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The Globe and Mail

Valero cools to TransCanada's revised Keystone plan

Valero's oil refinary plant in Lima, Ohio.


A key customer of TransCanada Corp. 's planned Keystone XL pipeline has given a cool reception to its plan to pre-build the southern leg of the line, raising new challenges for the company as it attempts to jump start the long-stalled project.

Valero Energy Corp. , based in San Antonio, Texas, had committed to 20 per cent of the volumes from TransCanada's XL pipeline but said Thursday it would likely take little oil from the pre-build portion.

U.S. President Barack Obama on Thursday confirmed he has asked federal officials to quickly approve TransCanada's plan to build a pipeline from Cushing, Okla., where there is a glut of oil, to the Gulf Coast, the world's largest refining hub.

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But the company may have to take more project risk – compared with its Keystone XL business plan – to get the southern leg built.

Gulf Coast refiners who have lined up to support Keystone XL are primarily interested in securing additional volumes of heavy oil to offset declining imports from Mexico and Venezuela. Companies such as Valero and Motiva Enterprises specialize in purchasing lowered-priced heavy oil for processing in their large, complex refineries.

"Our support was the Keystone XL, the entire line, not just the southern leg," Valero spokesman Bill Day said in an interview. "We're mostly interested in getting heavy crude oil from Canada down to the Gulf Coast, where we have refineries that can process that.

"This southern leg from Cushing to the Gulf Coast will bring mostly light and sweet crude. Which helps, but is not really what Valero is after," Mr. Day said.

The $2.3-billion Gulf Coast project would travel 780 kilometres from Cushing to refineries in Texas. TransCanada believes it can begin construction by June, and have it done by mid- to late 2013. The company has now delayed its completion target for the full Keystone XL to early 2015.

For the southern market, TransCanada is competing with Enbridge Inc. and its partner, Enterprise Products Partners , which are reversing the Seaway pipeline that had flowed from Texas to Cushing, Okla. That project, which will break the Cushing logjam, is to be finished by summer.

The new southern pipelines will help existing Canadian crude exporters who are suffering price discounting because of the glut in Cushing. But the new lines will do nothing to provide greater market access for growing oil sands production, said Greg Stringham, vice-president of the Canadian Association of Petroleum Producers.

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Nor will the new pipelines help refiners who are keen to get more imports from Canada by way of Keystone XL.

"Clearly, the refiners who had committed into the Keystone XL pipeline were heavy oil refiners that were losing supplies from Venezuela and Mexico and really need access to that heavy oil," Mr. Stringham said.

Asked about shipper support on the southern leg, TransCanada spokesman James Millar said the company doesn't "need the same level of contractual support" for the southern leg as for the full project, and that there is a "cost-sharing" involved between TransCanada and shippers.

"We have enough contractual support to be satisfied that we can proceed," he said. "Valero is not the only or the majority shipper on Keystone XL."

However, Paul Lechem, an analyst with CIBC World Markets Inc., said TransCanada may be accepting "some risk" on the southern part of Keystone XL, especially if the "northern leg never gets approved."

Roger Ihne, a Houston-based refining market specialist at Deloitte & Touche, said there is plenty of demand for crude in the Gulf Coast for both Seaway and TransCanada's project.

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TransCanada has positioned the southern leg as an important first-step investment for companies that want the whole thing, a logic some oil producers have accepted.

"It's a step in the right direction," said Jessica Wilkinson, a spokeswoman with Cenovus Energy Inc. "We think it's encouraging that the president is supporting moving forward on at least a piece of this infrastructure."

Editor's Note: Enbridge Inc. and its partner are reversing the flow of a pipeline that carried oil from Texas to Cushing, Okla. Incorrect information was published in an earlier version of this story. This version has been corrected.

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