Tuesday, February 14, 2012

The background to the Keystone XL pipeline debacle

President Obama's decision last month to veto the extension of the Keystone XL pipeline, intended to carry Canadian crude oil to refineries in Oklahoma and Texas, has attracted fierce criticism. However, the reasons why the pipeline was so important haven't been discussed at great length - there's been too much politics involved.

That's why I was pleased to find a clear, detailed discussion of the issues involved in the latest Casey Daily Dispatch. Here's an excerpt.

The problem is very basic: demand is exceeding supply. But that balance doesn't refer to oil – it describes North America's pipeline capacity. There are already more than a million kilometers of oil and gas pipelines crisscrossing the United States alone, and they count among the safest in the world. But the geographic distribution of oil production on the continent is shifting, creating the need for specific new pipelines to connect booming oil hot spots with refineries thirsty for crude.

The top three oil states in the US have long been Texas, Alaska, and California. Texas has produced a roughly a million barrels of oil per day (bpd) for a decade (it produced more before that); Alaska used to pump a million bpd but now kicks out about 600,000; and California's production has dwindled from 900,000 bpd ten years ago to 550,000 bpd today.However, while production in the top three states stagnates or dwindles, there's a new player on the team.

That player is North Dakota, where oil production increased 42% during 2011 to surpass half a million barrels a day near the end of the year. Put another way, oil production in the state has increased anywhere from 8,000 to 40,000 barrels a day every month since June. Over the last two years, output has doubled.

North Dakota's oil boom is great news for the US. Half a million barrels a day is equivalent to America's imports from Algeria and is more than top-fifteen suppliers Iraq, Angola, Ecuador, and Brazil. It is almost as much oil as the US currently imports from Russia. The point of these comparisons is that North Dakota's oil boom is enabling the US to move away from some of its riskier, less-reliable suppliers in favor of good old domestic production.

The only downside is that North Dakota's oil is now in direct competition with crude from the Canadian oil sands for pipeline space. Crude oil is not particularly useful until it is refined, and the center of North America's refining universe is the Gulf Coast. The 45 refineries along the Coast process more than eight million barrels of oil per day, accounting for almost half of America's refining capacity.

Those refineries have lots of capacity available to process all this new, North American crude. The issue is getting it there.

As North Dakota's oil production climbed, so did production in western Canada, growing by 7% last year. Both markets now feed into the refineries and oil storage tanks in the US Midwest, a processing district centered on the city of Cushing, Oklahoma. Pipelines running from Canada and North Dakota into Cushing are already jammed, so much so that many producers are using rail to move their product to market. Moving oil by rail is always significantly more expensive than moving it through a pipeline, so the fact that producers are relying on rail is a sure sign that pipeline capacity is maxed out.

There's more at the link, along with an explanation of the differential between prices for different kinds of crude oil. Very interesting information, which helps to explain why pump prices are doing their yo-yo thing right now. Thanks to Casey Research for a very useful analysis.



Anonymous said...

One grievance the anti-Keystoners have is that they feel US taxpayers are getting screwed in the deal - the excess Gulf Coast refinery capacity was created by $10B investement with a 'special' accelerated depreciation deal that lets the companies pay lower taxes. Further, they note that the refined product will largely be sold into the overseas market, and will be exempted from most US taxes in the process.
They neglect to understand that diesel & jet fuel are fungible commodities, and that the worldwide supply and demand drives US prices - if we don't refine new oil and export, we may well export what we already refine, and drive prices up to match the global market.
They also neglect to understand that oil refining and marketing companies (or those subsidiaries of integrated oil companies) are not very profitable. One of the main players in the Keystone project is Valero, a pure refining and marketing company: it has underperformed the stock market forever, except for a brief period, it returns only 4% profit on revenues, it has only a 6 P/E; this venture wouldn't stand much more taxation & is hardly 'profiteering'.

Anonymous said...

Then there is also ol' Warren Buffet's railroad investments which would have lost carriage business to a new pipeline.

trailbee said...

I get the impression that the second portion, Let the oil flow, was written at a different date. It sounded as though O was going to approve the pipeline, which he did not.
This is an interesting report. Thanks for the post.