Why the Keystone pipeline will be built.

imagesMKGGOGJ3Last March the US State Department released a report on the proposed Keystone XL (‘Keystone’) pipeline between Alberta, Canada and Texas in the United States, finding no significant environmental effect without significant increases – if any – of greenhouse gas emissions. The pipeline project should be used to carry oil from western Canada to US refineries in the Gulf of Mexico. The southern portion, between Nebraska and the Gulf of Mexico has already been built. The Keystone XL pipeline would connect the southern portion of Canada. However, the project has been stalled due to environmentalist concerns, which have resonated with most Democrats and, most crucially, with President Obama. The Senate barely rejected the Keystone project in a vote this week, which saw 49 votes against and 51 in favor. That very close result was made possible as some Democrats decided to challenge their Party’s orthodoxy, voting in favor of Keystone. The new Republican majority that will take over the Senate next January will likely vote in favor of Keystone, allowing President Obama and the Democrats to maintain the rejection, which their voters expect, even as the project will ultimately proceed.

The Keystone project has been delayed in the political duel of environment defending Democrats and pro-business and independent energy Republicans, each having to pander to their respective voters. Environmentalists have challenged the Pipeline because it would transport, primarily, oil from the ‘dreaded’ oil sands, whose extraction has produced higher emissions of greenhouse gases than conventional oils. The Republicans have been eager to approve the project, which according to them would create thousands of jobs. The facts are buried between the two positions. Yes, the diluted bitumen extracted from oil sands is just about the dirtiest type of oil that can be imagined and the last frontier of oil extraction. Alberta is at the forefront of tar sands extraction technology because its reserves are immense, estimated to be the second largest oil reserves in the world, with a total of 174 billion barrels of oil over an area of 4 million hectares. The oil is soaked in sand that also contains all manner of dirt and many other minerals, which requires a separation method that requires huge amounts of water and produces large amounts of toxic waste. Large areas of Alberta, cleared to dig tar sands, are now dotted with man-made ponds where the waste products are stored. The Canadian government plans to double production to 1.8 million barrels per day (bpd) over the next decade and the pipeline would move 830,000 bpd. This makes sense so long as oil remains at USD 90/barrel or higher. Jeff Rubin, a former chief economist at CIBC World Markets in Toronto, said that “falling commodity prices mean that soon there might not be enough oil flowing out of Alberta to fill those new pipelines.” The tar sands have therefore attracted controversy and opposition.

There are groups of citizens in areas affected by the route: farmers from Nebraska, where the pipeline threatens the Ogallala aquifer, and others from the region of Apalachi. There are the “Mothers for Peace” in New York. There are environmental groups, activists from 350.org (motion to limit emissions of greenhouse gases generated by human activity to global warming of the climate). Meanwhile, the Keystone XL pipeline is ready to be assembled and just waiting for the approval of the US federal government. Supporters of Keystone XL do not totally neglect the environmental risks. They justify their support by putting forward the anticipated economic benefits, especially in terms of jobs. At the same time claims that the Pipeline would create jobs are exaggerated. At best some 2,500 workers would be employed during the construction phase lasting two years while a far smaller number would be needed to run it. That said, all politicians, regardless of Party affiliation and ideological environmental position, will be paying attention to the fact that the Keystone enjoys more support than opposition among the American public. They believe that the pipeline will strengthen energy security by reducing US dependence on oil from an unstable region such as the Middle East in favor a close and reliable ally, Canada.

The main problem for the Obama administration is that the opponents, while somewhat ideological in their opposition, are mostly young and Democrats: the two essential categories of voters who are key to the Democratic Party’s electoral success. Now, that the Senate has just narrowly defeated the passing of the Pipeline ahead of what will surely be a favorable vote in 2015 when the Republicans take over the Senate, President Obama will not veto the law, satisfying a substantial majority of public opinion without alienating voters for the Democratic Party. He could find a balance by signing the bill into law, demanding higher environmental standards governing the production of electricity from coal, or extracting similar concessions to ‘sweeten’ the pill. Obama has fired the first round of heavy artillery; he unveiled Monday an outline of a bold plan to reduce greenhouse gas emissions in the United States at the G20, securing a similar effort from China. The U.S. ambassador in Ottawa promptly urged Canada to do the same. Nevertheless, while perceptions of energy independence will be cited by the most ardent Keystone supporters, this is still an insufficient reason for American policy makers to withdraw from the Middle East.

