The delay in a massive Canada-Texas pipeline project will inflame opposition to other export options for crude from Canada's oil sands and threaten the nation's aim of becoming a top global energy supplier.
Industry officials say the United States' move, after 39 months of review, to seek a new route for TransCanada Corp's $7 billion Keystone XL pipeline away from a crucial water source in Nebraska could derail the project as shippers and customers grow impatient.
The Canadian government and energy executives, expressing disappointment with the decision, say they will push even harder to advance an export route to the Asian market now that the Alberta-to-Texas alternative for crude derived from the oil sands is delayed for more than a year, adding to fears it could eventually be shelved.
It will not be easy.
This does underscore the necessity of Canada making sure that we are able to access Asia markets for our energy products, Prime Minister Stephen Harper told reporters at the Asia-Pacific Economic Cooperation forum on Sunday.
That will be an important priority of our government going forward and I indicated that yesterday to the president of China.
The industry will move quickly to tap Asian markets in the absence of the pipeline, said Steve Laut, president of Canadian Natural Resources Ltd, which has committed 120,000 barrels a day of oil to Keystone XL, in comments to analysts earlier this month. It's pretty clear if Keystone doesn't go ahead, that U.S. markets are not in favor of having Canadian oil.
Canada is already the biggest oil supplier to the United States, shipping more than 2 million barrels a day, much of it from oil sands. But the industry's promise - and problem - are projections that output from the tar sands alone could double to 3 million barrels a day by 2020 and jump to 3.7 million by 2025.
Should no other pipelines get built, production could overwhelm the capacity to export the crude within four years, said Jackie Forrest, who leads oil sands analysis at energy consultancy IHS CERA.
If nothing else happens between now and 2015, you'll see steeper and steeper discounts for Canadian crudes as they saturate the U.S. Midwest market, she said.
The result could be stalled growth and delays to multibillion-dollar projects as producers deal with a glut in supply and no new demand, Forrest said.
It would mirror the slowdown that has hit the natural gas industry as production surged and demand leveled out, slashing drilling and forcing workers to flee the sector.
At an estimated 170 billion barrels, the oil sands are the world's third-largest oil deposit, after Saudi Arabia and Venezuela. Harper and his Conservative government have said their goal is to turn the country into a global energy superpower.
But for now, the United States is its only export market and last week's Keystone XL delay laid bare the risks of that.
It also showed how the Alberta tar sands have become a cause celebre for environmentalists around the world. That alone will keep the pressure on any proposal to ship growing supplies outside the country.
We've entered a whole new context that absolutely is going to be a challenging context for any infrastructure project, for any new oil sands project, said Dan Woynillowicz, spokesman for the Pembina Institute, an environmental think tank. There's just going to be much more scrutiny and debate that is driven by these projects.
The industry's next big infrastructure proposal is Enbridge Inc's C$5.5 billion ($5.4 billion) Northern Gateway pipeline, which would extend to the Pacific Coast from Alberta. From there more than half a million barrels a day could be shipped on tankers across the Pacific to China and other Asian nations.
It faces significant opposition as well.
WEST COAST OPTION
Harper and his natural resources minister, Joe Oliver, have come under fire from green groups and aboriginal people for promoting it before public hearings begin in January. More than 3,000 people have registered to make comments during proceedings.
Native groups, including the Yinka Dene Alliance, whose lands make up a quarter of the proposed British Columbia route, say they will oppose the line under all circumstances and they promise court challenges should it win approval.
It would be a mistake to believe the outcry will die down following the Keystone delay, said Andrew Leach, a University of Alberta business professor who specializes in energy and environment issues.
The situation you have for Gateway was mirrored (with Keystone). You have commercial interests at either end of the pipeline, broad economic interests in terms of the value of the oil sands product for Canada, Leach said. But there's a ton of local opposition amplified by a national and international movement.
Much opposition is centered on carbon emissions. Studies comparing emissions of oil sands crude against conventional oil vary, and are at the heart of a push by the European Union to tag the oil as inherently polluting, another threat to expanding Canada's markets.
The sands containing the oil are either mined from vast open pits, and upgraded into refinery-ready oil, or steam is injected to loosen the crude so it can be pumped to the surface. Both methods are energy intensive, and oil companies are working feverishly to reduce emissions per barrel.
Pembina quotes research showing that oil sands emissions are 10-15 percent higher than conventional oil production. A much-quoted report from IHS CERA, combining several studies, puts the average at 6 percent above regular oil, measured from the point of production through to end use.
Canada does not export oil to Europe, but worries that the European tag could turn other markets against it.
(Additional reporting by Rachelle Younglai in Honolulu. Editing by Martin Howell)