It's unclear where oil piped through Keystone XL might end up - Omaha.com
Published Tuesday, November 12, 2013 at 1:00 am / Updated at 4:55 pm
It's unclear where oil piped through Keystone XL might end up

LINCOLN — The proposed Keystone XL pipeline has prompted massive speculation over what would happen to the oil TransCanada Corp. seeks to move to the Gulf Coast.

Given that the United States imports about 8 million barrels a day, it seems logical to conclude that the 730,000 barrels of Canadian oil transported daily by the pipeline would displace crude from countries such as Venezuela and Saudi Arabia.

Such a scenario may have played out five years ago, when the pipeline was proposed, but today, America is in the midst of a domestic oil boom. The United States now exports millions of barrels of petroleum products such as gasoline, diesel and jet fuel.

So it appears likely that at least some of the oil delivered by the controversial pipeline would end up on the world market as well.

Critics argue that the United States shouldn't take on the pipeline's environmental risks for oil that won't strengthen the nation's energy security. Keystone XL supporters maintain that most if not all of the Canadian crude would reduce reliance on nations that don't share America's interests.

What would ultimately happen to the oil remains speculative because the Canadian project is still seeking approval from President Barack Obama. The president's decision isn't expected until next year.

Understanding what would become of the Canadian oil imports must be seen in the broader context of domestic energy trends. As one industry observer put it: “It's all about the economics.”

Over the past five years, the economics of American oil have done nothing but gush.

Thanks mostly to horizontal drilling and hydraulic fracturing — commonly called fracking — crude production has exploded in North Dakota, Montana, Texas, Oklahoma and other states. Fracking has freed up oil from shale reserves that previously couldn't be pumped.

In 2008, American crude oil production averaged about 5 million barrels per day, the lowest level since 1946, according to the U.S. Energy Information Administration. In recent months, crude production has been hitting a little more than 8 million barrels a day.

The International Energy Agency has predicted that the United States will replace Saudi Arabia as the world's largest producer of crude oil by 2020.

Nonetheless, as the Energy Information Administration says: “It is unlikely that domestic crude oil will completely supplant imports.” In large part, that's because the United States consumes 18.5 million barrels per day. So even though America produces significantly more oil, it's still not enough.

Government energy analysts predict that the United States will continue to import millions of barrels of oil daily for at least the next two decades.

But even as production soars, demand for gasoline has declined in the United States during the slow economic recovery. Demand for gas and diesel has been stronger abroad, which is why the United States has increased exports of petroleum products.

Federal law, however, treats domestic crude oil much differently from petroleum products. Since the 1970s the government has banned exports of domestic crude — a policy that grew out of the Arab oil embargo.

The ban on crude exports does not apply to oil of foreign origin as long as the producer can show that it hasn't been blended with American crude, according to the Energy Information Administration. Thus, in theory, the Canadian oil could be loaded on tankers and exported.

So where would that leave the oil delivered by Keystone XL?

The pipeline would mostly transport diluted bitumen, which is a grade of heavy, sulfur-rich crude mined from western Canada's oil-sands region. TransCanada officials have said oil supplied by their project would displace other similar grades of heavy crude currently imported from Venezuela, Mexico, Saudi Arabia and other countries.

Shawn Howard, a company spokesman, said TransCanada has signed long-term contracts with producers and refiners to transport the oil through the 1,700-mile pipeline. The route would travel about 275 miles through Nebraska.

“None of them have said they're exporting a drop of oil,” Howard said, referring to unrefined crude. “That hasn't changed. Nobody is planning on exporting a drop of oil out of the U.S.”

But he added a disclaimer: TransCanada is the shipper. It doesn't own the product it delivers and, therefore, has no say over what ultimately happens to the oil.

Nonetheless, Howard pointed to a draft environmental analysis by the U.S. State Department that says the added cost of shipping the Canadian crude would make it unattractive for export. Howard said it makes business sense that the Canadian crude would remain in America to be refined.

Oil Change International, an anti-pipeline group, released a report recently that said the pipeline would contribute to a supply glut at U.S. Gulf Coast refineries, which would further increase pressure to send Canadian oil abroad.

The report said government-controlled companies in Venezuela, Mexico and the Middle East own several Gulf Coast refineries. Those refineries will continue to process their own oil.

“This oil is not going to be used to promote energy independence in the United States,” said David Turnbull, campaigns director for the organization.

Some in the oil industry disagree.

Anas Alhajji, chief economist with NGP Energy Capital Management in Irving, Texas, said the Canadian oil would not simply pass through the refinery region if Keystone XL is built.

“Some of that oil, if not all of it, will displace imports of crude of the same quality from Latin America and the Middle East,” he said.

After the oil is refined, some of it could be exported as various types of fuel, he agreed.

Valero Energy Corp., based in San Antonio, is one of the nation's largest refining companies. It exports about 8 percent of its gasoline and perhaps 20 percent of its diesel, said Bill Day, the company's spokesman. The rest remains in the United States.

Those percentages wouldn't suddenly change if the Keystone XL is built.

“It baffles me that anyone would be against the export of refined products,” he said. “If we were talking about cars, no one would care. If we were talking about washing machines, no one would care. But for some reason, when we're talking about petroleum products, it puts some people in a tizzy.”

Robert Bryce of Austin, Texas, has written several books on energy policy and serves as a senior fellow with the Manhattan Institute for Policy Research, a conservative economic think tank.

Bryce has long argued that U.S. independence from foreign oil is neither attainable nor desired in a global marketplace and rejects the idea that Canadian oil serves U.S. interests only if it remains on American shores.

To pipeline opponents who say Keystone XL would be an export pipeline, Bryce says: “So what?”

“This oil is going to get to market one way or another,” Bryce said. “In my view, it's much better if it comes to the U.S., where we can turn it into products and either use it ourselves or sell it.”

Contact the writer: Joe Duggan

joe.duggan@owh.com    |  

Joe works in the Lincoln bureau, where he helps cover state government, the Legislature, state Supreme Court and southeast Nebraska.

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