Tuesday, February 04, 2014

Profit Motive

Eli has been remarking about the Keystone Pipeline environmental report from the US State Department that people, except chemical kineticists, are very bad at rate problems. Tar sand oil is expensive. Building the pipeline will decrease the cost of mining the tar sand oil, which will make it more competitive. If the pipeline is NOT built then investment into tar sand mining will be lower as the profit would be smaller. QED the effect of building or not building the pipeline will be substantial.

In short, that means that sand in the gears that raise cost discourages investment, especially investment into things with small profit margins and long payouts.  On Jan 30, the Wall Street Journal reported on a splendid example thereof.  Royal Dutch Shell Oil's new president, Ben van Beurden, is repositioning the company, to guess what, make more money.  As part of this

Shell will suspend plans to drill in the Alaskan Arctic after a federal appeals court ruled last week that the U.S. government improperly relied on "inadequate information" in the process of awarding licenses for exploration there. The Arctic plan—which has cost Shell about $5 billion in permits, personnel and equipment since 2008—has faced delays due to sea ice and a drilling rig that ran aground. The government fined Shell $1.1 million for Clean Air Act violations by rigs during the 2012 drilling effort. "The lack of a clear path forward means that I am not prepared to commit further resources for  drilling in Alaska in 2014".
Shell has been very agressive about long term capital investments, not only in Alaska, but in Louisiana (a gas to diesel plant), Kazakhstan, Canada and world wide.  Within the company this set up a tension between those who thought that salvation lay in new sources and new investments and those whose focus was on the bottom line.  The problem with big bets is that they lose, and when they do, they lose a lot of money.  The hit to the bottom line has been huge (no, Shell is not losing money yet but profits are down last year from to 16 billion U$ from 27 in the year before.

Attentive bunnies may recall a few posts about the DOI, Charles Monnett and what turned out to be leaking of information to those opposing drilling in the Arctic, throwing sand in the gears.

20 comments:

Windchasers said...

"If the pipeline is NOT built then investment into tar sand mining will be lower as the profit would be smaller. QED the effect of building or not building the pipeline will be substantial."

/wince. That's no QED, if ever I saw one.

Yes, investment and profit will be lower without the pipeline. How much lower? Will it be *substantially* lower? Lower enough to matter?

You need to show your work before you can draw the QED. There are other ways of getting oil out of Canada that are already in use - mainly, by train - and investment in these is already increasing as an alternative to the pipeline.

It is not at all clear that stopping Keystone will substantially hinder the development of Canada's shale.

exusian said...

Ahem, what shale?
It's tar sand.

And there is exactly one way other than pipeline to get tar sand bitumen out of Canada, and if you hadn't noticed, rail is having it's own problems and it's own push back.

Aaron said...

Dilbit is bad stuff. However, the oil industry (including the authors of the environmental reports) want to pretend that dilbit is no worse than conventional crude oil.

That pretense is a lie. Dilbit is more toxic, more volatile, and more flammable than conventional crude. Conventional crude floats in water, while dilbit sinks, contaminating entire aquifers.

Before Obama and Kerry approve this thing, they should go out in the Rose Garden with a pie pan of crude oil and flip a lit cigarette into it. Nothing. Flip a lit cigarette into a pie pan of dilbit, and you have a column of fire the size of a fireman. Dilbit is not like conventional crude. It burns like gasoline, but also sinks to contaminate the entire water column. And, it is corrosive to pipelines. It will leak.

Any dilbit pipeline in a populated area needs secondary containment, good leak detection, and a well trained local hazmat team.

Jim Eager said...

And in today's news....
http://www.cbc.ca/news/canada/pipeline-rupture-report-raises-questions-about-transcanada-inspections-1.2521959

The 2009 rupture and fire of a TransCanada nat gas pipeline, and the government report on it, was kept secret until now.

Gee, I wonder why?

Tom Dayton said...

A writer at OilPrice.com made a similar point several months (years?) ago: If delivery by pipeline really did not reduce the cost or time, then the proponents of the pipeline would not be strong proponents of it.

Kevin O'Neill said...

TD says:"If delivery by pipeline really did not reduce the cost or time, then the proponents of the pipeline would not be strong proponents of it."

Don't forget that different parties have different economic interests.

As I pointed out in the comment thread to Jonathan Chait Is Wrong, dilbit is *already* being tranported by pipeline from the Canadian tar sands to the United States (to the Enbridge refinery in Superior, Wisconsin).

Enbridge has a planned expansion of this line that would nearly equal that of Keystone XL by 2016. Anyone who believes that killing Keystone would be a significant victory doesn't realize the game is *now* about who gets to pocket the money.

Enbridge has basically stayed below the radar, used existing lines to expand capacity, and one day we'll wake up and realize that 'Keystone' was built, approved, and put into operation without anyone noticing - but under a totally different name by a different industry player.

Brian said...

All this btw is another reason why delay is good - renewables are dropping in price, transportation infrastructure alternatives are gradually developing, and someday there will be regulatory and economic disincentives to using oil. The delay increases the chance that at least some of that tar sand oil stays where it is.

Flakmeister said...

Yes, it is all about who get's the money now and to complicate things there is even good ol'fashioned partisan politics at play...

The Gulf Coast refiners have been optimized to process heavy sour crude. Hydrocrackers are now de rigueur. Most people may be unaware that generic Tarsands oil, say Western Canadian Select has a very lucrative assay (more diesel per barrel) and trades at a large discount to WTI (currently $18 a barrel). The GC refiners would love to be able to export that diesel while exploiting large spreads and tax-free status.

