BARRELING THROUGH
Anti-Keystone activism hasn’t stopped Alberta oil from making its way to the Gulf Coast, and more is on its way.
The U.S. Gulf Coast is the most sophisticated refining complex anywhere
who oversaw much of the Keystone system construction. But it can’t start receiving oil until the tanks are done. Startup is anticipated at the end of the year.
Of course, this isn’t how things were supposed to work. Proposed about seven years ago, KXL was scheduled to already be in operation by now, providing a direct link between the world’s thirdlargest oil deposits to the world’s largest refining centre.
Enbridge, Canada’s biggest oil pipeline company, had its own plans to transport Alberta bitumen to the Gulf, after historically feeding it to other points in the U.S., like the Chicago, Detroit and Toledo, Oh. areas.
But Enbridge’s former president and CEO Pat Daniel “recognized that (those) U.S. Midwest … areas were going to saturate,” as Canadian production kept increasing, said Mark Maki, the Houstonbased president of Enbridge Energy Co. Inc.
“The U.S. Gulf coast is the most sophisticated refining complex you can find anywhere in the planet, and it has a built-in requirement for heavy oil. And that is the perfect market for Canadian oil,” he said.
The Keystone XL delays prompted Enbridge to accelerate the planned expansion of its own oil pipelines, he said. In 2012, it reversed the Seaway pipeline, built to carry Texas crude to the U.S. Midwest, and completed its expansion late last year, adding enouch capacity to move 850,000 barrels a day from Cushing to Freeport.
Further north, Enbridge built the Flanagan system (585,000 barrels a day) and the Spearhead system (193,000 barrels a day) from Flanagan, Ill., to Cushing. And the company says it is looking at further expansion to serve the Gulf.
Most likely, Maki said, it will add horsepower to increase flow on its Flanagan and Seaway systems. It is also looking at expanding pipeline capacity in the eastern side of the Gulf of Mexico, in the refining complex along the Mississippi and Louisiana corridor.
Before the word “Keystone” became shorthand for the fractious political battle over fossil fuels and global warming, TransCanada had secured a licence to build its “base” Keystone pipeline from Hardisty, Alta. to Steele City, Nebraska. Since 2010, that pipeline has been unassumingly carrying half-a-million barrels a day of oilsands oil to the U.S. Midwest.
Keystone XL was meant to be the next phase in the pipeline’s development, an expansion to roughly double the base capacity. But while the cross-border leg of KXL has been stuck in Washington’s political mire, TransCanada went ahead and built the southern part, Marketlink, that didn’t require a State Department review or presidential permit, since it doesn’t cross an international boundary. When completed, the Houston Lateral portion will be able to transport up to 700,000 barrels a day and offer ample storage capacity.
Meanwhile, both TransCanada and Enbridge are strengthening their local presence in Texas. TransCanada employs 568 people in its Houston office, up from 342 in 2008. Enbridge has a staff of 700 in Houston. Enbridge also has large operations in Cushing, where it has a big piece of the largest U.S. oil storage hub.
Mike Moeller, director of mid-continent assets at Enbridge, has a choice view of the growing movement of Canadian heavy oil to the Gulf.
Much of it passes through Cushing, where he is based, and where Enbridge owns a quarter of overall storage capacity – more than 20 million barrels stored in 88 tanks out of 80 million barrels overall.
Enbridge expanded the business in the last decade, more than doubling capacity, in anticipation of the growing flow of Canadian heavy oil production into the U.S. market, including refineries in the Gulf.
The hub, a trading point for West Texas Intermediate NYMEX contracts, is watched closely by world oil traders to assess the levels of U.S. oil kept in inventory.
For a fee, Enbridge offers storage, blending of different types of crudes, and connections to various refiners for a variety of market players, including traders hoping to capitalize on today’s low-price oil by storing it until prices recover.
The oil comes in on a dozen inbound pipelines and leaves on a dozen outbound pipelines. The completion of pipelines such as Flanagan South from the north, and the Seaway system heading south, significantly increased Canadian oil traffic in recent months, Moeller said.
“The Enbridge system does bring in some Bakken (tight oil from the Williston basin in and around North Dakota), but predominantly Canadian crude,” he said. “And then the Enbridge system, in conjunction with the Seaway pipeline, takes a lot of Canadian crude to the Gulf.”
The Canadian influx has contributed to the build-up of oil in storage over the past four months compared to the previous 18, he said. It has also strengthened the integration between the multiple facets of the Canadian and U.S. energy industries.
Still, the same frustration and disappointment many Canadians feel about the endless KXL debacle is being felt across the Gulf region. Here, it has taken on added symbolism of the inadequacy of the U.S.’s regulatory environment to accommodate the construction of the energy infrastructure required to take full advantage of the North American energy renaissance.
It fuels the sector’s frustration with Obama, who’s seen as indifferent to the energy-security gains enabled by innovation, or to the huge layoffs and investment cuts caused by the collapse in oil prices prompted by the price war launched last November by Saudi Arabia. Meanwhile, the State Department’s fixation on improving relations with Iran — a competing oil producer — rushing to settle a controversial nuclear deal, is seen as just another reason for the continuing indecision over Keystone, after six-and-a-half years of review.
The latest irritant is his lack of action on a 40-year ban on U.S. oil exports, implemented when the country was heavily dependent on imports. The industry urgently wants the ban lifted to allow surging production to serve global oil markets rather than piling up in storage tanks, depressing domestic prices.
Much as Canadian producers watched helplessly as lack of pipeline capacity in the past depressed Canadian oil prices, American producers are now seething that the ban is keeping them from realizing global prices.
“At a time when U.S. government is considering lifting sanctions on Iranian crude oil exports, it’s high time to give the green light to U.S. crude oil exports,” John Hess, CEO of Hess Corp., a leading independent energy exploration and production company, said at the IHS CERAWeek conference in Houston last week. “OPEC producers’ actions are squeezing U.S. producers out of business. Our crude oil here is trapped with no relief in sight.”
Jack Gerard, president of the Washington-based American Petroleum Institute, remains hopeful that a decision will come once Kerry is able to turn his full attention to the Canadian pipeline, and that it will be a positive one.
But he is also convinced that nothing will stand in the way of Canada’s heavy oil flowing into the U.S. Gulf — not even a denial of KXL.
KXL would be more efficient, better for the environment, and more cost effective, he said. But much as it has done so far, the market will sort itself out.
“There will be alternative routes to get it to the Gulf Coast,” he said, such as proposed pipelines to the East Coast and West Coast of Canada that could feed oil to tankers that could circle the continent and reach the Gulf from the south.
“In the U.S., we have a world classrefining sector,” Gerard adds. “That is where the product is going to find its way. It’s just a question of how costly, and how we get it there.”