--The proposed Keystone XL pipeline from Canada to the U.S. may
contribute to a rise in oil prices
--A final decision on permit approval for the project is seen
coming by year-end
--TransCanada would construct and operate the system
By Myra P. Saefong
A proposed pipeline stretching from Canada to the U.S. may
contribute to a rise in U.S. prices for oil and has the potential
to significantly change the landscape of the market.
It's called the Keystone Gulf Coast Expansion Project, or
Keystone XL, and a final decision on permit approval for the
project is expected to come by the end of the year.
"The entire pipeline, when all four phases are done, would
deliver 1.3 million barrels a day of crude to the U.S.," said Terry
Cunha, a spokesman for TransCanada Corp. (TRP, TRP.T), which would
construct and operate the system.
Phases 1 and 2 of the pipeline project have been operating for
more than a year, but Phases 3 and 4 require permit approval, he
said.
The pipeline would stretch from Hardisty, Alberta, in Canada,
crossing six states and serving markets at Cushing, Okla., the
delivery hub for New York Mercantile Exchange-traded crude;
Houston; and Port Arthur, Texas.
Once completed, the pipeline "will definitely have an effect on
the [West Texas Intermediate] crude oil benchmark posting for use
as an index by the big Wall Street investors," said Bob van der
Valk, a petroleum industry analyst in Terry, Mont.
A lack of transportation options for oil at Cushing had
contributed to a glut of the commodity in storage at the delivery
hub, prompting prices for WTI crude, which had previously been used
as a global benchmark, to trade significantly lower than Brent
crude traded in London.
On Thursday, Nymex crude closed higher at $93.96 a barrel, while
Brent on ICE Futures finished above $112.
"An increase in tar sands [also known as oil sands] and domestic
production has caused a bottleneck of crude oil at Cushing,"
according to van der Valk. "The WTI contract price has been
depressed when compared to its counterpart Brent and no longer
reflects global oil supply and demand."
Keystone XL would not only be transporting Alberta oil sands
crude, but also oil from the Bakken formation to Cushing, and in
turn, to the U.S. Gulf Coast refineries, he said.
Oil sands in Alberta contain a rich source of heavy crude and
the Bakken is also an oil resource, a formation of shale source
rock covering parts of North Dakota, Montana and Saskatchewan.
Having a transportation system for oil from these resources to
the gulf would substitute current imports from overseas sources,
van der Valk said.
Decreasing Reliance
So the pipeline has the potential to help the U.S. decrease its
reliance on offshore imports, which could make domestic supplies
more stable.
"Unlike the Middle East and North Africa, there is little
country risk of a supply interruption," said James Williams, an
energy economist at WTRG Economics. "We haven't been at war with
Canada since 1812."
About 20% of oil imports come from the Persian Gulf, and most of
that would be cut off temporarily if the Strait of Hormuz was
blockaded, he said. Members of the Organization of Petroleum
Exporting Countries account for about 48.5% of U.S. oil
imports.
"With the low risk associated with Canada, this is a
no-brainer," Williams said.
"The Keystone XL expansion would not just be a boon for
TransCanada in the short run, but in the long run as well," said
Seth Rabinowitz, a partner at management-consulting firm Silicon
Associates. It would support the company's "position as a key
player, considering the U.S.'s voracious hunger for oil."
Meanwhile, the obvious benefit of bringing in oil from Canada's
rich unconventional reserves has not been lost upon others in the
energy industry.
Enbridge Inc.'s (ENB, ENB.T) proposed Northern Gateway pipeline
project, for example, would transport petroleum from near Edmonton,
Alberta, to Kitimat, British Columbia, for export to offshore
markets.
Asia is considered a booming market with a growing appetite for
oil, said Rabinowitz, and "Chinese capital is flowing into the
Canadian energy sector faster than a Hummer burns gasoline" in
freeway traffic.
Back in the U.S., TransCanada isn't the only firm planning to
link Cushing with refineries on the Gulf Coast.
Enbridge, along with Enterprise Products Partners LP (EPD),
recently proposed a new pipeline that would run from Cushing to the
Gulf of Mexico.
"Pipeline operators, perhaps sensing there is money to be made
by opening an outlet to refineries in Texas with a less
high-profile project, are lining up to break the storage glut at
the Midwest trading hub, where more than 42 million barrels of
crude oil sat in terminals at the onset of the summer driving
season," said van der Valk.
The Downsides
Despite all the benefits the Keystone pipeline may have for the
bulk of the oil industry, there are some significant downsides.
The pipeline may contribute to a rise in U.S. oil prices,
lifting it to levels more on par with international prices, which
could hurt refiners.
"The impact on oil producers in Oklahoma, West Texas and North
Dakota will be higher prices, as the price which is depressed below
the rest of the world rises to international prices," said
Williams. "The only losers in this would be the refiners in the
area which have benefited from the below-market price of WTI."
Consumers, on the other hand, probably won't have to worry too
much about a rise in prices for oil products. "The price of
gasoline and diesel in the market served from Cushing oil already
reflects the international price," WTRG noted.
Still, the pipeline has hit quite a few roadblocks that have
slowed the permitting process. TransCanada filed its application
for permit approval with the State Department back in September
2008.
Tar Sands Action, which plans a massive White House protest
against the pipeline on Nov. 6, believes Keystone XL won't lessen
U.S. dependence on foreign oil, but transport "cheap" Canadian
crude to U.S. refineries for export to overseas markets.
That oil from tar sands has been sometimes referred to as "dirty
oil."
Jamie Henn, a spokesman for the Tar Sands Action group, said
that the carbon dioxide emissions associated with a barrel of tar
sands oil are three times the emissions from a barrel of
conventional crude.
The Keystone pipeline would also be transporting tar sands oil
through the U.S. agricultural heartland, the group said, as well as
the Ogallala Aquifer in the Great Plains region, posing a potential
threat to one of the largest underground water reserves in the
U.S.
"There isn't a dam on the Grand Canyon and we still have [some]
redwoods because every once [in a while], we make the right
decisions in regards to protecting valuable natural resources,"
said Henn. "Just because the economics of the tar sands make sense
at the moment doesn't mean their development, or the pipeline, are
inevitabilities."
But even in the face of staunch opposition to the pipeline,
others expect the project to get final approval by the end of this
year.
TransCanada will receive approval on its permit "as we have no
current readily available alternative for not building it, since
that will leave the U.S. once again subject to boycotts and cutoffs
by OPEC," as in the 1970s, said van der Valk.
The U.S. consumes about 15 million barrels a day of oil and has
to import 11 million, said TransCanada's Cunha, so the country can
import oil from Canada, which has "similar political and
environmental practices," or it can import "from the Middle East or
Libya, which does not."
-By Myra P. Saefong; 415-439-6400; AskNewswires@dowjones.com