TransCanada Corp., Calgary, Alberta, Canada, has raised the cost estimate of the beleaguered Keystone XL pipeline expansion by US$1 billion to $13 billion and said it expects regulatory delays.
According to a February 15 statement, the Calgary-based pipeline company increased capital expenditure estimates, because the necessary regulatory decisions for the pipeline project are not expected until “mid-to-late 2011,” and cited a “heightened political environment” and opposition to the project. “The revised capital cost estimate reflects currency translation, higher than anticipated costs to complete the first two phases of the project and an increase in the estimated cost of completing the U.S. Gulf Coast Expansion as a result of scope changes, evolving regulatory requirements and permitting delays,” the statement reads.
For shippers, traders and operators trying to reduce a glut of oil at the key Cushing, Okla., terminal – the delivery point for the NYMEX’s benchmark West Texas Intermediate (WTI) crude futures contract – the Keystone XL pipeline expansion delay will undoubtedly present new challenges.
Strategic or Not, the Proposed Project Is Delayed
If implemented, the Keystone XL pipeline expansion project would deliver 700,000 barrels per day (b/d) – effectively doubling the company’s heavy crude deliveries from producing regions in Alberta to several U.S. states. A proposed segment would extend Canadian crude flow to large U.S. Gulf Coast refineries from the key oil hub at Cushing – where earlier phases of the Keystone pipeline already deliver crude.
TransCanada is among the pipeline companies that have made Canada the largest supplier of imported crude for refineries in the Mid-Continent region and along the U.S. Gulf Coast.
Because the proposed, 36-inch pipeline would traverse 1,661 miles of U.S. territory – and a myriad of ecosystems – carrying Canadian crude oil, environmentalists have actively opposed the project almost since inception.
Environmentalists argue that Canadian crude should be considered “dirty oil” because of the energy-intensive, high-impact mining and upgrading process needed to prepare it for pipeline transportation.
Since the proposed Keystone XL pipeline route crosses the northern U.S. border, the U.S. Department of State is charged with drafting an Environmental Impact Statement (EIS) and rendering a National Interest Determination (NID) opinion for President Obama’s on whether the project is in the interests of the U.S. A final EIS, which is still being drafted, is required before the NID. The EIS is not expected for several months.
Delays Affect Upstream, Could Dampen Unconventional Oil
The delay of the Keystone XL project not only affects TransCanada but also the operators intending to ship crude to refiners.
The crude overhang has lowered WTI prices relative to other light/sweet oils, causing refining margins in the region to spike. More specifically, the oversupply has also affected downstream logistics for refiners with access to crudes priced along with WTI and for producers who sell their oil into the Cushing hub or whose sales are indexed to WTI pricing.
On the upstream side, this includes unconventional oil producers. They are using the relatively new hydraulic fracturing production techniques – used historically in onshore natural gas production – but are now being perfected and directed toward oily plays as investors and operators flee projects exposed to low natural gas prices while flocking to those leveraged to strong oil prices.
Rising unconventional oil production is coming to market from the Eagle Ford in Texas, the Niobrara in Colorado and Wyoming and the productive Bakken play in North Dakota and Montana.
Companies like SemGroup Corp, Enbridge Corp. – even TransCanada – are planning expansions or are already offering crude-takeaway capacity from these newly productive unconventional oil plays. Most are routed through the Cushing hub.
On January 26, TransCanada spokesperson Terry Cunha told GRFT that its successful Bakken Marketlink pipeline open season netted multiple firm five-year contracts to transport Bakken crude. According to Cunha, these contracts boost “total contract volumes moving on Keystone pipeline facilities to 975,000 b/d or just under 90% of commercial design. The Bakken will be the first U.S.-produced crude oil to move on Keystone pipeline facilities.”
That the Keystone pipeline is lining up to carry unconventional crude could be part of the reason that environmentalists oppose the project. Stopping it not only thwarts Canadian oil sands imports to the U.S., but it also dampens the economics driving unconventional oil and hydraulic fracturing, which many activists oppose.
An Opportunity For Mid-Continent Refiners
The already strong WTI/Cushing overhang also represents a profit opportunity for refiners in the Southwest and Mid-Continent with access to crude pipelines that feed to or from the Cushing oil hub.