What has made this a real political dog fight is that the rail method benefits W. Buffet (a noted socialist in the eyes of the far right) through the purchase of BNSF by Berkeshire-Hathaway. Whereas the Kochs are firmly on the other side (look up Flint Hills). So the pipeline is quite a proxy, a continuation of partisan politics by other means...

And as much as I hate to say it, the Tar Sands will be exploited, Keystone or not. No one has the balls to tell the American people they cannot have what they think they want...

So I figure that we'll be spraying S02 in the stratosphere no later than 2035....

Anonymous said...

Anon-101a here:

"Anyone who believes that killing Keystone would be a significant victory doesn't realize the game is *now* about who gets to pocket the money."

Anyone who claims, as above, that some is equal to all of something is completely and utterly failing to apply thought to the matter.

Anonymous said...

Anon-101a here:

"And as much as I hate to say it, the Tar Sands will be exploited, Keystone or not."

And as much as I hate to say it, there will still be rape, murders, thefts, arson, torture and use of tar sand oil.

So therefore let's not try to do anything about any of this.

Amirite?

Kevin O'Neill said...

Anon -101a ... did you read my comment? Dilbit is *already* flowing through pipelines from Alberta to the United States. Enbridge plans to expand the Alberta Clipper pipeline to the same size as Keystone.

Anyone that claims that some (as in Keystone) is equal to all is completely failing to give thought to the matter.



Flakmeister said...

101-A

If you want to win the game you had better know the rules and who exactly is playing and why...

BTW, do you get a volume discount from the straw salesman? You should.

Anonymous said...

Anon-101a here:

Flak, why do you think this just a game?

1. a form of competitive activity or sport played according to rules
2. an activity that one engages in for amusement.

Doesn't seem to fit. Maybe this definition:

manipulate (a situation), typically in a way that is unfair or unscrupulous.
"it was very easy for a few big companies to game the system"

PS what strawman? Or was that claim itself a strawman?

Kevin, If Dilbit is *already* flowing and that this is proof that there's nothing to gain if XL doesn't go ahead, then there's no need to build XL, is there.

Since there's a push for it, this doesn't seem to be believed by ANYBODY other than yourself, but maybe not even then: yours could be merely a rhetorical device to get people to accept what you need.

Kevin O'Neill said...

Anon 101a:" Kevin, If Dilbit is *already* flowing and that this is proof that there's nothing to gain if XL doesn't go ahead, then there's no need to build XL, is there."

Ummm, perhaps you missed the part about money. Enbridge would love to collect all the money from transporting dilbit through their expanded Alberta Clipper pipeline. Obviously TransCanada has a different economic interest.

For Enbridge there's no need to build Keystone XL.

For environmentalists there's no significant victory in stopping Keystone XL if they don't *also* stop Enbridge's Alberta Clipper.

For TransCanada, if Keystone XL is stopped that's a lot of profit out the window - even though the dilbit still flows south through Enbridge's facilities.

Believing that TransCanada pushing for Keystone XL approval is somehow proof that Keystone *must* be built to deliver dilbit via pipeline is simply not looking at the infrastructure that already exists.

Anonymous said...

Anon-101a here

Kevin, you don't seem to realise that your argument that you have here is self defeating.

If it doesn't matter if it stops, it doesn't matter.

So why argue to let it go ahead?

Kevin O'Neill said...

Anon - "So why argue to let it go ahead?"

Huh? I've never argued Keystone XL should be allowed to go ahead. I've repeatedly said it will not matter significantly if Keystone is stopped, if Enbridge is allowed to build the equivalent.

Susan Anderson said...

At least let's admit this has been rigged from the start. Outrageous!

"State Department review used studies funded by Alberta agencies and carried out by Jacobs Consultancy, a subsidiary of a major tar sands developer
by John H. Cushman, Jr., InsideClimate News, February 7, 2014"
http://insideclimatenews.org/content/us-keystone-report-relied-heavily-alberta-govt-funded-research

In an unrelated case, as always regulators are too cosy with the exploiters:
http://bigstory.ap.org/article/nc-regulators-shielded-dukes-coal-ash-pollution

Anonymous said...

Anon-101a here:
"Huh? I've never argued Keystone XL should be allowed to go ahead."

So your claims that nobody should fight it has had no purpose?

Why the hell do you peddle it so hard, then, dearie?

Kevin O'Neill said...

anon 101a - "So your claims that nobody should fight it has had no purpose?

Duh? You really do need to read, think, then post.

Reading really helps - it's very hard to respond to someone if you haven't paid any attention to what they've actually said.

Thinking is good too - so you're not just exhibiting your own ignorance or lack of rational thought.

I have pointed out, in numerous places and with great consistency, that the fight over Keystone XL will be a Pyrrhic victory if equivalent routes (i.e., Enbridge's Alberta Clipper) are put into operation.

I have never said we should not fight to stop Keystone XL.

I have never said the fight to stop Keystone XL has/had no purpose.

*IF* you had read my posts *AND* used a little logic you would realize my position is that while the fight against Keystone XL is necessary it *MUST* be accompanied by a similar fight against alternative routes. Otherwise little will have been gained.

Is that clear, dearie?

Anonymous said...

Anon-101a here:

"I have never said we should not fight to stop Keystone XL."

Then you need to read what you've written, dearest:

-Stopping Keystone XL is a waste of time and resources if all the other avenues aren't shut down at the same time.

- For environmentalists there's no significant victory in stopping Keystone XL if they don't *also* stop Enbridge's Alberta Clipper.

Your entire schtick is "EMBRIDGE!!!! DILBERT IS ALREADY FLOWING!!!".

So.
The.
Fuck.
What.

Tell you what, you go and stop pissing about Keystone and fight Embridge, or is that pointless if Keystone goes ahead?