Keystone XL Needs Much Higher Oil Prices To Be Viable
Latest piece from Art Berman arguing that the Keystone XL Pipeline is a bet on much higher oil prices a few years from now. Some key observations:
- It will take at least $85 oil prices to develop the new oil sand projects needed to fill the pipeline.
- U.S. tight oil plays produce ultra-light oil. Almost all of it is too light for refinery specifications. That means it must be blended with heavy oil in order to be refined and that is why there is demand for Canadian heavy oil.
- XL is a bet on the longevity of tight oil plays in the US.
- Production from the Bakken and Eagle Ford plays is in marked decline and Permian tight oil production growth has slowed. This is despite record high numbers of producing wells in all 3 plays.
- With oil discoveries at a 70 year low thanks to massive E&P cuts, there is little doubt that a supply crunch lurks in the future.
- However, the risk for Keystone is that much higher prices will collapse the global economy before new projects can fill the pipeline and pay out the investment.