Canadian Crude Safe for Keystone Pipeline

Brian Hicks

Written By Brian Hicks

Posted June 27, 2013

President Obama is running out of reasons to deny Keystone XL.

A report by the National Research Council, a wing of the National Academy of Sciences, revealed tar sands coming from Alberta are safe to transport through Keystone XL.

pipeline obamaThe report showed that bitumen, the commodity that will be transported through Keystone XL, is no more different than other forms of crude. And producers would not have to handle bitumen differentially than traditional crude.

This comes as a blow to environmental groups who claimed bitumen’s corrosiveness would pose internal damage to the pipeline itself, causing major leaks. Bitumen is known for its molasses-like composition, but it flows smoothly when mixed in with lighter oils. Diluted bitumen has been transported from western Canada into the U.S. for over 30 years.

Another report by the State Department found Keystone XL would not contribute to climate change in a major way, since the crude would have already been developed and is merely being transported.

Secretary of State John Kerry may ultimately hold the keys to XL approval, since President Obama said he would base his decision on Kerry’s advice and findings from the State Department. Unlike his predecessor Hillary Clinton, Kerry is more of a hardliner when it comes to climate change policy, but it would be hard for him to ignore research data compiled by his own department.

No one knows where Kerry and Obama will fall on the decision, but horizons are looking brighter, and there is plenty at stake for both countries.

Keystone XL’s added value to local economies through jobs, revenue, and production are reasons why virtually every governor who will host Keystone XL construction supports the project. And American companies in Keystone XL states will get to use the pipeline.

Keystone XL Value

Aside from environmental critics, there are other observers who believe Keystone XL would mostly benefit Canada and TransCanada (NYSE: TRP), the operator behind Keystone XL. But the U.S. has just as much riding on Keystone XL as its northern neighbor.

Drillers in the Bakken need an extra supply route to keep up with surging production. And Keystone XL would benefit Cushing, Oklahoma, a city that has long suffered from bottlenecking. Keystone XL would not only alleviate some of the oil gluts, but it could be a factor in WTI and Brent benchmarks narrowing on the energy market.

Keystone XL would interweave both nations in a mutually beneficial manner, especially as both nations press on as major oil producers in the world market.

U.S. production has already reduced OPEC imports, and the nation is on course to becoming completely independent of Saudi Arabian crude by 2035, according to projections by the International Energy Agency.

Canada is already a major crude exporting nation outside of OPEC, and the U.S. is on fast track to becoming a crude-exporting nation within its own right. Some may find the IEA’s data to be an overly rosy projection, but the U.S. gaining OPEC independence is more likely to happen with vital infrastructure like Keystone XL.

The rail industry would play a greater role if Keystone XL is denied, and regardless of the project, crude production will keep going. But crude operations in the U.S. and Canada would become more efficient with a national pipeline.

For years, Canadian and U.S. suppliers have been pushing pipeline capacity as crude production increases in both nations. Canadian crude output is expected to double by 2030, going from 3.2 million barrels per day currently to 6.7 mbpd in the next few decades, according to an estimate from the Canadian Association of Petroleum Producers.

On Canada’s end, there have been vast backlogs – forcing marketers to sell at discounts. And with Enbridge’s (NYSE: ENB) Northern Gateway pipeline undergoing its own oppositional setbacks, Canadians desperately need a source to funnel out emerging crude.

More refiners have upgraded their plants to accept light crude in the U.S., but many refineries in the Gulf Coast are still retrofitted to refine heavier grade crude from Saudi Arabia and Canada. It would be a cheaper option for refineries to bring in crude from Canada over OPEC.

U.S. refineries that chose to hold out for thick crude could pay off well if Keystone XL comes to fruition.


Profiting from Keystone XL

Companies in energy, construction, and refining will all benefit in some capacity.

One major company to benefit will be TransCanada’s partner in the pipeline’s construction, Quanta Services Inc. (NYSE: PWR). And construction company John Deere (NYSE: DE) is banking on it for heavy use of its equipment and thousands of jobs in the construction industry, expressing support for Keystone XL.

Production companies will also have a lot to gain, including Canadian Natural Resources Ltd. (NYSE: CNQ), which has interests in the Athabasca region of Alberta where the tar sands are located. Southern Pacific Resource Corp. (TSX: STP) and BlackPearl Resources Inc. (TSX: PXX) are smaller Canadian companies that would get a much needed boost.

Foreign interests in Canadian tar sands include Chevron (NYSE: CVX), Royal Dutch Shell (NYSE: RDS-A), and Koch Industries, through its subsidiary Koch Gateway Pipeline. EnSys Energy has consulted with BP (NYSE: BP), Koch Industries, and other major energy companies regarding tar sands facilities in the Midwest.

And even ExxonMobil (NYSE: XOM) has a dog in this fight through Imperial Oil (NYSE: IMO), a subsidiary of Exxon that has developments in Canadian oil sands. Marathon Oil (NYSE: MRO) is also heavily invested in Alberta sands and processes crude in its Detroit refineries.

Valero (NYSE: VLO) has refineries in the Gulf Coast and has been a vocal supporter of Keystone XL. Foreign refiner LyondellBasell NV (NYSE: LYB) of the Netherlands has one of the largest Gulf Coast refining centers in the world and is banking on cheaper crude coming from Canada instead of OPEC.

Phillips 66 (NYSE: PSX) has placed heavy investment in rail and coastal transportation to California, believing a decision on Keystone XL would not happen this year, but CEO Greg Garland is still holding out hope for its ultimate approval. CEO of ConocoPhillips (NYSE: COP) Ryan Lance has also given a thumbs up to Keystone XL in the press.


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