Matt Insley

Our good old friend, the Keystone XL Pipeline, is back in the news.

Obama’s recent global warming-themed speech brought the pipeline decision back to the spotlight.

This time around we’re heading further into the rabbit hole of rhetoric — luckily, there’s still three safe ways to play it…

“Allowing the Keystone pipeline to be built requires a finding that doing so would be in our nation’s interest. And our national interest will be served only if this project does not significantly exacerbate the problem of carbon pollution.” Obama says.

In case you’re not caught up with the conversation, the president is talking about a new pipeline that will carry crude oil from Hardisty, Alberta Canada as far south as Houston, Texas.

Keystone XL Pipeline Map Explained

But instead of a frank discussion on the pros and cons of the pipeline we were treated to a spintastic speech. What’s new, eh?

In an attempt to spur his social agenda Obama maliciously fogs the line between opinion and simple economics. On one hand he seemingly wants an objective decision on the pipeline, while on the other he stresses the need for the U.S. to be the world’s emission-cutting beacon.

As a quick aside we can all agree that polluting isn’t our number one goal. Indeed, your editor doesn’t leave his car on at night for the fun of it. Nor do I think conservation is a bad word.

But the hell if I’ll choose a bike to travel cross-country when I can take a 747.

That, my friend, is the power of cheap and abundant energy.

It’s important to remember that there are two sides to Obama’s environmental spin. Everything comes at a cost, you see. If we want lowered pollution, in this case a drop in Co2 emissions we better be prepared to pay for it. Higher energy costs and lowered energy security.

That being said, I’d like to clear up a few things. Specifically, let’s omit the fluff and bust some of the myths surrounding the pipeline decision. Without further ado, let’s take a look at five myths about the Keystone XL — plus, as you’ll see below there’s a bonus section with a safe way to play this opportunity…

Myth #1: The U.S. won’t benefit from Canadian crude shipments.

Let’s start with a softball question. Although some folks believe the U.S. won’t be the top benefactor of the Keystone decision I beg to differ.

Sure, Canada — especially the land-locked province of Alberta — will benefit to have more of their crude flowing to the open market. But that single benefit is overshadowed by bigger benefits for the U.S.

First, the U.S. will represent the gateway for Canada’s crude. The pipeline, if approved, will have the capacity for over 800,000 barrels of oil per day — that capacity includes crude from Canada as well as other “logistically challenged” areas in the U.S. like North Dakota’s Bakken formation.

The crude will flow south to refineries in Houston or eastward to refineries and storage in Illinois — at either stop there is a value-added benefit to U.S. refiners. Remember, of late the U.S. refiner sector has been booming, more crude oil capacity will likely lead to even more options (and profits) for U.S. refiners.

Refining profits aside, the pipeline serves an even bigger benefit for the U.S. in a geopolitical sense. Truly, you can’t put a price on energy security. Ask anyone that remembers the volatile period in the 70′s where gasoline lines were commonplace and you’ll see we don’t want to be at the whims of the Middle East, Russia, Venezuala or Nigeria.

Or back to my example above, start asking people to travel by bike on their next cross-country trip — see where that gets you! We’ve come a long way since the days of the Oregon trail, but some folks don’t seem to appreciate those leaps and bounds.

All said, with Canadian crude flowing south, the U.S. gets a priceless step closer in the race for energy security. Modern conveniences at our finger tips? Don’t underestimate this point.

Myth #2: The pipeline isn’t safe, it will leak.

The first obstacle in the Keystone decision was based on a Nebraska aquifer. That is, environmentalists proposed that a leak in the pipe system could contaminate one of the U.S.’s largest sources of fresh water.

It’s a valid concern. But it’s foolish to think that engineers these days can’t build a pipeline that doesn’t leak. Pipeline technology and monitoring systems far exceed the concerns about a spill.

Of note, the state of Nebraska’s recent impact study agrees.

Myth #3: Stopping the Keystone Pipeline with halt Canadian oil sand development.

Long-time readers remember we covered this topic back in 2011, in an article titled “Stop cheap oil, yes we can!”

Back then, protesters were lining up outside of the White House chanting “stop the pipeline, yes we can!” Unfortunately these protestors needed a lesson in global economics.

Simply put, even if Obama stops the Keystone Pipeline, the Canadian crude (at current economics) will be produced. That is, if companies can produce something for $60 and sell it for $70… $80…. $90… or even $100, they’re going to.

So the fact remains, it’s not a question of “if” Canadian oil sands are going to be produced, but rather a question of where the crude oil flows. Will it be south to Houston via pipeline, east to the open ocean via rail or pipeline, via rail to California or westward by boat to China?

One thing is for sure, the crude will flow to the path of least resistance — time will tell if that means a southern route.

Myth #4: Canadian oil sands are “dirty” energy.

