Keystone Pipeline Ends First Year Of Canada To Texas Delivery; Expansion on Hold

January 2015, Vol. 242, No. 1

Carol Freedenthal, Contributing Editor

TransCanada’s Keystone Pipeline has just completed a year’s service of bringing Canadian tar sand syn crude from Alberta to U.S. Gulf Coast facilities for refining and marketing. This was the third phase of the project. Bringing crude from Cushing, OK to Texas began in January 2013 and still has a lateral line to be completed that will bring crude oil from Nederland, TX to Houston-area refineries. A terminal will be completed in mid-2015 for the Houston refining.

The last phase of the total project is Keystone XL Pipeline which essentially duplicates the first phase between Hardisty, Alberta and Steel City, NE. The project is still in limbo awaiting presidential approval because this line will cross the Canada/U.S. border. The project will have a shorter route from Canada to the U.S. and have larger diameter pipe. Its proposed route would allow it to pick up crude produced in Western basins such as the Bakken formation in Montana and North Dakota that now suffer from a lack of pipeline transportation to refining and marketing centers.

The XL pipeline, as the new addition, is designed to transport 830,000 bpd from Western Canada and the Williston Basin (Bakken) areas. The go-ahead on this last phase is being held up by pressure from environmentalists who are opposed to the whole idea of developing the tar sands reserves in Canada to the transportation of the oil through the U.S. for refining and marketing. A pipeline citing law in Nebraska is is also playing a role before the final decision is made. The Nebraska ruling is expected shortly.

TransCanada initially proposed the project in February 2005. Phase 1 of the pipeline began in 2008 and was to deliver Canadian oil from Hardisty, 2,147 miles to Steele City, and then to the refinery in Wood River, IL. This was completed in June 2010.

In January 2008, ConocoPhillips made a 50% investment in the project. TransCanada became sole owner in June 2009 when it agreed to buy Conoco Phillips’ shares. The pipeline from Hardisty to Patoka, IL, Phase I, became operational in June 2010.

Next, Phase II was the extension from Steele City to Cushing, 300 miles away. This was completed in 2011. Phase III, the Gulf Coast Extension, is a 487-mile run from Cushing to refineries in the Port Arthur/Nederland, TX area and was completed in January 2014. This line has helped to alleviate the bottleneck of oil transportation out of Cushing to refining and marketing outlets in Texas. This was a problem facing Cushing for many years and definitely affected Cushing crude oil prices.

When Phase III was started, resistance began from environmentalists and landowners. Their biggest fears concerned pipeline ruptures, spills and other failures. Because the crude is derived from coal tar deposits and needs to be shipped, it requires additional solvents to be added and many were afraid of the impact of a spill from the liquid being shipped. The syn crude was assumed to be dirtier than normal crude and the lightweight hydrocarbons used as solvent could make it more flammable.

Protesters chained themselves to equipment to halt construction. They also built platforms in trees that would need to be cleared for the pipeline’s route. While these activities slowed construction, they did not stop the project. At the same time, TransCanada vowed it would make the Gulf Coast Extension the safest pipeline in the country.

TransCanada included 57 additional steps designed to increase safety. This included increasing the number of remotely controlled shutoff valves, increasing pipeline inspections, higher standards for pipeline construction, maintenance and integrity, and placing the pipe deeper in the ground.

The first two phases of the pipeline are designed to deliver 590,000 bpd of oil into Midwest refineries. Phase III is initially designed to deliver 700,000 bpd to Texas refiners with the potential to deliver up to 830,000 bpd. For the first year, planned capacity is 530,000 bpd. While data for the first year is not in yet, management feels that it has well exceeded the original plan.

Equally important, for the first year’s operation of the Gulf Coast Extension, there were no leakage or operational problems. The fears that the pipeline was a danger have not come true. Information learned from Phase III will be helpful in completing the Keystone XL segment once construction starts.

A trade group comprised of major oil companies including Anadarko Petroleum, BP, ExxonMobil and Shell Oil Co. commissioned a study on the impact that the construction of the pipeline had in the states through which its 487 miles travels in delivering oil from Cushing to the Gulf Coast. The study was prepared by the Maguire Energy Institute at Southern Methodist University in Dallas for the Consumer Energy Alliance.

The findings are interesting not only for the value of the Gulf Coast Extension but for what could be expected if and when Keystone XL is built. Some of the highlights of the study are the following:

• The project required $2.3 billion in private sector investment.
• It required employment of 4,800 people.
• TransCanada, spent $6 million each month directly with local businesses in Texas and Oklahoma.
• In Oklahoma, spending by the pipeline company boosted economic activity by $2.1 billion. In Texas, the project contributed $3.6 billion to the economy.

With the changes in Congress to where both houses are solidly Republican, there are hopes Keystone XL will get the necessary approval for construction to begin. The environmental groups have worked overtime to prevent this, mainly relying on the fears of what the increased production from the tar sands could do to the world’s climate.

They further play on the fears of a pipeline rupture or another catastrophe causing a pollution problem. Many of the fears are exaggerations, whether it is effect on climate change or spill or line rupture. Between TransCanada’s ability to do quality work in building the pipeline and the fact that the syn crude is really not very different from some of the crude already coming into the U.S., these should not be problems that block the XL pipeline.

The many advantages of getting additional oil from the northern neighbor rather than from other foreign countries with less friendly attitudes to the U.S. are appealing.

There now is more consideration to a factor that until recently has received very little attention. Crude oil prices in various markets were in the $100/B range not long ago. Slower demand and increased supply have brought world crude markets down by around 40%. Whether this will have an impact on the project’s owner is hard to evaluate at this time. Some signs of industry cutback on capital spending are becoming evident and this project could be one of those delayed until oil prices regain better pricing.

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