Oil Change International

Exposing the true costs of fossil fuels

Due to KXL’s “Hefty Financial Risk”, Will it Ever be Built?

C: Steve Rhodes

C: Steve Rhodes

For those fighting the KXL pipeline, there are important lessons to learn from recent events. First that Trump is defeatible. The man who has made a career of being an Alpha-male bully in business is now finding the reality of politics very different.

That he failed on Obamacare shows that, no matter that here is a man who may be President, he may be a billionaire, but he can still come second in a two horse race.

And he may yet lose on the controversial Keytone XL pipeline too, which he approved last Friday. Trump said the 1,200-mile pipeline will be “the first of many infrastructure projects” to stimulate jobs.

But like Trump, the KXL pipeline can be beaten too. In the short term, the fight over KXL moves to Nebraska, but in the longer term other issues are at play. KXL has taken so long to come to market that the market has moved on. It could be obsolete by the time construction is complete: a thousand mile rusting relic of a bygone age.

It is not a given that the pipeline will ever be built, especially if oil remains at current prices. It is a pipeline that is being squeezed at both ends: at the supply side and demand side.

The supply side is highly polluting and expensive and the demand is being eroded by cheaper oil from elsewhere and renewables. Let us not forget that KXL is a tar sands project, and the tar sands are some of the most expensive and polluting oil on the planet, which are rapidly becoming stranded assets: too risky, too expensive and too polluting to ever be exploited.

And all the time solar and renewables are getting cheaper.

Only this month, one of the companies that can withstand turbulent times, Shell dumped over $7.25 billion of its tar sands assets. As Bloomberg reported at the time: “The sale marks another step toward [Shell CEO] Van Beurden’s goal of preparing Shell for a world of lower oil prices and tighter restrictions on carbon emissions.”

Whether Trump likes it or not, the market for the dirty carbon intensive tar sands is decreasing by the day. As Amory B. Lovins, the Cofounder and Chief Scientist, Rocky Mountain Institute, outlined in an in-depth piece in Forbes yesterday, even “if the project surmounts substantial short-term legal, poli­tical, and environmental obstacles, it will then face three daunting long-term chal­len­ges: sustaining input upstream, sales downstream, and profits for its investors.”

These three issues could combine in a perfect vortex to scupper the project. The bottom line is that Trump can approve all the pipelines he likes, but that does not mean that investors will make any money from KXL, instead the pipeline will “deliver hefty financial risk” argues Lovins.

As Lovins states: “Unless world oil prices rebound to roughly twice recent prices and stay aloft for decades, this 1,179-mile pipeline can’t repay its $8-billion investment, and pro­ducers can’t finance the new projects needed to keep it filled as old ones decline.”

Others agree. Bill Arnold, a professor of energy management at Rice University’s Jones Graduate School of Business and ex-Shell argues thatThe biggest challenge to the pipeline now is not political. It is economic. Whether TransCanada will go forward with the project depends on its medium- and long-term price forecast.”

And the forecast does not look good.

And if TransCanada’s backers are blinkered to these risks, they face a new campaign by environmentalists to publicly name and shame them.

As Lindsey Allen, the executive director of the Rainforest Action Network, noted in an article for the Hill last week. “For too long, these mega banks have managed to avoid responsibility for the consequences of supporting companies that profoundly shape the future we will all live in.”

She adds: “It’s time to turn up the heat and demonstrate that banks will no longer be allowed to operate behind the scenes with no accountability for the damaging social and environmental impacts they contribute to. It is time to name names and pull these power players out from the shadows and into the light of public scrutiny.”

There are currently 21 financial institutions offering finance to TransCanada’s, including  JP Morgan Chase and Bank of Montreal, Citibank and Wells Fargo.

And here, campaigners will take heart from the wider fossil fuel disinvestment campaign as well as the campaign for disinvestment surrounding the Dakota Access pipeline.

In the race between oil and renewables, KXL could be the most expensive obsolete pipeline ever built. Even if investors accept the risk of exploiting high cost dirty oil, asks Amory Lovins, “what about the down­stream risks of being unable to sell oil at a profitable price? Those depend on competition between ever-costlier oil and ever-cheaper alternatives. Oil is losing.”

And the more oil loses, the more it will have to be sudsizied to compete. And the more it has to be subsidized the less money Trump will have to cut taxes, his other great priority.

Trump has already found that healthcare is more difficult that he imagined, and he is about to find out that so are the economics of energy.

 

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