EPRINC: Economic gains to be made from Keystone XL project

Nick Snow
OGJ Washington Editor

WASHINGTON, DC, Dec. 2 -- The proposed Keystone crude oil pipeline expansion would provide an estimated $100-600 million/year of net economic benefits from improved transportation and processing efficiencies in addition to an immediate boost in construction employment, a new Energy Policy Research Foundation Inc. (EPRINC) study concluded.

TransCanada Corp.’s Keystone XL proposal to construct a cross-border pipeline from Hardisty, Alta., through Cushing, Okla., to US Gulf Coast refineries still awaits US Department of State approval, which is expected early in 2011, EPRINC’s study noted. It said that the extension would permit shipment of an additional 509,000 b/d of Canadian crude to the gulf, most of which would be blended bitumen, which is similar to heavy crude.

“Additionally, TransCanada is looking to expand the Keystone XL capability by offering Bakken oil producers, located in North Dakota and Montana, a chance to link into the pipeline and send their crude to Gulf Coast refineries for the first time,” the study continued. “By increasing transport efficiency and allowing Bakken producers to tap into new refinery markets, the Keystone XL project will have the added benefit of improving wellhead values for oil production from the Bakken formation.”

It said that since many Gulf Coast refiners invested heavily in equipment to process heavier crudes from Mexico and Venezuela, where production has declined, higher volumes from Canada potentially could improve domestic refiners’ margins by matching the heavy grade with abundant and complex Gulf Coast refining technology.

Simultaneously, the project would deliver crude oil more efficiently into the US refining market while improving supply security with a long-term commitment accompanied by a high degree of confidence that commercial and trade relations would be sustained, EPRINC’s study indicated.

‘A false choice’
It noted that some critics of Canadian oil sands production have recommended that the US restrict imports from Canada and try to replace them with alternative fuels and conservation. “However, this strategy is a false choice,” EPRINC said. “Alternative fuels can reduce net imports of crude oil and petroleum products, but these alternatives (biofuels, electric vehicles, natural gas vehicles, new auto fuel standards) offer only limited opportunity to substantially lower oil imports in the near to medium term. Even under the most optimistic scenario for using alternative fuels and technologies, the US will import large volumes of petroleum in the next 10-20 years.

“If US refiners are denied access to Canadian oil sands production, Canadian bitumen blends will likely flow to alternative markets, displacing crude supplies which would eventually make their way to US import centers,” EPRINC said. “Total Canadian production and total US imports will likely remain the same with or without US imports of oil sands from Canada.”

Many US refiners are able to maintain profitable margins when they can take advantage of the price spread between light and heavy crude, the study observed. “When this spread is large, complex refineries purchase heavy crude at a discount to light crude and are able to produce a product slate commensurate with that coming from the refineries processing lighter, more expensive crudes, thus maximizing profit,” it explained. “However, when the spread collapses, as it has recently, and there is very little discount between heavy and light oil, heavy [crude] refiners are unable to realize any benefits from purchasing heavy crudes. They become less profitable, suffer underutilization, and forgo revenue.”

Much like US refiners, producers operating in Canada’s oil sands have an incentive to capitalize on a light-heavy crude price spread, the study continued. “Some Canadian producers would prefer to upgrade the raw bitumen into synthetic light crude and take advantage of the resultant higher value. However, given the convergence of heavy-light valuations, the incentive to upgrade larger volumes of Canadian oil sand output remains low,” it said.

“Upgraders, like complex refineries, are very capital intensive; without a substantial light-heavy value spread there is little economic incentive to build such facilities,” EPRINC said. “While there is a push by the government of Alberta to increase upgrader capacity, most Canadian oil sand producers will realize higher wellhead values by selling non-upgraded bitumen into the US market.”

Contact Nick Snow at nicks@pennwell.com.

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