Keystone left behind as Canadian oil pours into U.S.

Delays of the Keystone XL pipeline are providing little obstacle to Western Canadian oil producers getting their crude to the U.S. Gulf Coast, with shipments set to more than double next year.

The volume of Canadian crude processed at Gulf Coast refineries could climb to more than 400,000 barrels a day in 2015 from 208,000 in August, according to Jackie Forrest, vice president of Calgary-based ARC Financial Corp. The increase comes as Enbridge Inc.’s Flanagan South and an expanded Seaway pipeline raise their capacity to ship oil by as much as 450,000 barrels a day. Canadian exports to the Gulf rose 83 percent in the past four years.

The expansion shows Canadians are finding alternative entry points into the U.S. while the Keystone saga drags on. In the latest chapter, a Democratic senator and a Republican representative sought votes in their chambers to set the project in motion. The two are squaring off in a runoff election for a Senate seat from Louisiana, a state where support for the project is strong.

Oil Sands and the Environment

“Keystone is kind of old news,” Sandy Fielden, director of energy analytics at Austin, Texas-based consulting company RBN Energy, said Nov. 12 in an e-mail. “Producers have moved on and are looking for new capacity from other pipelines.”

TransCanada Corp.’s Keystone XL, which would transport Alberta’s heavy oil sands crude to refineries on the Gulf, has been held up for six years, awaiting Obama administration approval. The U.S. House of Representatives today approved a measure that would allow construction of the line. The Senate will vote on a similar measure Nov. 18.

Canadian Oil

Energy companies in Canada, including Suncor Energy Inc., Imperial Oil Ltd. and Canadian Natural Resources Ltd., produce crude from thick oil sands in remote areas of northern Alberta. The companies want pipelines and rail networks expanded so they can export more of their product, which has sold for an average $20-a-barrel discount to the U.S. benchmark West Texas Intermediate over the past year.

Canada sent about 54,000 barrels a day to the U.S. Gulf by rail in the first half of 2014, said Forrest at Arc Financial, which is a private equity management company that invests in energy companies.

TransCanada has been awaiting a U.S. decision since 2008 on its 36-inch Keystone XL pipeline, proposed to carry as much as 830,000 barrels a day from Hardisty, Alberta, to Nederland, Texas. Environmental groups say it would encourage development of the oil sands, which they say generate up to four times more carbon emissions than conventional crude, while supporters say it would create jobs and increase North American energy security.

Least Expensive

“Keystone XL still represents the least expensive way for our shippers to move product to the Gulf Coast,” TransCanada Spokesman Terry Cunha said in an e-mail yesterday. “This is why our shippers remain fully supportive of Keystone XL. When we develop projects like Keystone XL, we have the long-term commercial contracts in place when we announce them.”

President Barack Obama said today that Keystone XL allows Canadian producers to sell oil “everywhere else” and won’t affect U.S. gasoline prices.

Bills on Keystone in the U.S. House and Senate are coming as each party seeks to clinch the last undecided Senate seat, a contest pitting incumbent Senator Mary Landrieu, the Democrat, against Republican Representative Bill Cassidy. Both candidates have highlighted their support for the pipeline. The Senate will fall under Republican control next year after the party picked up at least eight seats in midterm elections this month.

While Keystone was delayed, other projects increased the flow of crude south. Average U.S. imports of Canadian crude rose to a record 3 million barrels a day in August, a 48 percent increase from five years earlier, according to U.S. Energy Information Administration data.

New Pipelines

Enbridge will begin operations on its Flanagan South pipeline from Pontiac, Illinois, to Cushing, Oklahoma, this month, Chief Executive Officer Al Monaco said Nov. 5. The Seaway Twin line, a venture between Enbridge and Enterprise Products Partners LP, is scheduled to start next month, two people familiar with Gulf Coast pipeline operations said Nov. 12.

The Canadian crude would add more cheaper, heavier oil available to Gulf Coast refiners, allowing them to save about $7 a barrel compared with the price of domestic light supply, ARC Financial’s Forrest said.

The Canadian oil would displace imports from Mexico, Venezuela and the Middle East, pushing those supplies onto the world market and adding to a supply glut after prices plunged 31 percent since June. Brent, the benchmark for more than half the world’s oil, fell below $80 a barrel Nov. 12 for the first time in four years.

More Supply

“Since the new crudes from Canada will add to the general sense of oversupply at the Gulf Coast, the market as a whole will be weak, so Brent and WTI could be impacted,” Fielden said.

Crude futures added $1.61 to settle at $75.82 a barrel on the New York Mercantile Exchange. Yesterday they closed at the lowest since September 2010.

For TransCanada, Canada’s second-largest pipeline company, the Keystone XL project has already been a six-year odyssey full of starts and stops. The company submitted an application for the 3,200-kilometer (1,988-mile) pipeline on Sept. 19, 2008. Because it crossed the U.S.-Canada border, it required approval from the U.S. government.

Keystone XL will take two years to build after U.S. government approval, according to the project website.

In August 2011, then Nebraska Governor Dave Heineman asked President Barack Obama to block the pipeline because it crossed the Ogallala aquifer, a natural endowment that provides drinking water for 1.5 million people and irrigates almost half of the state’s cropland.

Canada Reapplies

Obama told Canadian Prime Minister Stephen Harper in January 2012 that the project would be blocked and TransCanada would have to reapply, which it did, with a new route that reduced impact on the aquifer.

TransCanada built and started operating the southern leg of its Keystone XL, called the Gulf Coast Pipeline, in January. That section was split from Keystone XL in 2012 after TransCanada’s initial application was rejected.

The existing Keystone line runs from Hardisty to Steele City, Nebraska, where it divides into two legs, one heading to Patoka, Illinois, the other to Cushing, Oklahoma. Cushing is the largest oil-storage and trading hub in the U.S., and the delivery point for New York Mercantile Exchange futures contracts.

Last January, the project received a positive environmental review from the U.S. State Department. The department suspended its review in April after a Nebraska state court ruled against the process under which Heineman approved the route through his state. The case is now before the Nebraska Supreme Court.

Expected Ruling

A ruling on Keystone XL may come soon, Secretary of State John Kerry said last month. TransCanada said Nov. 4 that the cost of the project has increased to $8 billion from $5.4 billion.

In the meantime, the flow of Canadian oil into the U.S. keeps building without Keystone.

“Canadian production is not really pipeline constrained at this point,” Peter Buchanan, senior economist at CIBC World Markets in Toronto, said in a phone interview Nov. 12. “Canadian exports to the U.S. have never been higher than they have been in the past few weeks.”

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