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Keystone XL shutdown another sign of dire outlook for oil sands operations: GlobalData

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Oil sands projects have received another negative signal from the revocation of permits required to build the Keystone XL pipeline by President Joe Biden, according to Adrian Lara, Senior Oil & Gas Analyst at GlobalData.

"These projects have high upfront and operating costs, so closing the option to pipeline transportation for an additional 830 mmbd of production, means that costs to reach certain US markets will be permanently high," Lara stated. "It also means that frequent bottlenecks in Alberta due to a lack of pipeline capacity won't go away and will continue to put a large discount to Canadian heavy crude oil."

Lara pointed out that many major oil and gas companies have stepped away from projects in the oil sands due to a range of factors, including high breakeven price and a perceived association with "dirty" oil due to the need for mining and high volumes of water. However, heavy crude is still needed in the United States, especially at Gulf Coast refineries. Suppliers such as Mexico and Venezuela are not available to provide that level of export capacity today.

"Currently, approximately 3.6 mmbd of Canadian oil is exported to the US, of which around 75 percent is heavy crude, and as long as there is demand for transportation fuel in the US these flows from Canada will continue," Lara said. "In fact, this volume could grow if rail exports increase. However, to put this in perspective, the major implication of a challenging future for oil sands projects is that roughly 165 billion barrels of oil reserves, one of the largest in the world, will likely never be developed at its full capacity."

The new US administration is signaling a significant shift on policy regarding fossil fuel development and towards cleaner energy sources through the Keystone move, rejoining the Paris Climate Accord and other oil and gas reviews. However, Lara said, there are still questions regarding other moves.

"It is still to be seen how measures, such as restricting drilling in federal lands will impact US production, and how oil and gas companies will react to defend their interests," he stated.

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