In a series of emails unearthed by an access to information request from energy think tank Pembina Institute and provided to CBC News, Canadian energy counsellor Paul Connors warned ambassador Gary Doer in the summer that America's current oil boom could alter the viability of cross-border pipeline plans.
Keystone XL is a proposed 1,900-kilometre pipeline being pitched by Calgary-based TransCanada that aims to bring Canadian oilsands oil from Hardisty, Alta., south through five U.S. states to oil refineries on the Gulf Coast in Texas.
The plan is an ambitious one, coming with a price tag of more than $7 billion, and has faced numerous regulatory hurdles over several years while various governments and companies try to negotiate the final details.
Broadly, Canada lacks the refining capacity to adequately process the billions of barrels of oil that are contained in the Athabasca oilsands. America, meanwhile, has more than enough refineries operating at less than full capacity, so the plan has been pitched as an economic bonanza for both sides.
But recent events may have changed those economics. A series of oil discoveries in the Bakken, Eagle Ford and Permian basins scattered across the continental U.S. have increased America's possible oil output to a far higher level than previously believed.
The U.S. now has so much recoverable oil that it's now expected to surpass Saudi Arabia as the world's largest oil producer at some point in the next 10 to 20 years.
Refineries are configured to process different types of crude — heavy crude goes to heavy refineries, light crude to light ones. Currently, heavy oilsands oil from Alberta goes to heavy oil refineries predominantly on the U.S. Gulf Coast.
"The significant increase in U.S. domestic production in recent years is light sweet crude which has lower [greenhouse gases] than heavy crude," Connors wrote in an email to Doer in June.
The best way for America to profit from its current oil boom would be to export its new sources of light crude, because that’s what’s most in demand internationally and that’s what fetches the higher prices
"However, if reducing U.S. [greenhouse gas] emissions is the goal, the U.S. could decline to export its light sweet crude surplus [and] domestic light sweet crude would begin to [replace] heavy oil imports."
U.S. President Barack Obama has repeatedly said that his government would only approve the Keystone XL project if it would not materially alter America's greenhouse gas emissions. So a suddenly plentiful energy alternative with a smaller environmental footprint could put the pipeline's future in doubt.
That could be bad economic news for Canada, which mainly produces heavy oil, almost all of which currently goes to the U.S. If America chooses to use more of its own lighter oil domestically and accepts less heavy Canadian oil, there is little Canadian oil producers could do in the short term to maintain a market for their product.
Canadian oil, known as Western Canada Select, already trades at a discount of about $30 compared to the American benchmark, West Texas Intermediate or WTI, mainly because it's heavier and therefore more expensive to refine, which limits the number of refineries willing to take it.
"While this is economically sub-optimal for the heavy oil refineries, it would make the mix of U.S. crude oil lighter and less [greenhouse gas] intensive,” Connors wrote.
TransCanada did not immediately reply to a request for comment on the report from CBC News.