Oil is global. Any crisis in a major production region like the Middle East, or a threat to transport routes such as sea lanes (Strait of Hormuz, pirates in the Red Sea) affect the price of oil and, therefore, on the US economy as well internationally. Obama’s new strategy is targeted towards “a low carbon future, with choices of alternative energy, with greater energy efficiency, and sustainable exploitation of our oil and gas”.  Obama’s new climate change initiative plans to:

  • Reduce 30% of carbon emissions from U.S. power plants by 2015 compared to 2005.
  • Encourage more insistently other countries to take action in the fight against climate change in the context of negotiations on a new international treaty must resume next year.

This is much easier said than done of course. As much as Obama wants to lecture Canadians about CO2 emissions, there is a huge gap between the USA and Canada. Americans consume a lot of coal, much more than Canada and coal is the most polluting energy source; it accounts for close to 40% of all electricity generation in the United States. In Canada coal only supplies 8% of energy. Environmentalists, however, say that the U.S. is currently on track to achieve their goal of reducing emissions by 2020 (even if these will still not be as low as those in Canada), accusing Canada of not working toward achieving its planned greenhouse gas emissions, especially as far as the sands in Alberta are concerned.

A landmark climate accord that leaves ‘green tech’ and rare earths as the biggest gainers

images6RB08RY2Yesterday – after cutting tariffs on technology products – Chinese President Xi Jinping and US President Barack Obama have signed a landmark agreement to reduce greenhouse gas emissions. The agreement obliges the USA to achieve new carbon emission targets while China will commit to reduce the rate at which these are increasing by 2030. Evidently, the two countries, the world’s largest economies, accounting for some 40% of the global greenhouse gas emissions have been quietly negotiating to reach a common approach, which could serve as the impetus to reach a new global climate agreement by 2015. It was China’s objections at the 2009 Copenhagen Summit that blocked such a treaty.

The crux of the agreement between the USA and China lies in the fact that the former will cut 26-28 percent of the greenhouse gas emissions by 2025, while China will reach its peak emissions by 2030, reducing them thereafter. Whilst this may appear, at first glance, as a climate agreement, it is first and foremost is a business deal: the green economy promises to be the largest source for global growth in the coming years. Indeed, to achieve China’s targets, Xi announced that ‘clean energy’ sources, such as solar and wind power, would supply 20 percent of China’s total energy needs. In turn, the United States will double the pace of global pollution reduction from 1.2% per annum between 2005 and 2020, to 2.3 and 2.8% in the subsequent period from 2020 to 2025. Meanwhile, China’s goal is extremely ambitious, as it will start from zero percent to 20 percent of energy consumption based on non-fossil fuel sources. Nuclear power will be one of the principal tools, along with wind and solar installations, in order to develop anywhere from 800 to 1,000 gigawatts.

Together the US and China are responsible for about one third of global emissions of greenhouse gases, and hence their agreement has an effect that is at once practical, in its provisions to cut emissions, even as it encourages all relevant parties to re-engage in the so-called Kyoto Protocol. The later will be one of the main points of the UN climate summit scheduled to take place in Paris in 2015. The agreement also carries political weight as President Obama, can use it to secure some tangible results after his Democratic Party’s defeat in the midterm elections. The first step in a series of initiatives for which he can use his executive powers to exploit and save his legacy. But there are other important facts of the agreement signed in Beijing.

