Keystone XL in 2025: Strategic Miscalculation or Necessary Infrastructure?

Key Takeaways:

I. Keystone XL's economic viability in 2025 is severely compromised by volatile oil prices, increased U.S. domestic production, and the substantial risk of becoming a stranded asset.

II. Reviving Keystone XL carries substantial geopolitical risks, potentially straining U.S.-Canada relations and undermining U.S. credibility on climate commitments, while offering limited strategic energy security benefits.

III. Prioritizing Keystone XL in 2025 would represent a strategic misallocation of resources, diverting investment from crucial renewable energy infrastructure and hindering the transition to a low-carbon economy.

The Keystone XL pipeline, a proposed 1,179-mile (1,897 km) conduit designed to transport 830,000 barrels per day (bpd) of Canadian oil sands crude to U.S. Gulf Coast refineries, stands as a potent symbol of the ongoing tension between energy security, economic interests, and environmental responsibility. Initially proposed in the early 2000s by TransCanada (now TC Energy), the project's estimated $5.4 billion initial investment quickly became entangled in a web of regulatory hurdles, legal challenges from environmental groups and indigenous communities, and shifting political priorities. President Obama's 2015 rejection, citing climate change concerns and the higher carbon intensity of oil sands crude (estimated at 17% higher than conventional oil, according to the U.S. Department of State), was reversed by President Trump in 2017. However, President Biden's revocation of the permit on his first day in office in 2021, followed by TC Energy's official abandonment and subsequent write-off of over $8 billion in sunk costs, seemingly ended the project. Yet, calls for its revival persist, particularly within certain political circles. This necessitates a rigorous, data-driven reassessment in the context of 2025, where U.S. domestic oil production has surged (reducing import reliance by over 30% since the project's inception), and the global energy transition, driven by commitments to reduce greenhouse gas emissions (with renewable energy sources now comprising over 20% of the U.S. energy mix, up from less than 10% in the early 2000s), has fundamentally altered the long-term outlook for fossil fuel infrastructure.

A Decade of Discord: The Tumultuous History of Keystone XL

The Keystone XL pipeline's origins lie in a period of perceived energy vulnerability and a desire to strengthen North American energy security. Proposed by TransCanada (now TC Energy) in the early 2000s, the project was envisioned as a critical link between Alberta's vast oil sands reserves (estimated at 166 billion barrels in 2024) and the refining capacity of the U.S. Gulf Coast. The initial proposal outlined a 1,179-mile pipeline capable of transporting 830,000 barrels per day (bpd) of heavy crude oil, with an initial investment estimate of $5.4 billion. This was a time when U.S. oil imports were a significant concern, and Canada was seen as a stable and reliable source. The project was initially presented as a way to bolster North American energy independence and reduce reliance on oil from less stable regions.

The regulatory approval process for Keystone XL quickly became a protracted and complex battle, illustrating the growing influence of environmental concerns and the challenges of cross-border infrastructure projects. The project required a Presidential Permit due to its international border crossing, placing the U.S. Department of State at the center of the review process. Early legal challenges from environmental groups, indigenous communities, and landowners focused on potential pipeline spills, contamination of vital water resources like the Ogallala Aquifer (which provides drinking water for millions and supports billions in agricultural activity), and the infringement on treaty rights. These legal battles, combined with extensive environmental impact assessments, added years to the project timeline and significantly increased costs. For instance, lawsuits filed by the Sierra Club and other environmental groups challenged the adequacy of the environmental impact statements, leading to court-ordered revisions and delays.

President Obama's 2015 rejection of the Keystone XL permit marked a pivotal moment, transforming the project into a national symbol of the climate change debate. Obama's decision was explicitly based on concerns about the climate impact of oil sands extraction, which produces crude oil with a significantly higher carbon intensity than conventional oil – estimated to be 17% higher, according to the U.S. Department of State's own assessments. The growing influence of the environmental movement, which successfully framed Keystone XL as a 'climate test,' amplified the political pressure. This decision was a major victory for environmental activists and a significant setback for the project's proponents, signaling a shift in the political landscape towards greater consideration of climate change in energy policy decisions.

President Trump's swift reversal of the Obama-era decision in 2017, while seemingly a green light for the project, ultimately failed to overcome the entrenched legal and political opposition. Trump's approval, framed as a boost to job creation and energy independence, was immediately met with renewed legal challenges. Despite the executive order, court cases and rulings continued to delay and threaten the project. The political polarization surrounding Keystone XL remained intense, with Democrats and environmental groups continuing their staunch opposition. By 2020, the estimated cost of the project had ballooned to over $8 billion, reflecting the significant financial impact of the ongoing delays and legal battles. This illustrates the limitations of executive action in the face of sustained legal and political resistance.

