TransCanada Corp. has signed up enough customers to proceed with its 150,000 barrel-per-day pipeline from Oklahoma to the Gulf Coast, a project that will help end a bottleneck weighing on benchmark North American crude prices.
The $70-million (U.S.) Cushing-Marketlink spur is part of TransCanada's controversial Keystone XL pipeline project that would connect Alberta oil sands producers with the massive Gulf Coast refining hub.
The company said Wednesday it has come to terms with enough U.S. producers to justify the new line, which would take two years to build and deliver crude from Cushing, Okla., to Port Arthur, near the Louisiana border.
Cushing is now the market hub for many U.S. producers as well as growing volumes of Canadian crude; those deliveries are set to soar when TransCanada finishes its initial Keystone pipeline project.
Already, the increased supply and weak U.S. demand has created a glut at Cushing, where West Texas Intermediate - the benchmark North American crude - is priced. As a result, WTI is trading at a steep discount to foreign crudes and even some U.S. grades that are refined on the Gulf Coast.
In trading Wednesday, West Texas Intermediate closed at $87.33 (U.S.) per barrel, while North Sea Brent closed at $97.91 in London.
TransCanada chief executive Russ Girling said the Keystone XL pipeline, along with the Cushing-Marketlink spur, will eventually help relieve that pressure and reduce the discount being paid on West Texas Intermediate.
Canadian crude producers also face price discounts as a result of increased supplies in their traditional Midwest market. TransCanada says the Keystone XL pipeline would also boost Canadian prices by giving suppliers access to the Gulf Coast market, though they would be competing there with Venezuelan and Middle East producers.
"Producers are looking for an outlet to get their crude from that landlocked, bottlenecked point to where the larger refining market is, which is Texas and Louisiana," Mr. Girling said in an interview.
"So it is very strategic for those parties."
TransCanada is now planning a three-legged extension Keystone project: one that will deliver Alberta crude to the Gulf Coast near Houston, one that will deliver crude from Cushing to Port Arthur and one that will deliver crude from the Bakken play in the U.S. to the Gulf Coast.
The entire project hinges on the U.S. State Department granting a permit for TransCanada to build the international pipeline, a process which was delayed when the U.S. Environmental Protection Agency and the U.S. Department of Energy questioned the need for the pipeline and its potentially adverse impacts.
Mr. Girling said he expects to receive the final permit by the end of the summer.
Environmental groups opposing TransCanada's plan have seized on the company's claim that the XL pipeline would boost demand for Canadian crudes, while allowing WTI spreads to narrow.
In a filing with the National Energy Board, the company estimated that revenues to Canadian companies would grow by as much as $3.9-billion per year.
"TransCanada admits Keystone XL will drive up oil prices in the United States," said Ryan Salmon, energy policy adviser at the National Wildlife Federation, one of the groups seeking to block the company's permit application.
"If we're talking about raising the prices of not only Canadian oil but oil produced in the United States, that is something the State Department ought to be really concerned about."
But Mr. Girling said the pipeline would increase the supply of oil into the United States - with a potential capacity of some 950,000 barrels per day - and would keep overall prices lower, even as it reduced the discounts being paid on specific crude sources.
"If we're going to move another one million barrels of more supply into the United States, in a market that consumes about 15 million barrels per day, that would likely have a downward pressure on prices," he said.
"All things being equal, I would think the U.S. would benefit from the increased supply and the increased reliability of supply."