February 29, 2012
Keystone moving forward
In a development that should not have come as a surprise to Econbrowser readers, TransCanada announced on Monday that it would proceed with the portion of the controversial Keystone pipeline expansion that would connect Cushing, Oklahoma to the Gulf of Mexico. Because this part of the project does not cross the U.S.-Canadian border, it does not require approval from the U.S. State Department.
The Wall Street Journal reports that the 435-mile segment could carry 700,000 barrels/day from Cushing down to the coast, and the company expects that segment of the pipeline to be in service by mid to late 2013. This would be in addition to the 400,000 barrels/day that Enbridge is hoping to send from Cushing to the coast through the Seaway Pipeline by the first quarter of next year, with 150,000 of that already flowing by the middle of this year. Even so, the Wall Street Journal reports:
Even the Gulf Coast leg and Enbridge's project may not be enough to relieve the bottleneck at Cushing. Alex Pourbaix, president of TransCanada's oil-pipelines division, said he believes at least two million barrels a day of oil will need to flow between Cushing and the Gulf Coast over the next decade to relieve the bottleneck there.
Confirmation of that assessment comes from the observation that, despite the news, the price of a January 2014 Brent futures contract is still selling at a $7 premium to Jan 2014 West Texas Intermediate.
TransCanada separately reported that it is also reapplying for permission to construct the rest of the original Keystone expansion, and the company seems hopeful that the objections to the original proposal have been resolved:
TransCanada will continue to work collaboratively with the State of Nebraska on determining an alternative route for Keystone XL that avoids the Sandhills. TransCanada has been working on assessing the routing in Nebraska since November 2011, following the State Department's notice to delay a decision on a Presidential Permit until an adjusted route that avoids the Sandhills was developed....
Reapplying for the Keystone XL permit is supported by words used in President Obama's statement January 18, 2012 when he said the denial of the permit was not based on the merits of the pipeline but rather on an imposed 60-day legislative timeline to make a decision on the project.
Perhaps more importantly, the White House appears to be on the same page:
TransCanada gave the State Department advance notice of its intention to submit a new application for the cross-border segment of the Keystone XL pipeline, from Canada to Steele City, Nebraska, once a route through Nebraska has been identified. House Republicans forced a rejection of the company's earlier application in January, by not allowing sufficient time for important review or even the identification of a complete pipeline route. But as we made clear, the President's decision in January in no way prejudged future applications. We will ensure any project receives the important assessment it deserves, and will base a decision to provide a permit on the completion of that review.
But even if the Canada-to-Steele-City segment continues to be blocked by regulatory delay, the Cushing-to-Texas segment alone can provide an important boost to the U.S. economy. The company expects the $2.3 billion project to provide employment for 4,000 people, and there are significant gains from constructing an efficient way to transport oil to where it is most economically valuable. Again quoting from the White House press release:
The President welcomes today's news that TransCanada plans to build a pipeline to bring crude oil from Cushing, Oklahoma, to the Gulf of Mexico. As the President made clear in January, we support the company's interest in proceeding with this project, which will help address the bottleneck of oil in Cushing that has resulted in large part from increased domestic oil production, currently at an eight year high. Moving oil from the Midwest to the world-class, state-of-the-art refineries on the Gulf Coast will modernize our infrastructure, create jobs, and encourage American energy production.
Who am I to argue with the President?
Posted by James Hamilton at February 29, 2012 08:15 AMdigg this | reddit
Note that Bloomberg shows that current global spot crude oil prices, excluding WTI, range from $120 to $135.
Light Louisiana Sweet, which tends to be the median global crude oil price, is at about $124:
Posted by: Jeffrey J. Brown at February 29, 2012 08:34 AM
It is amazing to me that the White House is blaming Republicans for Obama rejecting the pipeline. These plans have been in the president's hands since 2010 and the environmental studies go back to 2009. Rejecting this deal to pander to special interest groups is not what this country needs. We need shovel ready jobs now. A foreign company offering to bring in literally billions of dollars is the type of stimulus we need now. Only a fool would pass up this opportunity. I guarantee if a Canadian company wanted to build a high speed train along the exact same route the president would have fast tracked the deal back in 2010 and the thing would be half built today.
Posted by: J-So at February 29, 2012 08:47 AM
I'm pretty ignorant of such things: could anyone explain to me why foreign firms like TransCanada are going to build and operate economically important US infrastructure? Do they know more about the technology of oil pipelines than US firms? Do they have easier access to capital these days than US firms? Do they care less about the regulatory/environmental/financial risk of such projects? I can't believe they're better informed about US investment opportunities than US firms....so what is it?