China faces many years growing concerns from the population over excessive pollution and its effects on health. A recent study found that only in 2012 the number of deaths connected to coal-fired plants was 670,000re 670 thousand. The Chinese government has been working for long time to invest in clean energy (including nuclear power). Of course they are also planning new coal plants – to meet the huge and ever-growing energy demand of a country with a booming economy.  In wider terms the agreement means that demand for the raw materials needed to build and fuel the new green technology, rare earths and uranium for starters, will increase significantly.

China is the world’s largest consumer of coal-by far, using 50% of the world’s total production and driving more than 70% of its energy. Coal consumption had increased annually by an average of nine percent for the past decade. Nevertheless, there is increasing pressure for change at all levels of society. Coal has fueled China’s tremendous economic growth, but if this growth is to continue, energy production must change. The Chinese government has already started to increase its nuclear energy generation capacity, expected to quadruple by 2030; sales of electric vehicles in China have also increased.  This change and the historic US-Chinese climate agreement should affect the global production and distribution of rare earths. While domestic production fell in 2012, demand for rare earths will increase to the point where China will soon start to import these minerals.

The government cannot hold back any longer on addressing environmental degradation of which air pollution is one of its most notable effects. China will have to devote more resources to innovation to address the problem because it has become a major issue of social and political concern. Chinese citizens are no longer content to be ‘mute’; they have taken quite well to protesting to express discontent and demand for changes. Many of the recent protests have addressed environmental degradation and the lack of standards. Chinese authorities have certainly become concerned by the events known as ‘the Arab Spring’ and they seem well aware that if political and democratic rights are denied, they will have to take action.

Demand for environmental protection – a phenomenon contributing in no small part to the closure of some Chinese REE production facilities in 2012 an 2013 – and higher wages can only point to the inevitability of China losing its low-cost wage advantage and the price of its export goods will increase in accordance – no doubt leading to the emergence of new cheap labor workshop countries and, more likely, a gradual increase of the prices of many consumer goods. Xi Jinping, China’s president clearly outlined that one of his government’s priorities will be to tackle environmental degradation.  The recent crackdowns to curb illegal rare earth mining has reflected this trend, sending a signal to the West that it is becoming risky for China to absorb the environmental and socio-economic risks associated with low cost industrial practices. China itself has to change and become less price competitive with the unavoidable rise of labor and regulatory costs, resulting from stricter emissions, tougher industry entry obligations or even energy consumption.

All of this suggests that China and the USA should see a surge in internal demand for green technology solutions, leading to greater demand for rare earths, despite the lower output numbers reported by such Chinese rare earth producers as the Baotou Group (IMBREHT). The lower production of rare earths in the past year, caused by consumer reluctance and global economic uncertainty – in China as elsewhere – has already started to reverse toward a more bullish direction. About 90 percent of all currently mined rare earths come from China. With its pricing policy, the country has displaced almost all competitors from the market. The USA, Canada and Australia have been challenging this market dominance, and new mines and processing facilities are being developed. There is no risk of market saturation because when the new mines come on line, China’s experience with coal suggests that it will become a major importer of rare earths.

China used to be a major exporter – as well as user – of coal. However, with the tremendous pace of its industrialization, domestic consumption limited the amount of coal available for export, as the mineral was needed to fuel steel plants and power generation. It has not taken long for China to become one of the largest importers of coal in the world. Rare earths are staring at a similar fate – and one that is approaching at rapid pace. Domestic concerns – environmental ones in particular – will boost internal demand, limiting the amounts available for export. Ten years ago, China has consumed about 25% of domestically produced rare earths; even in the slower growth scenario of 201, China’s domestic rare earth consumption has risen to 65%. Today, 80 percent of the magnets, and 70 percent of the world’s manufactured phosphors originate from China. Domestic supplies of rare earths will not be sufficient to sustain such a rhythm of production and Chinese government agencies will have to seek other products to maintain this dominance, forcing it to seek supplies elsewhere. China’s pollution is encouraging news for the newly emerging rare earth plays.