One of the most overlooked challenges associated with the exploration and production of fuel is the transportation after it is produced. It does not matter if it is oil, natural gas or coal: getting it out of the ground is one thing, but getting it to market is quite another.
In the case of oil, the primary transportation method is pipelines and ships. Some of the newer pipelines are incredibly expensive and their costs have to be factored when considering delivering oil to the market. If the price to transport is too high, the oil remains in the ground.
It only makes sense. Bankers financing pipelines want to be sure they will get their investment back. If there is any risk the pipeline will be sabotaged or the delivered oil becomes uneconomic, major oil producers such as BP (BP), ConocoPhillips (COP), Sunoco (SUN) and Exxon Mobil (XOM) will refuse to invest.
There are two examples where there are vast amounts of oil are waiting to be harvested, but have been blocked by huge transportation challenges. The first is in Kazakhstan and the land-locked Caspian Sea. The other is the Canadian oil sands.
Kazakhstan has enormous oil reserves located in a challenging environment around the Caspian Sea. In order to get their oil to market, the Baku to Tbilisi to Ceyhan (BTC) pipeline had to be built. Daniel Yergin writes in his new book, The Quest: Energy, Security, and the Remaking of the Modern World, that the BTC line would be, "one of the longest oil export pipelines in the world, and the engineering challenges over the tall peaks of the Caucasus were enormous. It was very difficult to make the economics work."
The decision to build the 1,099-mile pipeline and the routes to be taken were driven by geopolitics, economic security and physical security. Yergin writes that the route required bypassing Russian and Iranian territories. The best route required crossing 1,500 rivers and watercourses, high mountains and earthquake fault zones. The Azeris and Turks wanted this pipeline and it was in the vital interests of the U.S. As the Secretary of State said at the time, "We don't want to wake up 10 years from now and all of us ask ourselves why we didn't build that pipeline."
The same can be said for the Keystone Pipeline System which, when completed, will link Canadian oil fields in Alberta to refineries and transportation hubs in Illinois, Nebraska, Oklahoma, and Texas. As with the BTC case, federal officials must be concerned what happens if we don't build this pipeline.
The Keystone pipeline system is owned by TransCanada (TRP) and is composed of four phases. Two of the four phases are already completed, commissioned and operating.
Phase One is the 2,147-mile pipeline from Alberta to a hub in Steele City, Neb. and continues to refineries in Illinois. It was commissioned June 2010 and it is currently operating.
Phase Two, the Cushing Extension, is a 300-mile pipeline from the Steele City hub to storage and distribution facilities in Cushing, Okla. It was commissioned February 2011.
Phase Three, the Gulf Coast Expansion (XL), is a proposed 430-mile pipeline from Cushing to Port Arthur and Houston, Texas. This pipeline is an important addition to provide liquidity for the oil locked up in Cushing, the trading hub for West Texas Intermediate (WTI) crude oil.
The final XL phase is a proposed 327-mile redundant pipeline that is proposed to originate from the same point in Alberta and terminate at Steele City. It takes a shorter path and provides additional capacity to Steele City and beyond.
There are concerns about Keystone's final phases. One is that the Keystone XL pipeline extension will cross the Ogallala Aquifer. Ogallala is one of the largest reserves of fresh water in the world. Critics are concerned a major leak could ruin drinking water and devastate local economies. However, Keystone's Phase One and a lot of other transportation systems currently cross the same aquifer.
Another outside concern is that some believe that the Keystone XL line oil pipelines are unnecessary. They believe the additional extensions could introduce overcapacity of pipelines from Canada. The argument seems spurious as the financial risk of any overcapacity falls to pipeline owners, not taxpayers. Also, with more oil flowing from Canada, less oil must flow from unfriendly sources.
The Keystone pipeline provides serious contributions to the nation's energy security. Kazakhstan found success by avoiding Iran and Russian and partnering with their friendlier neighbors, Georgia and Turkey. In the Keystone case, the U.S. is planning to replicate Kazakhstan's success by partnering with Canada.