Posted by: Simon van Norden at February 29, 2012 10:01 AM
So the fact that Sino owns Transcanada alarms nobody? Or that the new Panama Canal is due to come on line in the next 5 years? The next big whoosing soound you hear will be all of our crude being sucked out of here on it's way to China. More economically viable that way.
Posted by: dickeylee at February 29, 2012 11:27 AM
Your earlier post was an uncharacteristic overreaction. The President was pretty consistent in saying that re-routing the pipeline would be a reasonable solution, he was only rejecting the proposal because the House forced him to approve or reject while they were considering other routes, and both sides were happy with a plan to resubmit the proposal with a different route.
Posted by: KJMClark at February 29, 2012 11:40 AM
TransCanada is one of the major pipeline companies in North America. Historically, US natural gas moves from the Gulf of Mexico area or from the west of Canada towards the East Coast. So there are major sets of pipelines taking gas southeast from Canada and northeast from the Gulf. TransCanada is the key pipeline company on the northern (Canadian) route.
North America (Canada + US) is a largely integrated market in terms of oil and gas. For example, US companies have interests in the oil sands. Shell obtains 2.5% of its global production from Alberta.
It is not more unusual, I think, for TransCanada to build a US pipe than for US oil companies to operate in Canada. It's business. However, TransCanada's lead in the Keystone XL project probably originates in the need of Canada's oil sands producers to find a high value outlet for their growing production. It's a Canadian initiative, hence TransCanada's lead.
Posted by: Steven Kopits at February 29, 2012 01:06 PM
There is very likely an understanding that the full pipeline will be built and that building this segment is an act of good faith.
Not sure how profitable the Cushing segment will be for TransCanada, but it is obvious that the key money maker is being able to move Canadian oil to refineries.
None of this undoes the fact that the original pipeline should already be finished.
Posted by: aaron at February 29, 2012 01:21 PM
"The next big whoosing soound you hear will be all of our crude being sucked out of here on it's way to China. More economically viable that way."
Regarding "our oil," I assume that you do realize that about 60% of the crude oil process in US refineries is imported?
Posted by: Jeffrey J. Brown at February 29, 2012 01:39 PM
The Obama administration is already backtracking on its rejection of the Keystone pipeline. TransCanada has stepped around them and they have to get back in the game in order to not look like total fools.
Expect an announcement from the Obama administration post haste allowing the pipeline to be built and then attempting to take credit for TransCanada's move around them. This was a bone-headed political mistake and Obama cannot afford to have it still an issue when people vote in November.
Posted by: Ricardo at February 29, 2012 02:55 PM
What KJMClark said. I would only add that Obama may be a bit of a slow learner when it comes to negotiating with Republicans whose primary aim is to see him defeated in November, but eventually Obama caught on. Foot dragging served two purposes. First, it put pressure on TransCanada to reconsider rerouting the pipeline around environmentally sensitive watershed areas. Up until Obama took a "get tough" attitude TransCanada resisted calls to reroute the pipeline. The second purpose served by foot dragging was that it allowed Obama to keep a winning bargaining chip in his hand. Why give up a valuable asset without extracting any concessions from the "Republican'ts"?
Posted by: 2slugbaits at February 29, 2012 02:59 PM
Steve Kopits: Thanks for your reply. I saw nothing odd about Transcanada trying to get Canada oil (which they transport) to more valuable markets. But Jim's post pointed out the economic gains from just building a pipeline from Cushing to the Gulf. I shake the feeling that there's a $100 bill lying on the ground in OK and no American to pick it up.
Posted by: Simon van Norden at February 29, 2012 03:13 PM
2sb, the environmental risks were determined to be minimal 3 years ago.
You argument makes less than no sense. All 'Bama did was make sure that markets would be inefficient and prices would remain high for at least three extra years.
Posted by: aaron at March 1, 2012 06:24 AM
2sb, other than using it as a polical tool, that part makes tremendous sense.
Posted by: aaron at March 1, 2012 06:26 AM
Excellent related post from John Kingston over at Platts:
Posted by: Steven Kopits at March 1, 2012 08:58 AM
Stephen Kopits: Shell is not an American company.
Integrated market indeed. Much of US domestic supply is controlled by international firms and sold at market prices to refiners operated by international firms. And we are going to be continually outbid by people in Asia for "our" oil.
Also, take note of the Chinese moving strongly into Canadian tar sands. Kind of feels like being on the losing end of a game of Risk.
Oh, but the jobs. So many jobs. Yeah, that's it.
