Energy Ink

The politics of choice

Keystone XL may be redundant, but for producers, that's a good thing

April 04, 2011

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It appears U.S. legislators aren’t the only ones playing political badminton with a proposed expansion to TransCanada Corp.’s Keystone pipeline network. This weekend brought news that the venerable New York Times has come out against the oil sands bullet line that would carry crude from Alberta to refineries on the U.S. Gulf Coast. The multibillion-dollar link is “not only environmentally risky, it is unnecessary,” read a weekend editorial.

The newspaper’s admonishment of the Keystone project, and by extension, the oil sands, as a “major threat” to water supplies on both sides of the 49th parallel comes several months after the Washington Post urged Congress to sanction the pipeline, “ensuring it’s done responsibly.” Republicans on Capitol Hill, perhaps not surprisingly, continue to stump for the pipeline, which could see deliveries of Alberta crude to the U.S. Gulf Coast hit 1.1 million barrels per day by the targeted in-service date of 2013.

Policymakers and interest groups alike have pitched the export line as both a geopolitical and economic hedge against declining imports of oil from Mexico and Venezuela. It’s also seen by some as a gateway towards lessening dependence on imported oil from the Middle East. Industry chieftans, meanwhile, are virtually salivating at the chance to move Alberta crude past the growing bottleneck at Cushing, Oklahoma, to refineries primarily in the Galveston, Corpus Christi and Houston corridor. “There’s a tremendous amount of hardware there,” said Imperial Oil Ltd. chief executive Bruce March, in an interview.

His assessment is reinforced by the U.S. Department of Energy. A study commissioned by the department and released in February says the Gulf region represents a “major growth market” for Canadian producers, who are eager to find customers for increasing oil sands production. But, as the Times correctly points out, spare pipeline capacity leaving Alberta for U.S. markets is such that Canadian exports today could be doubled without so much as a shovelful of Nebraskan sod being turned.

Not building Keystone, of course, would leave storage volumes at Cushing untouched, further deflating prices for West Texas intermediate against other global benchmarks. Keystone would certainly help alleviate a glut at the Midwest trading hub, but it is far from the only release valve. In fact, the market may actually be asking the wrong question, analyst Paul Cheng at Barclays Capital notes. “While it is important to increase the takeaway capacity from Cushing, it could be equally effective if we build takeaway capacity that diverts oil away from going to Cushing,” he wrote in a March research note.

In other words, easing storage levels in the Midwest could just as easily be accomplished by shipping more oil to refineries in the U.S. northeast and Ontario. (Think of Enbridge’s Line 6B on its Lakehead System). Of course that line experienced a serious shutdown last summer, causing production shut-ins and high price discounts against heavy grades of western Canadian oil.

The possibility of another prolonged shutdown, and the prospect of lost revenues that would come with it, in part helps explain why Keystone is viewed by producers less as a vital artery to the Gulf (although it is) so much as a backstop against unforeseen outages elsewhere on the continental pipeline network. If there’s one thing shippers learned from last summer’s pipeline break in Michigan, it’s that system redundancies matter. “We’re a producer of a commodity,” March said. “Having multiple outlets to multiple markets is always by principle the way we would prefer to go.”

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