The way the thinking goes: Canadian oil sands require more energy to get to market, thus they represent “dirty” energy.

I don’t disagree with the fact that oil sands require more energy to get to market. That’s just the simple nature of the energy market these days. The “easy oil” as Byron King says, “is gone.” So beyond Jed Clampett-style energy discoveries, where oil easily gushed from the ground, our current energy situation involves a lot more input.

Whether it’s tertiary oil treatment of old conventional oil wells with water and Co2 injection, shale development with hydraulic fracturing and horizontal drilling or deepwater development miles offshore, there’s a lot that goes into getting oil out of the ground.

At what point does energy turn “dirty?” I’ll leave that up to you.

But I can tell you that in a free market, the “dirty” energy will begin to regulate itself. That is, the more effort and energy needed to get crude oil to market, the higher the price. And when prices get too high consumption starts to wane.

Don’t be fooled by folks saying an energy source is “dirtier” than the next. Even though it may take more effort to get oil to market this line of thinking is nothing more than an abstraction.

Myth #5: There will be a simple yes/no decision made on the pipeline.

This myth is proving to be falser by the day. In the early stages of the Keystone Pipeline decision it appeared the state department would give a black and white approval or denial on the pipeline project. But with each passing day and mounting pressure for all camps, it’s clear that this pipeline decision is getting muddier by the day.

That is, if we do see an approval (which I still believe will happen), we’ll likely see some sort of tethered policy along with it. Nowadays that tether looks to be linked to Co2 emissions. It’s important to see how this shakes out, stay tuned.

*Bonus* Myth: There’s no way to profit from the Keystone XL decision.

Allow me to reiterate the fact that you don’t want to place all of your chips on Red or Black here.

Betting on or against a pipeline company or oil sands play is a gutsy bet. Sure, I think some sort of agreement will okay this pipeline project, but that doesn’t mean I’m buying all the oil sand producers I can find.

Instead I’d urge you to look at the safe bet, or in this case three!

The three companies that I suggest all have production in the Canadian oil sands. But importantly, these big energy players can bank a profit no matter which way the decision goes — pipeline or not!

ConocoPhillips (COP), Exxon Mobil (XOM) and Chevron (CVX) all have exposure to Canada’s oil sands. Of course, you’d also be correct if you said they have massive exposure elsewhere in the U.S. as well:

  • ConocoPhillips, to be clear, is the largest natural gas liquids (NGL) producer in the U.S. So when liquids-rich shale gas starts to come online (something that’s happening as I type) ConocoPhillips will be first in line cash in.If the pipeline decision is scrapped forever, these liquid-rich plays will be even more important — and ConocoPhillips will cash in. If not, ConocoPhillips can start reaping the benefits of its oil sands production.
  • Exxon is a huge player in the unconventional oil and gas market here in the U.S. And while the battle over the pipeline rages on, Exxon will continue producing domestic oil and selling it at the current near $100/barrel.
  • Chevron holds huge potential in unconventional U.S. plays. A few years back I ventured out to visit one of Chevron’s operations in west Texas. With oil prices near $100, Chevron’s oil production is paying dividends, literally!

These three domestic amigos, as I’ve referred to them before, are a safe way to play the North American energy picture. They all pay a solid dividend and whether the pipeline proceeds or not they all stand to benefit.

Keep your boots muddy,

Matt Insley
Original article posted on Daily Resource Hunter

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Matt Insley is the managing editor of The Daily Resource Hunter and now the co-editor of Real Wealth Trader and Outstanding Investments. Matt is the Agora Financial in-house specialist on commodities and natural resources. He holds a degree from the University of Maryland with a double major in Business and Environmental Economics. Although always familiar with the financial markets, his main area of expertise stems from his background in the Agricultural and Natural Resources (AGNR) department. Over the past years he's stayed well ahead of the curve with forward thinking ideas in both resource stocks and hard commodities. Insley's commentary has been featured by MarketWatch.

  • Tom Sawyer

    There is absolutely no obligation for oil companies to sell the oil from Canada to US markets as we can see much of the oil in Alaska goes to Japan. If the oil companies were nationalized like much of the companies under dictatorship rule than I might agree.
    Secondly “oil sands oil” is dirty oil. In that I mean unless it is massively reprocessed it is really only good for black top. It will not be the cheap oil we have come so accustomed too.
    When you make the claim that our engineers can certainly build a pipeline that won’t leak I only invite you to revisit the nuclear reactors in Japan that were built by some of the worlds best and brightest to withstand every conceivable scenario only failing in the end.

  • mismy

    So, Alberta is landlocked, how far to the west does the oil need to go to get to the sea for shipping?? Probably a whole lot less than clear across the US. And where does the refined oil end up after crossing clear across the US?? Asia? Japan?? Who really benefits from this pipeline??

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