Posted by: Robert Hurst at March 1, 2012 09:00 AM
These pipelines will increase the cost of gas for those in the north and have minimal effect on the price of gas for those in the south. On the other hand, it will create billions in new profits for northern oil producers. Why should consumers be in favor of something that transfers more of their money to oil producers? It is a net loss for consumers.
Posted by: Joseph at March 1, 2012 09:53 AM
I do not understand why people are concerned about foreigners making long term capital investments in the US? If they put their money into a fixed asset and the global economy goes sour, that asset is still here. It will still benefit the US economy. So, what is the problem that I am missing?
Posted by: JLR at March 1, 2012 10:00 AM
From bloomberg.com today: Keystone Oil Pipeline May Raise U.S. Gas Prices
Pasted: “The Canadian plan was to use their market power to raise prices in the United States (UNG) and get more money from consumers,” Philip Verleger, founder of Colorado-based energy consulting firm PK Verleger LLC, said in an interview. Prices may gain 10 to 20 cents in central states, he said.
Cheap energy remains popular. Nasty exploitive Canadians. Where are the Chavistas when you need them?
Posted by: westslope at March 1, 2012 10:45 AM
Some people see partisan politics in everything. Many Republican Nebraska officials, including the govenor, and Senator Johanns were opposed to the original route, the one rejected by the adminstration.
Seems as if the Canada to Cushing will ultimately be approved in adequate time to do any good, since there is a bottle neck at Cushing that won't even be completely eleviated by the Cushing to Gulf portion that their moving forward on. The Canada to Cushing portion will do nothing to help that bottle neck.
Posted by: jwg at March 1, 2012 12:28 PM
aaron, The State department's determination that the environmental impact would be minimal was controversial amoung fair-minded observors. Notice the opposition to the initial route from the Republican Govenor and Republican U.S. Senator from Nebraska.
Posted by: jwg at March 1, 2012 01:20 PM
Kinder Morgan Canada bought and operates the TransCanada pipeline that takes Alberta oil, often upgraded synthetic crude oil made from bitumen, and delivers it to small tankers in the Burrard Inlet of Greater Vancouver on the Pacific Coast.
Kinder Morgan Canada is US owned. It appears to be an extremely well-run company. But I doubt that Kinder Morgan possesses the savoir faire to stick handle an expansion of the TransCanada pipeline and the proposed dredging of Burrard Inlet to accommodate larger tankers. Though frankly, I'm not convinced that a Canadian-owned pipeline operator would do much better.
The pipeline business involves an incredible amount of careful community relations. Canadian companies may have a comparative advantage in this area. I can't say for sure.
Funny to think that pipelines used to be such a boring capital-intensive business. For those of you who have been downing generous helpings of anti-pipeline propaganda, ask yourself, what would you rather do, live by a rail road carrying freight trains of 150+ cars, where much of the cargo is either highly flammable or extremely toxic on the one hand, or live by a quiet underground pipeline that experiences fewer accidents than other type of transportation mode in North America?
Posted by: westslope at March 1, 2012 01:32 PM
aaron the environmental risks were determined to be minimal 3 years ago
Determined by whom? The Bush/Cheney folks? Excuse me if I'm skeptical. Trust but verify.
ricardo The Obama administration is already backtracking on its rejection of the Keystone pipeline. TransCanada has stepped around them and they have to get back in the game in order to not look like total fools.
If that's your understanding of the dynamic here, then I hope you hadn't planned a second career in politics because you have a tin ear. Obama got what he wanted. He wanted a rerouted pipeline and a bargaining chip for dealing with the GOP. TransCanada wanted the original route and eventually caved and agreed to rerouting after they recognized they were holding a losing hand.
westslope what would you rather do, live by a rail road carrying freight trains of 150+ cars, where much of the cargo is either highly flammable or extremely toxic on the one hand, or live by a quiet underground pipeline that experiences fewer accidents than other type of transportation mode in North America?
Pipeline accidents happen all the time; they just don't get a lot of media attention. And not all "accidents" are accidents. People were worried about accidents happening at the water table level and contaminating an aquifer that supplied most of the fresh water for people living between the Mississippi River and the Rocky Mountains. Rerouting the pipeline dramatically reduced the social cost at very little private cost. TransCanada's complaint was that they had to absorb all of the private cost.
Posted by: 2slugbaits at March 1, 2012 02:43 PM
Jospeh: "It is a net loss for consumers."
The crack spread is the gross profit per barrel between what a refinery pays for a barrel of crude oil and what they get from selling the refined products. This morning, the price spread between Brent and WTI crude oils is $17.
Here are the Bloomberg charts for WTI and Brent crack spreads. If you click on the five year option, you get an idea of historical trends:
WTI crack spread (currently $30):
Brent crack spread (currently $13):
Note that the difference between the two crack spreads is also $17.
