With its huge capacity to refine heavy oil, the U.S. Gulf Coast is nirvana for Canadian oil sands producers, and the Keystone XL pipeline represents the most direct means of achieving it. The lure is such that oil sands producers such as Suncor Energy Corp. prefer to ship their expanded production to the U.S. refiners that can handle the raw bitumen rather than invest $11.6-billion in additional processing capacity to upgrade it into synthetic crude. For both Suncor and Lyondell, Keystone is a pipeline to profits.
Lyondell is already refining 60,000 barrels a day of heavy oil from Cold Lake, Alta., that is being carried down the Seaway pipeline, which was reopened in January. The line once carried crude from the Gulf Coast to Cushing, Okla., but Enbridge Inc. and Enterprise Products Partners have reversed the flow. Once the refinery maintenance is completed, the plant will be able to efficiently process 175,000 barrels a day of supply from the oil sands for both the U.S. and the fast-growing export markets.
In an industry bedevilled by rapidly changing fortunes, many U.S. refiners are now sitting in a sweet spot. Despite weak U.S. gasoline demand, they are reaping the benefits of highly efficient operations, low-priced North America crude and rock-bottom natural gas costs to expand their share of a market that extends to eastern North America, South America and Europe.
“Over all, the U.S. refining industry is really looking up,” Roger Ihne, a Houston-based energy consultant with Deloitte & Touche, said in an interview. “With the North American energy renaissance that is occurring, it really bodes well for our industry, and specifically refining,” he said.
But for the heavy-oil refiners of the Gulf Coast, something is still missing.
The pipeline system hasn’t kept up with changes in supply and demand for oil, meaning the Texas and Louisiana facilities that are so well-suited to processing Canadian bitumen can’t get their hands on enough of the stuff. And so they’re paying top dollar for competing Venezuelan and Mexican heavy crude. A barrel of Mexican Mayan sold recently on the Gulf Coast for $100 (U.S.) a barrel, while comparable Canadian crude was fetching about $70 a barrel, a discount that reflects the inability of Alberta producers to reach that key market.
The Canadian companies are desperate to extend their access to the Gulf Coast in order to reduce the glut of oil sands crude in the U.S.’s mid-continental market and thereby drive up the price they receive for their oil. Saturated markets and pipeline logjams have caused the steep price discounts, depriving the Alberta and federal government of billions of dollars in royalties and tax revenue.
Industry executives believe increasing volumes of Canadian heavy crude will reach the Gulf Coast, though they question in what quantity and at what price.
TransCanada is already building the southern leg of the Keystone XL pipeline that will bring Canadian and American crude from Cushing, Okla., currently the southern terminus of its network. Enbridge Inc. is proposing to upgrade an existing pipeline system to bring an additional 800,000 barrels a day of Canadian bitumen to the market, while industry analysts say another 400,000 barrels a day could be shipped by rail and barge.
Valero Energy Corp., of San Antonio, Tex., expects its five, coker-equipped Gulf Coast refineries to be big customers for the diluted bitumen from the Keystone XL pipeline and other new transportation sources. Its heavy-oil suppliers in South America and Mexico are failing to maintain production, even as Valero expects to increase refined-product exports to Europe and South America.
U.S. exports of refined products have soared in recent years, from one million barrels a day in 2006 to three million last year, according Washington’s Energy Information Administration. And that growth is expected to continue.
“To have your refineries that are already complex and built to handle this stuff run as efficiently and profitably as possible, you want adequate supplies of heavy oil and so that’s why Valero has supported the Keystone XL pipeline,” company spokesman Bill Day said in an interview.
Keystone opponents contend it is essentially an export project for Canadian producers and Gulf Coast refiners, and will add little to U.S. energy security or American jobs, a view echoed this week by Ms. Pelosi. The critics point to Valero’s export-oriented growth plan as proof.