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To the dismay of proponents in Canada, the Obama administration has lately been sounding cool to Keystone XL—even cooler than it did to TransCanada Corp.’s border-hopping oil pipeline just before it got mothballed a year ago. If that’s testing nerves in Ottawa and Edmonton, it’s also stimulating the creativity of U.S. refiners. Many of them, desperate to profit from Canada’s cheap oil, are working feverishly on a Plan B. They’re making plans to load bitumen onto railcars, barges and trucks to bring it south to their processing facilities in Texas.
Even if Keystone XL is approved, the reasoning goes, it won’t be completed until at least 2015. And that’s an unlikely best-case scenario. The year started off well, with Nebraska, initially opposed to the pipeline, approving TransCanada’s new route around an ecologically sensitive area. After that, though, the signals were worrisome. Climate change, largely ignored in the electoral campaign, resurfaced in the president’s State of the Union address. Shortly thereafter, some 20,000 protesters descended onto Washington for an anti-oilsands rally. And newly appointed Secretary of State John Kerry, the man charged with accepting or rejecting TransCanada’s permit application, sounded sour on Keystone during his first tête-à-tête with Foreign Affairs Minister John Baird. Kerry also brought up environmental issues in his first public speech.
Meanwhile, pipeline bottlenecks are keeping western Canadian crude trading at roughly half the world oil price. That’s why “people are scrambling to get that oil to market,” says Craig Pirrong, professor of finance at the University of Houston. In Canada, trains and trucks offer a way to limit losses, but in the U.S., they’re about refiners hunting for a bargain.
“You get out your sharp pencils and compare the price,” says Pirrong. The discount on western Canadian oil is more than enough to compensate for the higher cost of unconventional transport. Take trains, for example: it costs an additional $5 to $10 per barrel over the $7 to $8 toll a pipeline would charge, according to various estimates, but that’s far less than the current discount on our oil.
That’s why Valero Energy Corp., the largest independent U.S. refiner, is planning to own 9,000 new rail cars by year end to bring in crude from Canada and the U.S.’s equally clogged shale oilfields to processing facilities. Phillips 66, another leading U.S. refiner, has similar ambitions. Both companies are active in the Gulf of Mexico, where refineries largely feed on heavy oil similar to Alberta’s and have been struggling with declining imports from Venezuela and Mexico.
Rising rail traffic to the Gulf Coast should help Canadian producers, too. As more of Alberta’s crude reaches the coastal U.S., its price will rise. Still, the higher cost of transport will come off producers’ top line, such that the price differential persists.
As Valero chief operating officer Joe Gorder noted during the company’s latest earnings call, Keystone XL remains the cheapest way to get Canada’s goodies to the Gulf. That’s why, he added, “we are still fully supportive of the pipeline.”
