Current / Economics

Oily Stupidity

So, the U.S. Senate filibustered Keystone XL to death:

A bill to force approval of the Keystone XL pipeline failed in the U.S. Senate on Tuesday, sparing President Barack Obama from an expected veto of legislation that several fellow Democrats supported.

The measure fell just short of the 60 votes needed for passage, despite frantic last-minute lobbying by supporters, especially Democratic Senator Mary Landrieu of Louisiana, who faces a runoff election on Dec. 6. She has staked her hopes of winning a fourth Senate term on the Keystone gambit.

The tally was 59 to 41 on TransCanada Corp’s $8 billion project, with all 45 Republicans supporting the bill.

Well, until the new Republican majority takes office in January–it is pretty much inevitable that XL will be built.  Strangely, I have seen no stories describing how much of a boondoggle XL will become, and not for environmental reasons.  I really wonder if American congressional numb-nuts know what this damned future pipeline really is:


Canadian crude oil is already flowing through the Keystone pipeline to American oil refineries.  The primary American crude index, West Texas Intermediate (WTI), is based off of domestic crude that flows through its main terminal in Cushing, OK.  Keystone connects Alberta with the WTI hub and, far more importantly, added a connection from Cushing to Gulf Coast refineries (which connect via existing pipelines to the rest of the Eastern Seaboard refinery complex) for the first time.  Yes, the Eastern United States did not have access to domestic crude until the January 2014 opening of the Phase 3a pipeline.  No, I have no idea why it took 113 years from the first discoveries of Texas crude to connect all American oil refineries to American production fields.

XL is Phase 4, a straight shot from Hardisty to Steele City, two points that are already connected by existing pipelines.  I suppose we should be grateful XL will add additional transportation routing for Bakken oil production…

File:Bakken Reservoir fields in Williston Basin.jpg

…though wouldn’t it be more sensible to run a pipeline from Baker, MT due east until it connects to the main Keystone pipeline in southeastern North Dakota?

Wait, given the existing Keystone pipelines, what is the purpose of XL anyway?

Canada badly needs to find a way to get its crude to customers in Asia and avoid the oversupplied North American market to fetch a better price for its oil.

Surging output of light sweet oils from North Dakota and Texas is crowding out demand for heavier, sourer crudes from Alberta – pushing the price of blends such as Western Canadian Select (WCS) to a $25 discount against West Texas Intermediate (WTI) and down as much as $45 against Brent.

Until recently, TransCanada’s Keystone XL pipeline appeared to be the most promising option. If it is eventually given the go-ahead, Keystone will take crude from Alberta south across the United States to the U.S. Gulf Coast, from where it is likely to be loaded onto tankers for export via the expanded Panama Canal or the Cape of Good Hope to refineries in China, Korea and Japan.

Come again?

Keystone was never intended to take oil to China. It was meant to take Canadian crude to the complex U.S. refineries along the U.S. Gulf Coast able to process the bituminous and sulphurous oil into valuable light products.

But with the unanticipated upsurge in domestic U.S. output, there is much less demand for heavy Canadian crude.

New U.S. crude streams from North Dakota’s Bakken and Texas’ Eagle Ford have a much lower sulphur content and yield a much higher proportion of low-boiling point molecules suitable for making gasoline and diesel than Alberta’s heavy crudes, making them much easier and cheaper to process.

Domestic U.S. crudes cannot be exported (except to Canada) under current U.S. law. So U.S. refineries have a strong incentive to refine them in preference to Canadian oil. If Keystone is eventually built and Canadian crude reaches the U.S. Gulf Coast market, it is likely Canadian crude will be exported while U.S. oil is refined locally.

Why exactly will American refiners eschew Canadian crude?

Gulf refiners have invested heavily in cokers to handle heavier crudes such as those produced in Alberta. But those investments were made before the extent of the shale revolution became clear, when U.S. refiners expected to source an increasing proportion of heavy oils from places such as Canada and Venezuela.

Coking units consume a lot of energy and are expensive to run. The investment in building them must now be considered a sunk cost.

Gulf refiners will only buy Canadian crude if it is priced at a significant discount to shale oils, which would leave Canadian producers with the same problem albeit probably not quite as bad as at present.

There is no point trying to export Canadian crude to Europe where refineries are not equipped to cope with heavy crude. The only way to unlock the full value of Canadian crude is to export it to modern giant coking refineries in Asia.

I’m not anti-Canadian, just anti-stupidity.  TransCanada probably bet on the wrong horse:

If Canadian crude is going to end up in Asia, it makes much more sense to send it west through the Rockies.

The route from Alberta west over the Rockies and across the northern Pacific is far shorter than taking oil south to Texas and then putting it on a tanker through the Panama Canal or around the Cape of Good Hope.

Reuters on 2 February 2013 advocated the Northern Gateway project, now headed by Calgary-based energy giant Enbridge.  But it seems Enbridge probably will finish behind Kinder Morgan:

Fort McMurray, the center of Alberta Tar Sands production, lies far to the north of Bruderheim, requiring extensive pipelines down to central Alberta.  Edmonton is the provincial capital and its metro area holds almost one third of the province’s population (the Calgary and Edmonton metro areas have roughly the same 1.1-1.2 million population size).  Northern Gateway was approved on 17 June 2014; Trans Mountain has been in operation since 1953 and connects a large Alberta city both to a larger port than Kitimat (and much larger city) in the Vancouver, BC area.

Environmentalists oppose Northern Gateway as fervently as they oppose XL, and Aboriginal tribes in British Columbia also oppose NG.  Based on the economics alone, I might wager NG and XL will become white elephants should Kinder Morgan succeed in its bid to increase Trans Mountain’s capacity.

So much for this oily (American and Canadian) jobs programs…






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