Keystone delay causing tremors among big oil, benefiting small refiners


Keystone Pipeline travels through North Dakota, South Dakota and NebraskaThe US State Department's decision to delay TransCanada Corp.'s expansion of its Keystone pipeline system sparked quick concern in the North American energy industry. The pipeline is critical for companies that have invested billions of dollars in expanding the production capacity of Canada's oil sands and refurbishing US refineries to handle heavy crude.

The State Department said Thursday it will postpone until after the 2012 election a decision on the Keystone expansion as it explores a rerouting that will avoid environmentally sensitive areas in Nebraska. Previously, a final decision was expected by the end of 2011, and TransCanada aimed to have the pipeline ready in 2012.

The move would delay completion of the project by a year and a half, according to the American Petroleum Institute (API).

Vocal supporters of the pipeline expansion, dubbed XL, include companies like Valero Energy Corp. (VLO) and ConocoPhillips (COP). Both companies are eager to have access to vast amounts of cheap, heavy Canadian crude for their US Gulf Coast refineries, which currently buy heavy oil from Venezuela and Mexico.

Houston-based Conoco, one of the original proponents of the Keystone pipeline system, has major investments in Alberta's oil sands. Exxon Mobil Corp. (XOM), the world's largest publicly traded oil company and a big oil-sands producer, has also been a big pusher for the pipeline's approval, saying it would ease access to Canada's massive resources.

The Keystone expansion would double the amount of oil-sands crude that TransCanada ships to the US to 1 million bpd, but environmentalists and officials have opposed it, alleging that exploiting Canada's oil sands produce more greenhouse gases than other types of crude and the corrosive nature of oil-sands crude could result in more spills. The oil industry says the pipeline is safe and will create thousands of jobs.

"Any delay in opening the Keystone XL pipeline extension is unfortunate for our nation," said Valero Chief Executive Bill Klesse, who in a statement called the US government's move "short-sighted."

"The administration's decision will actually increase greenhouse gas emissions because without this project, oil will be transported further and by more carbon-intensive means. Valero continues to support the Keystone XL pipeline project, and we feel [the pipeline] makes too much sense not to approve," Klesse said.

The American Petroleum Institute said the project has been under review for three years already, and that further delays could jeopardize it.

But the delay is also likely to benefit refiners, such as Western Refining Inc. (WNR) and HollyFrontier Corp. (HFC), which have been making a killing due to their access to a glut of cheap crude in the U.S. midcontinent.

The supply had been piling up earlier this year due to a lack of pipeline capacity to bring it out to the Gulf Coast.

Analysts say that Keystone XL, in addition to bringing an additional 500,000 bpd of Canadian crude, would also help eliminate the glut by transporting 150,000 bbl of light, sweet crude from Cushing, Okla., to Texas refineries.

Excess supply in Cushing is keeping the barrel of U.S. benchmark West Texas Intermediate crude about $16 cheaper than a barrel of European benchmark Brent.

The delay "extends the amount of time midcontinent refiners will be making money hand over fist," said Sarah Emerson, an energy analyst with consultancy ESAI Inc.

TransCanada's direct competitors are likely to benefit, too. Enterprise Products Partners (EPD) and Enbridge (ENB) have a joint venture to build the 500-mile Wrangler pipeline, connecting Cushing to Houston by mid-2013.

There also has been talk of reversing the flow of the Seaway pipeline, a conduit owned by Conoco and Enterprise Products that brings 350,000 bpd from the Gulf into Oklahoma.

"Frankly, it increases the chance of Wrangler happening and increases the chance of Seaway being reversed," said Brad Olsen, an analyst at Tudor, Pickering Holt & Co.

Oil markets are unlikely to see any near-term impacts from the decision, but that it would result in a continuation of the currently depressed prices for WTI, said Tom Bentz, director at BNP Paribas Commodity Futures in New York. "I don't really see that as a big impact right now," he said.

Fadel Gheit, an analyst with Oppenheimer & Co., says that the State Department's demurral is just delaying "the inevitable," as access to Alberta, one of the richest oil basins in the world, is key to both national security and the US economy.

Dow Jones Newswires

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