Economic Realities: Assessing Keystone XL's Viability in 2025

The economic case for reviving Keystone XL in 2025 is significantly weaker than it was during the project's initial proposal. The global oil market has undergone a dramatic transformation, driven by increased U.S. domestic production, fluctuating oil prices, and the rise of alternative transportation methods. While proponents often cite job creation as a major benefit, independent analyses, such as the Cornell University study (2014), estimated only 35 permanent jobs would be created. The vast majority of jobs associated with the project would be temporary construction jobs, lasting only for the duration of the pipeline's construction phase. Furthermore, the economic viability of the pipeline is heavily dependent on oil prices. The breakeven price for oil sands production is estimated to be around $50 to $60 per barrel, and with Brent crude prices hovering around $80 per barrel in early 2025 (reflecting ongoing market volatility), the long-term profitability of oil sands extraction remains uncertain.

The rise of rail transportation as a viable alternative for moving Canadian crude oil to market has further eroded the economic rationale for Keystone XL. While pipelines traditionally offer lower transportation costs per barrel over the long term, rail provides greater flexibility and requires lower upfront capital investment. This flexibility allows producers to adjust to fluctuating market conditions and production levels more easily. Although rail transport carries its own environmental risks, including the potential for derailments (with an average of 1,704 derailments per year in the U.S. between 2010 and 2020, according to the Bureau of Transportation Statistics), the comparative risk assessment between rail and pipelines is complex and depends on various factors, including the specific route, safety regulations, and the type of crude oil being transported. The increased competitiveness of rail has diminished the strategic advantage once envisioned for Keystone XL.

The accelerating global energy transition, driven by international commitments to reduce greenhouse gas emissions and the rapid growth of renewable energy sources, poses a significant 'stranded asset' risk to Keystone XL. Stranded assets are investments that become obsolete or lose their value prematurely due to changes in market conditions, technology, or policy. The International Energy Agency (IEA) projects a significant decline in oil demand in the coming decades under various climate scenarios, particularly if countries meet their commitments under the Paris Agreement. This declining demand, coupled with the increasing availability of lower-carbon energy alternatives, could render large-scale, long-lived fossil fuel infrastructure projects like Keystone XL economically unviable long before the end of their projected lifespan.

The argument that Keystone XL would significantly enhance U.S. energy security has been substantially weakened by the dramatic increase in U.S. domestic oil production over the past decade. The shale revolution, driven by advancements in hydraulic fracturing and horizontal drilling, has transformed the U.S. into a major oil producer, significantly reducing its reliance on foreign oil imports. In fact, U.S. crude oil imports from Canada, while still substantial (averaging around 3.8 million barrels per day in 2024), represent a smaller proportion of total U.S. oil consumption than in the early 2000s. This increased domestic production has diminished the strategic imperative for importing large volumes of Canadian crude via Keystone XL, further undermining the project's economic justification.

Geopolitical Implications: Keystone XL and U.S.-Canada Relations

The Keystone XL pipeline has become deeply intertwined with the complex and historically close relationship between the United States and Canada. Canada remains the largest foreign supplier of oil to the United States, with exports averaging around 3.8 million barrels per day in 2024. The oil sands in Alberta represent a significant economic resource for Canada, and the Keystone XL pipeline was initially viewed as a key piece of infrastructure to facilitate the export of this resource to U.S. markets. The project was seen by many in Canada as a symbol of strong bilateral ties and a commitment to North American energy cooperation. However, the repeated delays and ultimate cancellation of the project have introduced significant strain into the relationship.

The Obama and Biden administrations' decisions to reject the Keystone XL permit, while based on domestic environmental concerns, were perceived by many in Canada as a disregard for Canadian economic interests and a sign of unreliability in the bilateral relationship. The Canadian government consistently lobbied in favor of the pipeline, arguing that it was crucial for the economic prosperity of Alberta and for maintaining a strong trading relationship with the United States. Official statements from Canadian officials following the cancellations expressed disappointment and frustration, highlighting the potential for long-term damage to the trust and cooperation that have historically characterized U.S.-Canada relations. Reviving the project could be seen as an attempt to repair this damage, but it could also be perceived as a politically motivated gesture with limited long-term impact, given the broader shifts in the energy landscape.

Keystone XL: A Strategic Crossroads

In 2025, the Keystone XL pipeline represents a strategic crossroads, forcing a difficult choice between short-term political expediency and long-term economic and environmental sustainability. The project's economic rationale has significantly weakened, the geopolitical implications are complex and potentially negative, and the environmental concerns remain substantial. While reviving the pipeline might offer a symbolic gesture of support to Canada, it would come at a high cost, undermining U.S. climate credibility, diverting investment from crucial renewable energy infrastructure, and increasing the risk of creating a stranded asset. A forward-looking energy policy for North America must prioritize investments in clean energy technologies and infrastructure that align with the global transition to a low-carbon economy, rather than doubling down on a project with a troubled past and an uncertain future.

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Further Reads

I. Even without Keystone XL, U.S. set for record Canadian oil imports | Reuters

II. Keystone Pipeline - Wikipedia

III. Even without Keystone XL, U.S. set for record Canadian oil imports | Reuters