B.C.).
- Industry insiders: I’ve left out some info for obvious reasons. Don’t @ me because it’s meant for your own benefit (aka to preserve your jobs).
