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The LyondellBasell refinery in Houston.

The cherry-red crane looms emphatically over the grey industrial landscape of the Houston shipping channel where a refinery processes crude oil into gasoline, diesel and other petroleum products.

Dutch-owned LyondellBasell NV is using the behemoth – billed as the second-largest crane in the world at 175 metres tall – in the overhaul of one of its two cokers, a refinery unit that is critical for the processing of heavy crude like Alberta's oil sands bitumen.

Crane operators moved towering derricks off the coker so workers could replace four aging, 360,000-kilogram drums and carry out inspections and maintenance to get the unit ready for a tidal wave of diluted bitumen that is expected to reach the Gulf Coast from Canada's oil sands in a few short years, assuming proposed pipelines get built.

The 268,000-barrel-a-day Lyondell plant is one of some 50 refineries that dot the Texas and Louisiana coasts, the largest refining hub in the world. The industry here is rapidly transforming from being dependent on imported crude and challenged by foreign refiners to becoming a world-beater that processes mainly North American crude – a trend that supports employment in the oil fields, the pipeline sector and the refineries themselves.

To further reduce their reliance on higher-priced offshore crude and enhance their competitiveness, Gulf Coast refiners such as Lyondell that specialize in processing heavy crude are keen to get access to cheaper supply from Canada. And that means more oil coming through new projects like TransCanada Corp.'s Keystone XL pipeline.

"It's really important for the American worker that the [crude] costs come down, whether it's Canadian or domestic crude or whatever," Kevin Brown, senior vice-president for refining at Lyondell, said in an interview at the plant after a recent visit by Natural Resources Minister Joe Oliver. "When you think that refineries were going to close a few years ago and now we've got a feedstock advantage, if that advantage carries through, refineries around the Gulf Coast have the ability to export and protect jobs."

But the Keystone project, and indeed the future of the Gulf refining industry itself, is being bitterly contested now. Environmental advocates have been warning for ages that North America must wean itself off oil – and particularly the carbon-intensive bitumen from the oil sands – in order to head off catastrophic climate change. But the debate has taken a new turn, one that sees the pipeline's opponents seizing on another point. They argue that the economic benefits to the U.S. are minimal and the torrent of new Canadian oil won't do much to help America's energy security, since some portion of that new fuel will simply wind up on ships, bound for overseas markets.

The pipeline question has divided Democrats and Republicans in Washington, and this week Nancy Pelosi, one of Washington's leading Democrats, echoed the environmentalists' opposition, dismissing as "amazing" the claims that Keystone will bring tens of thousands of new jobs and greater energy security. "The oil is for export and the jobs are nowhere near that," she said in a press briefing after her meeting with New Democratic Party Leader Thomas Mulcair, who attacked the Conservative government's environmental record without directly opposing Keystone.

Conservative ministers – including Foreign Minister John Baird, Trade Minister Ed Fast, and Mr. Oliver – have flocked to the U.S. in recent weeks to lobby for the Keystone project, while President Barack Obama continues to weigh the decision, which is not expected before this summer.

In the cross-hairs of the debate is the Gulf Coast refining sector, as old as the automobile era itself, where people are eager to tell you that the facts belie the argument that Ms. Pelosi just made.

The lure of Lyondell

The Lyondell refinery has seen a century of ebbs and flows in the Texas energy story. The plant opened in 1918 under the Sinclair Oil banner and was later owned by Atlantic Richfield, which became Arco. It survived dramatic changes in the industry, relying first on conventional Texas light oil for feedstock. As that production began to wane, it turned in the 1990s to Latin American suppliers of heavy oil that needs extra processing. Now, it is looking to take advantage of the boom in North American supply, whether from the new light oil fields in North Dakota's Bakken and Texas's Eagle Ford, or from the expected tripling of production in the oil sands.

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.

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.

Shawn McCarthy