FINANCIAL POST
The anti-Keystone campaign hasn’t stopped a surge of Alberta oil from making it to the U.S. Gulf Coast. And there’s more coming.
The end point of the Keystone XL pipeline, at the western tip of a 77-kilometre segment that runs from Port Arthur, Tex., to the huge refineries lining the Houston Ship Channel, hardly resembles the flashpoint of the most intense controversy to hit Canada–U.S. relations since the softwood lumber dispute.
Still under construction, it’s now a pit surrounded by steel walls to keep its banks from caving in. Inside, hard-hatted workers are restless to get the pipe connected to a processing area and to storage tanks as the humid spring heat settles in America’s Southern Coast.
Later this year, the $300-million, 36-inch diameter pipeline and associated tank terminal will fill up with oil from Calgary-based TransCanada Corp.’s recently completed Marketlink pipeline. And when it does, the Houston Lateral — as the final leg of KXL is known —will mark another successful leap in the Canadian oilsands industry’s race to the refining market in the U.S. Gulf of Mexico.
Despite the massive, celebrity environmental movement campaign to stall Canadian oilsands growth Canadian heavy oil is nevertheless making its way here in significant and increasing spurts. President Barack Obama, under pressure from his big-eco backers, may have refused to grant a permit for the northern cross-border leg of Keystone XL, but just as water will find its way through any crack in a foundation, Canada’s oil keeps streaming its way to Texas’ refinery row.
And these refineries are primed for an outright invasion of oilsands oil, as other pipelines are built and expanded — Calgary-based Enbridge Inc. is in the process of ramping up means of getting Alberta oil to Texas. And of course, for if and when KXL is approved.
“The vision was to get to the Gulf Coast, to the refining areas — the refining complex in Port Arthur and the refining complex in Houston, Texas areas,” said Derek Graham, the former U.S. Air Force mechanic who is now TransCanada’s manager of U.S. business development for liquids pipelines.
“There are more options here in Houston. In Port Arthur, there are four refineries. Here you have eight — a total of 2.1-million (barrels a day of ) refining capacity. That link is established today and we are optimistic that with the approval of KXL, we can increase that.”
Until just a couple of years ago, fewer than 100,000 barrels a day of Canadian crude was reaching the Gulf Coast, while Canadian oil exports were flowing largely to refineries in the U.S. Midwest.
According to the U.S. Energy Information Administration, approximately 377,000 barrels per day of Canadian crude was imported to the U.S. Gulf Coast in January 2015, the latest month for which data were available.
TransCanada alone expects an additional 100,000 to 150,000 barrels a day of Canadian oil to get to the Gulf Coast by this summer. If KXL goes ahead, with a capacity for 830,000 barrels a day, Canadian producers will have the option to bring many of those barrels to the area.
Enbridge is also moving large volumes of its own and expects big increases, though it won’t reveal how much for reasons related to its contractual obligations.
With the world’s largest concentration of refineries and capacity to process seven to eight million barrels a day, the U.S. Gulf has long been the Canadian oilsands industry’s holy grail. As significant as they are, Can- adian supplies are a fraction of the more than three million barrels a day of medium and heavy crude imported by Gulf refiners, from Mexico, Venezuela, Nigeria and Saudi Arabia.
But while KXL’s approval has sat stalled for six years in the White House, other pipelines have been built or expanded to ease bottlenecks, including TransCanada’s “base” Keystone line, and its Marketlink project from Cushing, Okla. to Port Arthur. Enbridge has built out the Seaway pipeline from Cushing to Freeport, Texas, with its Enterprise Products Partners. Other Alberta heavy oil shuttles thousands of kilometres to get here by train. Still more comes by barge.
Certainly all of this takes longer, costs more and is less efficient than if KXL had been up and running. But it’s coming nonetheless, a measure of the inevitability and creativity of market forces.
It helps that American buyers are eager for Canada’s oil, even as the green class claims otherwise, and as the U.S. produces gushers of light oil of its own from tight reservoirs — enough to boost world oil supplies to a point where it has tested OPEC’s grip on world oil markets.
Because the fact is that many refineries in the Gulf are built to process the kind of heavy oil similar to the oil Canada produces. All that production from U.S. tight fields is light and requires different processing. With imports from overseas, quality can be inconsistent, so U.S. refiners love their Canadian fix.
“It’s very good feedstock. It’s of consistent quality and therefore it’s easier for us to run,” said Gary Heminger, president and CEO of Marathon Petroleum Corp., the fourth-largest U.S. refiner. “We’ve been running Canadian heavy for quite some time, and I’d like to run a lot more,”
That complementarity is aided by the large investments made by U.S. companies — Marathon, ConocoPhillips Co., Exxon Mobil Corp., Chevron Corp., Devon Energy Corp. — in Alberta’s oilsands.
The arrival of Canadian supplies is “creating a direct link between two very stable environments,” said Paul Miller, executive vice-president and president of liquids pipelines at TransCanada. “That stability … allows Canadian producers to engage with the U.S. refiners to get into long-term supply deals,”
Even a prolonged slump of low oil prices isn’t likely to stop Canada’s rush to the Texan coast. While brand new Canadian oilsands projects will require pricier oil to justify themselves, those projects already underway or under construction are just going to keep pumping out oil. Both Imperial Oil Ltd. and Suncor Energy Inc. said this week that their oilsands production levels for this year’s first quarter are up 11 per cent over the same period last year, when oil prices were nearly double what they are now. Cenovus energy Inc.’s production has been rising. And Imperial said it will soon double production at the Kearl oilsands mine, and new production has begun at its Nabiye operation.
As more pipeline space opens up, significant volumes will move away from rail — 500,000 barrels a day are now put on trails out of Western Canada alone — and back into the pipe network, Miller said.
The final leg of KXL is significant because it connects to a highly desirable refining cluster. The terminal is located on a 250-acre site with ample room to expand storage to 10 million barrels that is only six miles away from the seaway channel that welcomes tankers from around the globe.
The busy waterway has been expanded and deepened over decades to receive large vessels, such as oil tankers, from overseas. Huge masses of twisted steel — refineries, petrochemical plants, tank farms — sit on its shores.
But with so much oil coming in by land, from the oilsands or U.S. tight oil fields, imports are thinning.
At TransCanada’s Houston terminal, more than 150 workers and contractors are busy completing two 350,000-barrel tanks so the pipeline can start filling them with oil.
“We got metering to count what is coming out of the terminal, and one tank is largely a merchant tank, and the other is partial merchant and partial surge,” says terminal project manager Jeff Bickar, explaining the surge tank is meant to cushion any big, unexpected wave coming down the pipe. Links are being made to nearby refineries like Exxon’s Baytown, Royal Dutch Shell PLC’s Deerpark, or Marathon’s plants.
Work is scheduled to continue through the summer. Coolers full of water bottles are placed throughout the worksite to help keep workers hydrated in the Texas heat. The pipeline is mechanically complete, explained Meera Kothari, a University of Calgary engineering graduate now based in Houston,
We’ve been running Canadian heavy for quite some time, and I’d like to run … more