Keystone XL Pipeline Project cancelation: Who is the real loser?
Some argue that the sophisticated US refineries on the Gulf Coast are the real losers in President Joe Biden’s decision to cancel the Keystone XL Pipeline Project (Phase IV expansion). Since the refineries are built on processing medium and heavy sour crude grades, and given the quality problem with US shale light sweet crude, there will be a drop in Mexican and Venezuela crude oil exports.
Can US refiners survive without the controversial expansion of the pipeline?
Actually, there is already an existing Keystone XL Pipeline, which connects Hardisty, Alberta with Cushing, Oklahoma. The pipeline moves sufficient Canadian crude oil to Cushing and if the US needs more oil, it has only to look at the world supply, including Arabian Gulf sour crude grades.
If the US needs oil on the Gulf Coast, Canada could build a pipeline to the Pacific in order to have access to customers all over the world rather than to US customers only. If a pipeline were built to the Pacific, Canada would have access to customers on the US West and US Gulf coasts, in addition to access to the Asia Pacific market.
Although Canada has around 10 percent of the world’s oil reserves, 95 percent of those reserves are heavy unconventional “oil sands” located in the western province of Alberta. Due to a geographical infrastructure imbalance, the capacity of Canadian refineries, which are mostly located in the east, is about 1.9 million barrels per day. In fact, Canada imports crude oil to supply its eastern refineries.
Because Canadian refineries are located mostly in the east, they cannot benefit from the western Canadian oil sands, which are mostly exported to the US. Canada has essentially a single country border of 6,400 km with the US only.
Canada’s capacity to refine its heavy oil sands is extremely low; it has to import about 759,000 barrels per day for its refineries located in the east, far from Alberta and its sands. The country produces around 3.8 million barrels of oil per day and is the largest oil exporter to the US. It exports about 3 million barrels per day, mostly heavy oil sands from Alberta where there is no transport of Canadian oil except through pipelines.
The output from Canada’s oil sands is far beyond pipeline capacity to its US market. Two pipeline projects that could help relieve this huge supply glut are still tied up in legal proceedings. The Keystone XL Pipeline Project (Phase IV) was supposed to begin near Hardisty, Alberta, Canada and end in Steele City, Nebraska with a capacity to deliver up to 830,000 barrels per day. President Biden, however, rescinded a cross-border permit, marking the end of the road for the long-delayed 1,930 km project.
It will not hurt US Gulf Coast refiners. It will affect the Canadian oil sands that already have limited access to international markets and will suffer from an increase in cost.
While some argue that Biden’s decision will impact US energy security, that is debatable because of the pandemic, which has led some US refineries to experience bankruptcies and closures with huge restructuring plants able to process everything from light sweet West Texas oil to Canadian bitumen. There is also a need to integrate refineries with petrochemical plants.
By canceling the pipeline expansion, Biden is not only throwing a bone to his rabid environmental wing, but he is also utilizing it as the Trojan Horse for environmentalists during his term. How can environmentalists be concerned about a new pipeline when there are 200,000 miles of old hydrocarbon pipelines in the US, which should merit huge concern since they were built more than 50 years ago?
In brief, canceling the pipeline expansion project will not hurt US Gulf Coast refiners. It will, however, hurt the Canadian oil sands that already have limited access to international markets and will suffer from an increase in cost.
- Faisal Faeq is an energy and oil marketing adviser. He was formerly with OPEC and Saudi Aramco. Twitter:@faisalfaeq