In other words, Mid-continent refiners are paying WTI crude oil prices, but basically charging Brent based prices for refined product.
Mid-continent product prices are lower than the East and West Coasts, but you also have to consider factors like taxes and regional requirements for specific gasoline blends. However, the crack spread data speaks for itself.
In any cases, the only real winners from the current spread between WTI and global crude oil prices are the Mid-continent refiners, who are doing quite well.
Posted by: Jeffrey J. Brown at March 2, 2012 05:35 AM
Incidentally, there are only two net oil exporters in the entire Western Hemisphere that have shown increasing net oil exports in recent years, Canada & Colombia, but the combined net oil exports from the seven major net oil exporters* in the Americas and the Caribbean fell from 6.2 mbpd in 2004 to 4.8 mbpd in 2010, a 23% decline in only six years.
Mid-continent refiners are providing a billion dollar per month incentive for Canadian producers to take their oil elsewhere.
*Venezuela, Mexico, Canada, Colombia, Argentina, Ecuador, Trinidad & Tobago (BP data, 100,000 bpd or more of net exports, total petroleum liquids, in 2004)
Posted by: Jeffrey J. Brown at March 2, 2012 06:16 AM
You are, of course, correct. Shell is Anglo-Dutch. But I like to think of them as true-blue American. In the oil patch, I think Shell is considered de facto American. Total is French, Statoil is Norwegian. BP is British. But I'm not aware that anyone thinks of Shell as particularly British or Dutch.
Notwithstanding, I might have noted that Devon, Murphy and Koch also have oil sands interests. I believe they're all US based.
Posted by: Steven Kopits at March 2, 2012 06:19 AM
No worries. A WSJ columnist suggests that US natural resources are not "limited." (Emphasis added)
Gingrich's Energy Charge
"For decades the nation has deadlocked over America's supposedly limited natural resources, fighting over whether high gas prices made it worth touching, say, the supposedly pristine Alaskan wilderness. It's been a debate in the context of scarcity.
"Mr. Gingrich's savvy has been to grasp that this is over, done, passé. America is embarking on a seismic energy shift. A decade of technological advances—from 3-D mapping, to fracking, to horizontal drilling—has turned this country into a resources monster in oil and gas and coal. The old, tired GOP argument is that we need to drill for energy security. The new, rebooted argument is that America is primed to become the largest energy producer in the world, with all the money, jobs and benefits that come with it."
Posted by: Jeffrey J. Brown at March 2, 2012 06:52 AM
Steven wrote: "But I'm not aware that anyone thinks of Shell as particularly British or Dutch."
I'm guessing you would find a few over at the company's headquarters in the Hague.
I guess their propaganda has been pretty effective.
Posted by: Robert Hurst at March 2, 2012 08:23 AM
Jeffrey J. Brown: "In other words, Mid-continent refiners are paying WTI crude oil prices, but basically charging Brent based prices for refined product."
If refiners are reaping huge windfalls and are not passing on savings to customers, this suggests effectively a monopoly or at the very least a market with inadequate competition for refiners.
Posted by: Anonymous at March 2, 2012 10:17 AM
Yes, no doubt Shell CEO Peter Voser has some notion of Shell as an Anglo-Dutch company.
However, I visit with any number of companies in the oil exploration, production and services businesses. And some of these have very characteristic cultures. Aker, for example, is very Norwegian. Even its headquarters in Houston is Euro. (Frankly, almost everything Norwegian is very Norwegian, come to think of it.)
Some companies are very American (even Texan). Williams or Murphy feels that way.
But visit Schlumberger in Sugar Land outside Houston, and you could forgive yourself for thinking you're in Silicon Valley. Lots of casually dressed, multi-ethnic engineers milling around a low-slung, blue-roofed campus. It has no particular national feeling at all.
Shell is a true global corporate--and I mean that as a compliment. It has many people of many nationalities working together in many places in the world. Consider its projects: GTL in Qatar, FLNG in Australia, leading holdings in Alaska, big aquisition in Halifax of gas fields. In terms of large scale technology projects, Shell is the leader. Nobody else has projects like that. It's a great company.
Posted by: Steven Kopits at March 2, 2012 11:41 AM
2slugbaits: Apologies if my out-of-context post confused you. But then on the other hand, you should avoid reading into my comments what is clearly not there.
I am exceptionally aware of pipeline accidents because I lived by one a few years ago and because I monitor sabotage of pipelines in Colombia and Nigeria on a regular basis.
As you apparently lack quantitative analysis skills, please note that I am arguing that pipelines are less damaging than other modes of transport. I did not argue that pipeline cause no damage.
