LINCOLN — With the fate of the Keystone XL pipeline more uncertain than ever, some in the oil industry question whether the highly controversial project is still needed.
The project, which would carry 830,000 barrels of heavy crude through Nebraska on a daily basis, has become the most scrutinized and debated underground pipeline project since it was first proposed five years ago.
Delays have increased speculation that President Barack Obama will reject the pipeline, leading oil producers, shippers and refineries to explore other ways to get oil from western Canada to refineries in the Gulf Coast.
The ramping up of rail transport along with recent announcements of other pipeline projects indicates some investors are hedging their bets on the Keystone XL.
Some argue the pursuit of pipeline alternatives shows that rejecting Keystone XL will only slow the flow of Canadian oil, not stop it.
“I question the naiveté of those who think by shutting down a pipeline, they prevent the development of the oil sands,” said Robert Rapier, a chemical engineer with a background in biofuels who writes a blog about energy trends. “If there isn't Keystone, there are many, many ways of getting it to market.”
Others, including supporters and opponents of the pipeline, say the project remains critically important to the oil industry.
Those working to develop the oil sands region of western Canada point out Keystone XL is furthest down the regulatory road. Pipeline opponents continue to call the pipeline a linchpin that would unleash an environmentally damaging oil resource they refer to as tar sands.
“They are in a real tough spot when it comes to the availability of cheap options to get tar sands to market,” said Anthony Swift, an attorney with the Natural Resources Defense Council.
When TransCanada Corp. officials submitted the application five years ago, they figured the project would be built by now. After all, the company's first Keystone pipeline, with a daily capacity of nearly 600,000 barrels, went in with little fanfare and virtually no opposition.
Objections to Keystone XL emerged over a route that would have taken the pipeline through the environmentally sensitive Nebraska Sand Hills and above the Ogallala Aquifer. Elected officials, landowners and activists raised concerns. Eventually Gov. Dave Heineman told the company to move the route to avoid possible contamination of the aquifer.
In late 2011, the U.S. State Department postponed a decision on the pipeline over the aquifer issue. TransCanada agreed to reroute the project to skirt the Sand Hills.
In the nearly two years since, blocking the Keystone XL has become a major goal of several national environmental groups. They argue the pipeline will further unlock the oil sands region to development and, since that source creates more carbon pollution than conventional crude, contribute significantly to climate change.
The application for the pipeline has since undergone reviews by Nebraska's environmental agency and the State Department. The reviews found the project presented no major threats to land, water or global temperatures.
Those conclusions, however are disputed by the U.S. Environmental Protection Agency and many environmentalists.
Currently, the State Department is sorting through more than 1 million comments received on the preliminary environmental review. The president is not expected to reach a decision until late this year or early next year.
The delays and debate have not diminished the importance of Keystone XL to the petroleum industry, said Greg Stringham, vice president of the Canadian Association of Petroleum Producers.
“It is still very strategic for Canada to be able to access the Gulf Coast refineries,” he said.
Stringham acknowledged, however, that investors and shippers aren't standing by while the project remains in limbo. The rail industry, in particular, appears to be taking advantage of the delay.
By some projections, railroads could load up to 800,000 barrels of heavy Canadian crude daily by 2015. That's nearly as much oil as would move through Keystone XL.
Two years ago, for example, rail transported about 10,000 barrels daily of diluted bitumen, the type of heavy oil mined in Canada. Now, railroads load close to 200,000 barrels daily, Stringham said.
The American Association of Railroads views pipelines and railroads as safe and sees a role for both in transporting crude.
The growth of oil-by-rail hasn't been without criticism. The practice is being more closely scrutinized since July, when railcars loaded with North Dakota crude derailed and exploded, killing 47 people in a small town in Quebec.
In addition, it costs significantly more to ship oil by train than by pipeline.
But rail provides more flexibility for producers to get their oil to market. And existing rail lines do not need the president's approval to bring Canadian oil into the U.S.
While most of the oil in the Keystone XL would flow from Canada, about 100,000 barrels of its daily volume would originate in the booming oil fields of North Dakota and Montana. But the head of one of the biggest oil producers in North Dakota has said Keystone XL has become all but irrelevant.
Harold Hamm, CEO of Continental Resources, recently told the National Journal that rail transportation and other pipelines have emerged to ship North Dakota's oil. And more are planned.
“It's not critical any longer,” Hamm said of Keystone XL. “They just waited too long. The industry is very innovative, and it finds other ways of doing it and other routes.”
Shawn Howard, spokesman for TransCanada Corp., said Keystone XL remains just as necessary today as when it was first proposed in 2008. Thursday marked the fifth anniversary of its application for a presidential permit.
The company has signed contracts with oil producers and refiners that will fill the pipeline near capacity if it is built, he said.
Howard called the use of rail a “short-term response” because of its higher costs. And he pointed out that federal studies have shown pipelines to be the safest transportation method for liquid fuels.
But a pipeline can't deliver oil until it's built, said Bill Day, spokesman for Valero Energy Corp., which operates Gulf Coast refineries capable of processing bitumen. The company had a contract with Keystone XL, but it has expired, he said.
Valero is currently upgrading some Louisiana refinery units to receive Canadian oil via rail and other pipeline proposals that would not need a presidential permit.
“One way or another, the oil will find its way to the Gulf Coast or find its way to other countries,” Day said.
Meanwhile, pipeline companies aren't surrendering to rail. TransCanada recently proposed a different pipeline that would move 1.1 million barrels per day to eastern Canada, therefore avoiding American politics. Others have been proposed to take oil to Canada's West Coast, and pipeline builder Enbridge has announced a project that would move more Canadian oil out of Illinois to the Gulf.
Environmental groups and others don't buy that argument. They cite recent analysis by major investment firms that predict if Keystone XL fails to win approval, development of the Canadian oil sands could stagnate.
All parties with a stake in the fight will continue to closely follow Keystone XL, said pipeline opponent Jane Kleeb, executive director of Bold Nebraska.
“If Keystone XL is denied, it could have a domino effect on other pipelines of a similar nature,” she said. “If they lose this pipeline, it puts doubt on their investment.”