Valero is the largest refiner in the United States and accounts for roughly 25 per cent of the country’s exports in refined products. But Mr. Day said exports still represent a small portion of the company’s total output – about 8 per cent of gasoline production and 15 per cent of diesel. While the refiner expects to expand product exports, it also counts on grabbing a larger share of U.S. product market share, especially in eastern North America from older, less efficient domestic refineries and from imports.
“The idea that all of that is just going to get turned into products for export markets is ridiculous,” he said. “That is not going to happen. The vast majority of the products made at the refineries on the Gulf Coast stay in the United States for domestic use.”
The Canadian strategy has long been aimed at replacing offshore suppliers of heavy crude. With the use of hydraulic fracturing, production of light crude is booming from shale oil plays in North Dakota, Texas and elsewhere, and the U.S. Gulf Coast is no longer importing light crude oil. As pipeline connections and expanded rail capacity bring in more crude from the U.S. Bakken and Canada, the region will be even less dependent on offshore sources.
The Texas and Louisiana refining sector can process more than seven million barrels a day of crude, including roughly three million barrels of daily capacity for heavy crude. Until just a few years ago, Venezuela, Mexico and Ecuador were supplying all the heavy crude the refiners needed, but the Latin American producers have seen production plummet, and their exports to the U.S. have fallen to around 1.8 million barrels today from three million barrels a day in 2008.
Much of the Gulf Coast capacity to process heavy oil was built in the 1990s, in partnership with Latin American state-owned companies such as Petroleos de Venezuela SA (PDVSA) and Petroleos Mexicanos (Pemex).
The Lyondell refinery is a case in point.
In 1993, Lyondell entered into a joint venture with PDVSA’s subsidiary, Citgo, in which the Venezuelans guaranteed supply, and the two partners invested in the cokers needed to process PDVSA’s heavy crude.
In 2009, the refinery was still running on a full diet of Venezuelan crude. But PDVSA then began underperforming, and the partnership was ended in 2011. By last year, the South American producer provided only 50 per cent of Lyondell‘s heavy oil needs, and it was finding the other 50 per cent on the open market.
Alfred Luaces, a downstream analyst with IHS Inc. in Houston, says there is little chance that either Mexico or Venezuela will reverse the slide in supply to the Gulf Coast, even with the death of Venezuelan President Hugo Chavez who milked the national oil company to finance popular social programs and failed to reinvest in its productive capacity.
And their problems will keep a window of opportunity open for the Canadian producers, assuming Keystone – or a pipeline like it – can be built.
Who wins if TransCanada loses on Keystone XL
Mexico’s Pemex and Venezuela’s PDVSA: While their volumes into the Gulf Coast have declined, the two Latin American producers are still among the top sources of heavy crude. Less competition from Canadian oil sands will mean higher prices to them.
Railways: Companies such as Burlington Northern and Santa Fe Railway, owned by Warren Buffett’s Berkshire Hathaway, and Canadian National Railway have dramatically expanded their oil-carrying capacity. Lack of pipelines into the Gulf Coast will increase the use of rail, at higher costs to producers.
Enbridge Inc.: Defeat of Keystone XL will stiffen Ottawa’s resolve to push through Enbridge’s Northern Gateway pipeline in B.C. Enbridge is also promoting a plan to bring 800,000 barrels a day to the Gulf Coast through pipeline expansions and reversal.
U.S. Midwest refiners: Currently the dominant export market for Canadian bitumen, they will enjoy prolonged price discounts if KXL gets blocked. BP is installing a 225-000-barrel-a-day unit to process bitumen at Whiting, Ind., with completion set for 2014.
Environmental activists: A victory will embolden activists in opposing other pipelines from the oil sands.