I have no issue with the re-routing of the Keystone XL pipeline extension. Pipelines create right of ways that in a world shaped by widely-held open-access ideology can in of themselves create problems for the natural environment and, where still applicable, aboriginal peoples.
But frankly I am unfamiliar with that part of Nebraska where lies the controversial aquifer. Is the area empty of low density monster houses, shopping centres, industrial lots and heavily-subsidized, polluting farming? Or is this another case of temporary environmental damage being viewed as socially unacceptable while permanent damage is viewed as most socially acceptable?
The president and CEO of TransCanada is a fool for a bunch of reasons, primarily because he thought he could "win" this one by appealing to the lowest common denominator of xenophobic and uninformed American citizens.
Posted by: westslope at March 2, 2012 04:04 PM
JLR: In case you (or anyone) thought I was xenophobic, I should probably explain that I'm Canadian. When I see TransCanada building pipe from Cushing to the Gulf that no one else has wanted to, I'm wondering whether there's something about the economics of this project that Jim (and I and the other readers of this blog) are missing. Do other firms view the price differentials as too temporary to make the return on pipeline investment attractive? (Beats me.....like I said, this is really not my expertise.)
Posted by: Anonymous at March 2, 2012 05:31 PM
Anonymous: "If refiners are reaping huge windfalls and are not passing on savings to customers . . . "
In any case, given the very high WTI crack spreads, what this means is that Americans are effectively paying global crude oil prices virtually everywhere in the country.
Posted by: Jeffrey J. Brown at March 3, 2012 01:08 AM
westslope please note that I am arguing that pipelines are less damaging than other modes of transport. I did not argue that pipeline cause no damage.
Where did I say that you claimed pipelines cause no damage? I said "Pipeline accidents happen all the time; they just don't get a lot of media attention." But my central concern was that not all "accidents" are accidents. As you yourself just said, sabotage happens. It's not a problem in the US, but it is a problem in other parts of the globe. Blowing up pipelines is something global terrorists like to do. To date it hasn't been a problem here because the production function economics of terrorism just don't work here for pipelines. But running a pipeline across the Ogallala aquifer could change the cost/reward calculus. It would be an attractive and essentially indefensible target.
I am unfamiliar with that part of Nebraska where lies the controversial aquifer
The proposed pipeline runs right through the heart of the aquifer, as you can see on this map:
The problem could be easily avoided by just rerouting the pipeline around the heart of the aquifer. But that would have cost TransCanada some extra bucks and they thought they could use their political influence to pass the social costs onto the taxpayer. Remember, they first proposed the pipeline back when Bush/Cheney were in charge.
Posted by: 2slugbaits at March 3, 2012 05:44 AM
Steven Kopits wrote:"Shell is a true global corporate--and I mean that as a compliment. It has many people of many nationalities working together in many places in the world. Consider its projects: GTL in Qatar, FLNG in Australia, leading holdings in Alaska, big aquisition in Halifax of gas fields. In terms of large scale technology projects, Shell is the leader. Nobody else has projects like that. It's a great company."
Wow, you really like Royal Dutch Shell a lot.
One 'large scale technology project' Shell's been interested in is the Colorado "oil shale," aka kerogen. Royal Dutch Shell has been steadily angling to get US taxpayer assistance to develop a very low, or even negative, net energy resource with huge negative consequences to the local environment. Trying to cook Colorado kerogen into oil will be detrimental to all parties except Royal Dutch Shell. So that is not what a great company does.
Posted by: Robert Hurst at March 3, 2012 10:40 AM
What I would like to see happening is the manuafacturing of a brand new oil refinery close to the Canadian line to produce and sell those products in the United States! Why spend money on researching what this big pipeline might do to a hugh section of our country if something goes wrong? Let alone the target aspect such a pipeline would create for terrorists. The idea of piping that oil all the way to the Gulf Coast to sell overseas seems ludicrous! If Shell is an American company, why couldn't they invest money to build refinerys that will create long-lasting jobs in America? They could then sell the product to Americans! Would this not make more sense in the long run? We talk a lot about becoming less dependent on foreign oil -- seems to me nobody is doing anything about it.
Posted by: Sherry at March 9, 2012 09:47 AM
I think Sherry has the brightest idea of the lot by building new refineries close to the Canadian border. These could be modern and very efficient and provided permanent jobs for people as well as providing finished product that could be delivered in a multitude of different means. What is truly lacking in this world today is "common sense" it generally can solve a problem the easiest way. Tom Dunlap
Posted by: Tom Dunlap at March 21, 2012 09:32 PM