Is Keystone Still Alive??
Maurice B Dusseault, PhD, PEng WISE Member
Studying the USA Gulf Coast refineries explains something quite simple that probably helps to drive continued interest in the Keystone Pipeline. The Texas Gulf Coast refineries are very good at processing heavy oil. They are currently “undersupplied” with heavy crude because of rapid depletion of the Mexican heavy oil reservoirs and chaos in Venezuela. In the case of Mexico, unexpectedly rapid loss of pressure and solution gas drive in their heavy oil reservoirs has led to a precipitous drop in oil production and thus exports to the Gulf Coast refineries (see figure). In Venezuela, populist policies and many strange decisions have handcuffed the heavy oil industry, and more and more of the production goes to China, India, and other countries, and not as much to the US Gulf Coast refineries. Venezuela and Mexico, along with Trinidad and Tobago, a few other heavy oil sources and some Canadian crude, helped keep the US Gulf Coast refineries supplied for decades, but the last 10 years have seen a radical shift away from Mexico and Venezuela toward Canada. As their main profit source, the US Gulf Coast refineries traditionally supply a significant part of the eastern seaboard of the USA (Florida to New York), which is under-equipped in terms of refinery capacity to meet local needs. Mexico ceased to be a significant oil exporter some time ago and the country is in rapid economic growth mode, meaning a growing demand for products (gasoline, diesel, jet, lubricants, asphalt…), supplied in large part by the Gulf Coast refineries.
This situation is clear evidence that the interest in a Keystone type project is by no means dead, merely dormant, and although a lot of Canadian bitumen has found alternative routes (other smaller pipelines, rail, barge down the Mississippi…), there is no doubt that a large pipeline would be environmentally safer overall, as well as cheaper per barrel.
Because the US Gulf Coast refineries are already configured to process significant fractions of heavy oil, and re-configuration is expensive and a lengthy (and financially risky) process, the Gulf Coast US refineries want more Canadian heavy crude. Of course, they like it best at a large discount so as to maximize their profits as they process it into products themselves, and also to allow for growth to meet
the rising Mexican demand (market share) for products. Good business model. If they cannot meet the Mexican needs because of a deficiency of crude, other countries will of course gladly step in and provide crude oil (Canada is not in a privileged position in this highly fungible commodity market). But not from Canada, as we do not have the products streams (gasoline, jet…) to ship, except from the Irving Refinery in New Brunswick, which has a limited capacity, and ships into the New England market only. Mexico has increasing demand and insufficient refining capacity to meet it, hence the US refineries’ excitement and desire for stable Canadian crude oil provision.
Note also that Irving in Saint John would very much like to have the Energy East pipeline go ahead to get access to more western Canadian oil (see the article by Claudia Cattaneo, who emphasizes the hypocrisy associated with this issue http://business.financialpost.com/news/energy/as-politicians-gloat-about-climate-leadership-saudi-arabias-oil-is-dumped-in-canada ). If Irving had secure sources of western Canadian heavy crude, they would likely invest in the technology to process this material, and gradually displace foreign crude sources over a period of 10-15 years. Remember that Canada still imports, to the Maritimes and through the St Lawrence Estuary, over 600,000 barrels per day of crude oil from interesting countries such as Saudi Arabia, Nigeria, Algeria… That is 30 million dollars a day.
So, in the US Gulf Coast, they want more (cheap) Canadian oil because they are equipped to handle more heavy crude than they currently do, and they definitely do not want it processed whatsoever in Canada. Also, as long as there are no other significant exports of heavy oil and bitumen to countries other than the USA, Canada remains a price taker. The US refineries and the US sector of the industry will, of course, oppose any moves to change that situation, and are definitely not supporters of the other proposed pipelines in Canada to export oil. It is likely a minimum of four years to get heavy oil to tidewater in Canada through the TransMountain Project expansion, if it goes ahead.
Mr Trudeau said this week (Dec 17-22) that he supports the possible rebirth of Keystone.
Mr Trump may nevertheless want “more” from Canada to revive Keystone… He wants a “deal that is better for the US”. It is hard to think of any deal that could be better than the one that is emerging.
Stay tuned, 2017 will be an interesting year.