For a refiner’s perspective, GRFT spoke with Bill Day, spokesman for Valero Energy Corp., which operates the largest U.S. refining fleet – 14 North American refineries processing 2.6 million barrels b/d. The company’s refineries ran 80 different crudes in 2010, Day told GRFT, including more than 450,000 b/d of heavy crude like that from Canada.
According to Day, the Cushing hub is long crude, and the extraordinary length is pressuring prices for WTI crude stored at the terminal.
With WTI priced in the mid-$80s per barrel versus other crudes, Valero’s 100,000-b/d Three Rivers Refinery “can get foreign crude or Louisiana Light Sweet (LLS) crude through a pipeline that comes from Corpus Christi where the tanker ships offload,” Day said.
With the availability of Eagle Ford unconventional crude and its low price relative to WTI, waterborne LLS (Louisiana Light Sweet) or London Brent, the “Eagle Ford crude is more affordable,” Day said, “So we are maximizing its use at Three Rivers.”
Day said the same domestic Mid-Continent price advantage holds true for two other refineries with access to crudes that track WTI prices. “We are maximizing the WTI-priced crudes at our Ardmore, Okla., refinery (90,000 b/d) and our McKee Refinery in the Texas Panhandle (170,000 b/d),” he said.
However, “these two refineries don’t have access to Eagle Ford crude” yet, Day added. Instead, Ardmore sources its WTI crude directly from Cushing, and McKee receives local crude from the expanded gathering system “which we actually doubled recently. All that helps out,” he said.
And Valero hopes to receive Canadian crude from the Keystone XL pipeline.
“The people that have opposed the Keystone XL pipeline expansion that would bring in Canadian crude oil are typically those who don’t understand that balance,” Day said.
Expanded Cushing Takeaway Capacity Needed, But Not Expected Soon
If the Cushing supply overhang is to be worked off to reduce WTI price discounts to waterborne Brent and LLS grades, and if unconventional oil producers want to sell production at higher prices, it is clear that Gulf Coast refineries need access to Cushing.
The Gulf Coast refining complex – tracked by U.S. government entities as PADD III – offers more than 8.6 million b/d of refining capacity. The Mid-Continent PADD II region has less than half of that, at 3.7 million b/d, and the Rocky Mountain Padd IV region has 620,000 b/d of refining capacity.
One way to provide access to Cushing is to approve and complete the Keystone XL expansion project. Another method would be to reverse or convert existing pipelines between the Gulf Coast and Cushing.
Although pipeline conversions and reversals occur often in North America’s energy patch, they do not happen quickly.
Magellan Midstream Partners is mulling such a project to relieve the supply pressure at Cushing. The petroleum logistics company is considering a plan to reverse westbound product flow through a section of the Longhorn Pipeline and convert to eastbound crude oil flow back to Houston, according to a February 15 Reuters report. If approved, permitting and construction could take up to 24 months, the report said.
A third option could involve the reversal of the 350,000-b/d Seaway crude pipeline owned by ConocoPhillips and operated by Enterprise Products Partners. That pipeline currently delivers oil from Houston to Cushing, according to a February 15 Bloomberg report.
But ConocoPhillips CEO Jim Mulva downplayed any potential reversal project in a February 15 conference call, saying “we don’t really think that’s in our interest, because we need more crude in the area” to supply the company’s Mid-Continent refineries.
Mulva’s comments about the rare economic opportunity for refining discounted WTI or unconventional oil in the Mid-Continent region seemed to echo those of Valero’s Day.
According to the Energy Information Administration’s weekly supply report for the week ended February 11, inventories at the Cushing terminal rose 250,000 barrels to 37.7 million barrels. Without expanded takeaway capacity from Cushing to the Gulf Coast, that storage overhang and the WTI discount may persist for several quarters, if not years.
If the Keystone XL pipeline expansion is approved and constructed, it will not only lower the Cushing overhang and associated WTI discount, it will provide strategic crude for U.S. refiners and fuel consumers in general.
Could the Keystone Project Be Rejected?
Valero’s Day told GRFT that those opposed to the Keystone XL project likely “do not understand how beneficial it would be to have a dedicated source of oil that’s close by and secure. If it’s not coming to U.S. refineries, it will end up going somewhere, whether it’s China or India or elsewhere.”
Check for future installments on oil’s transforming landscape. The potential for other countries to compete to receive Canada’s national treasure – its heavy black gold – will be the subject of a future installment.