Keystone Debate: Obama Rhetoric Rings Half True

President Barack Obama's sharpest criticism yet of Keystone XL this weekend included a controversial contention that the huge pipeline would be used to pump Canadian oil sands crude to global markets, not to U.S. refiners.

TransCanada Corp. (TRP), the pipeline giant that has been waiting six years for U.S. approval to build the $8 billion line, strongly denies it and says it is constructing the 1,179-mile (1,900-km) conduit only to serve import-dependant Gulf Coast refiners, weaning them away from supplies of heavy crude from Saudi Arabia and Venezuela.

The truth, experts say, lies somewhere in between.

The 830,000-barrel-per-day (bpd) pipeline helping link Canada's oil sands to the Gulf Coast was conceived six years ago to supply U.S. customers. Since then, however, the U.S. shale revolution has turned the market on its head: oil flows have been rerouted and refiners have retooled.

Canadian crude once urgently sought to reduce a growing U.S. reliance on foreign oil may now end up being a surplus commodity in a region suddenly awash in oil. Although most American shale crude is light and sweet, unlike Canada's viscous oil sands', it is already displacing heavier crudes, data show.

"Some of it will stay in Gulf, some of it will leave," said Sarah Emerson, president of Energy Security Analysis, Inc. in Boston. "I don't think anyone would have built if they thought the oil was just going to stay in the Gulf Coast, that is like bringing coal to Newcastle."

Obama's comments at the weekend emerged amid an acceleration in congressional efforts to force a final decision on Keystone XL, which requires State Department approval because it crosses an international border.

In a bid to get reelected in a tight U.S. Senate run-off race next month, Democrat Mary Landrieu of oil-dependent Louisiana has led a charge to do what Republicans have been trying for years: gain Senate approval of Keystone. A vote on Landrieu's bill that is expected late Tuesday may come up one vote shy of the 60 Senators needed to push it through.

THE EXPORT DEBATE

While reiterating that Keystone XL will be approved based on its impact on the environment, Obama also revived a line often used by the XL's loudest critics, including hedge fund billionaire-turned-activist Tom Steyer, to rebut Republican claims that rejecting it could inflate U.S. pump prices.

"Understand what this project is," Obama said last week while on a visit to Myanmar. "It is providing the ability of Canada to pump their oil, send it through our land, down to the Gulf, where it will be sold everywhere else. That doesn't have an impact on U.S. gas prices."

In January Steyer's political action committee ran a television ad saying that Keystone would funnel Canadian crude to China because they found voters responded more strongly if the oil was leaving the United States.

Later in January, TransCanada CEO Russ Girling blasted back, saying customers have told him they will "absolutely not" sell the oil abroad. "Not a chance. Not in my lifetime," he told journalists.

On Monday, a TransCanada spokesman said that it "makes no business sense for our customers to transport oil down to the U.S. Gulf Coast, pay to export it overseas but then pay to transport millions of barrels of higher-priced oil back to the U.S. refineries to create the products we rely on."

Yet, big Canadian producers who may have once assumed they would sell their oil to U.S. refiners could end up looking further abroad to get the best price, experts warn. Ultimately it is committed Keystone XL customers such as Suncor Energy (SU) and Canadian Natural Resources (CNQ) who will decide how and where to sell their crude, not TransCanada itself.

According to Michael Wojciechowski, an analyst at Wood Mackenzie, there is still ample demand for heavy crudes in the U.S. Gulf coast refining system.

"It seems a stretch to believe that a crude oil marketing group would use the Keystone XL pipeline to take about 800,000 bpd of heavy crude to the world's largest concentration of heavy coking capacity, and then bypass all that so it could put it on a ship and take it somewhere else for an additional $4 to $5," he said.

One of TransCanada's rivals, Enbridge Inc., was the first to re-export Canadian crude via the U.S. Gulf this year after it began shipping through the reversed Seaway pipeline from Oklahoma to Freeport, Texas, according to port and oil tanker data via Thomson Reuters' Eikon.

Thus far it has only sold two such cargoes to European refiners, the last in July, although shipments could rise with the doubling of Seaway's capacity next month, traders say.

There is growing evidence that the U.S. shale sector is beginning to take market share from heavier producers. U.S. refiners are either retooling in order to consume more light crude or are blending grades together.

In recent months, Canada's Come-by-Chance refinery in Newfoundland swapped out Iraqi crude, typically a medium grade, to run U.S. shale oil instead, Reuters reported.

Imports to the U.S. Gulf have also begun to slide. Until late last year, Gulf Coast imports from the five largest heavy crude suppliers (Iraq, Kuwait, Saudi Arabia, Venezuela and Mexico) had been holding relatively steady at just above 3 million bpd, U.S. data show. In June and August, however, they dropped to almost 2.6 million bpd, the lowest since 1995.

A growing share of those imports are now going to refiners owned or part-owned by foreign suppliers, such as Saudi Arabia's Motiva venture, or Mexican PEMEX's half-owned 327,000-bpd Deer Park plant. Those contracts are likely to be hard to displace, since many such producers want to maintain a geographically diverse slate of customers.

Ultimately the question of exports may come down to a completely unrelated but equally contentious U.S. energy policy. Exporting domestic crude has been banned for four decades, although re-exporting foreign crude is not subject to the ban.

"The ironic argument to Obama's statements is if we licensed exports of (U.S.) light sweet crude it would open up more capacity in the U.S. refining system to use Canadian heavy crude," Guy Caruso, senior advisor to the energy program at Center for Strategic and International Studies.

"If Obama thinks it's important to keep that Canadian crude in the U.S. we should export more light sweet."

By Nia Williams and Timothy Gardner