The southern leg of Keystone XL is more than 90 percent complete and will be shipping oil through Texas by the end of the year, pipeline owner TransCanada says.
Refineries are cheering the new line, which will bring up to 700,000 barrels per day of oil to the Gulf Coast – with or without the proposed northern connection to Canada that has drawn intense environmental opposition.
The milestone will play into the plans of refineries, some of which are making changes to process more of the kind of light crude from U.S. shale plays that will be increasingly available because of the Keystone XL southern leg.
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LyondellBasell has boosted its ability to turn more American oil into gasoline, diesel and other fuels at its Houston refinery, spokesman David Harpole said.
And Valero is adding processing units at its Houston and Corpus Christi refineries that will increase their daily capacity for light crude by a combined 160,000 barrels. The changes will help Valero shift to a higher mix of domestic oil at those facilities, said Bill Day, spokesman for San Antonio-based company, the nation’s largest independent refiner.
“The more light crude that comes to the Gulf Coast the better, because the Gulf Coast is where the refining capacity is, ” Day said. “So that definitely will be a benefit to refiners like Valero that have a lot of capacity along the Gulf Coast.”
More than half of the nation’s refining capacity is on the Gulf Coast, according to the U.S. Energy Information Administration.
Energy information firm Genscape says Keystone XL will be just the second pipeline moving oil south from the major hub of Cushing, Okla., where shipments from booming oil production nationwide pushed storage to a record of 51.9 million barrels in January – though the backup has eased since.
“Basically more has been coming in than has been able to get moved out and this situation has created increases in inventories, ” said Joanne Shore, chief industry analyst for the trade group American Fuel & Petroleum Manufacturers. “It’s a bottleneck there in the middle of the country.”
While other pipelines recently have helped move oil around or out of Cushing, Keystone XL will double the pipeline capacity moving south from the northeast Oklahoma hub, giving refineries new access to vast oil supplies there.
Keystone XL is one of an array of new pipelines aiming to move oil to the Gulf Coast from prolific plays elsewhere in Texas.
Just two years ago there was relatively little pipeline capacity to move crude or related liquids to Gulf Coast refineries, with a maximum of about 250,000 barrels per day reaching the region from U.S. onshore production, according to data from Genscape.
The rest of the crude came from the Gulf of Mexico or overseas, for refining in the area or for pipeline transportation to other locations.
Today, pipeline capacity moving to Gulf Coast refineries is at 2.55 million barrels per day, with oil moving to refineries from the Eagle Ford and Permian Basin regions in South and West Texas, according to Genscape.
Keystone XL’s southern leg will boost that capacity by 27 percent.
Even as Keystone XL starts up, however, other pipelines already are alleviating the bottleneck at Cushing, moving oil directly from oil fields to refineries, or out of Cushing.
Oil stocks there hit a low for the year as of Sept. 6, falling to 34.1 million barrels, down more than a third from January, according to the Energy Information Administration.
The increase in domestic oil flowing to Gulf Coast refineries has helped reduce oil imports, from a recent peak of 11.1 million barrels per day in July 2010, to 8 million barrels per day last week, according to the federal agency.
While that increased oil availability has lowered the immediate need for Keystone XL’s southern leg, U.S. oil production is expected to continue rising, said Tim Evans, an energy futures analyst for Citi Futures.
“Temporarily, we’ll have more pipeline capacity than we have crude oil production, but that oil production will still be rising, ” Evans said. “So eventually that’s going to fill the pipeline up and it doesn’t look like it’s going to take all that long. Maybe 12 months.”
TransCanada says the 700,000 barrels per day capacity of the Keystone XL southern leg is largely contracted through binding, long-term agreements.
Keystone XL also will move more Canadian oil to the Gulf Coast, even though it will lack its Canadian connection, at least for now. That’s because heavy crude from Canada has made its way to Cushing by other means, said Roger Ihne, principal energy portfolio leader for consulting firm Deloitte.
But despite the benefits of Keystone XL’s added capacity, the pipeline won’t be as important if the northern leg fails to win government approval, Ihne said.
It was Keystone XL’s proposed Canadian connection that raised protests from environmentalists and has resulted in delays and increased scrutiny from the Obama administration.
A new pipeline connection crossing the national border with Canada requires State Department approval, while pipelines inside the United States do not.
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The major source of crude from Canada would be oil sands, which mainly contain a solid, hydrocarbon-bearing material called bitumen. Producing bitumen from oil sands creates more carbon emissions than conventional oil production and opponents say it is especially damaging to the environment.
Bitumen has to be heated and diluted in order to be transported in pipelines. Refiners could use it to replace heavy crudes imported from Mexico and South America, where output is declining, Valero’s Day said.
Ihne, the Deloitte specialist, said that because Gulf Coast refineries are equipped to handle that heavy crude, they are especially interested in supplies from Canada that could keep their plants fully engaged.
Will consumers notice?
Oil industry backers of the northern Keystone XL pipeline promote it as a way to get reliable supplies of crude from a friendly neighboring country and to produce jobs.
But Evans, of Citi Futures, said it’s not clear that consumers will see immediate benefit from the southern leg, where oil is about to start flowing, or the northern stretch if it is built.
“I really don’t think that you’re going to be able to go to the local gas station and say, ‘Oh look, they just lowered the price a nickel, thank you, TransCanada.'” he said. “I don’t expect the impact to be noticeable in that kind of way.”