TransCanada Corp. started moving crude on its Gulf Coast Pipeline, opening up a pathway for more Canadian oil to reach U.S. refineries.
The Gulf Coast line, also known as the southern leg of the controversial Keystone XL pipeline, was initially flowing at 288,000 barrels a day and transporting entirely U.S. light, sweet oil to Nederland, Texas, from Cushing, Oklahoma. It will ramp up over the course of the year toward its 700,000-barrel capacity and carry more heavy crude from Canadian oil sands formations, executives said in a press conference at the company’s headquarters in Calgary.
“Refiners couldn’t access lower-cost domestic production and were forced to pay a premium to ship crude from foreign suppliers,” TransCanada Chief Executive Russ Girling said. “The Gulf Coast project will change that.”
The $2.3 billion (C$2.55 billion) Gulf Coast line was split apart from the larger Keystone XL project in 2012 after the U.S. rejected TransCanada’s initial application because of concern over an environmentally sensitive area in Nebraska. While Keystone XL is debated, the section from Oklahoma to Texas will help prevent a glut of oil from building in Cushing, the U.S. supply hub, and feed less-expensive oil to the Gulf Coast, home to about half of U.S. refining capacity.
West Texas Intermediate crude, the U.S. benchmark, rose $1.76 to $96.73 a barrel, its highest price this year. Its discount to international marker Brent narrowed 22 cents to $11.54, based on March futures contracts traded on the New York Mercantile Exchange and ICE Futures Europe.
As the line ramps up, it will transport more Canadian oil, Girling said. Once Keystone XL is built, the combined system would probably ship from 500,000 barrels to 700,000 barrels a day of heavy crude from Canada’s oil sands region to the Gulf Coast, Girling said.
Girling objected to the statements of environmental groups and Canadian rock legend Neil Young that oil transported on TransCanada’s lines to the Gulf Coast would end up in China.
“Not a chance,” Girling said. “This oil will be refined by U.S. refineries on the Gulf Coast.”
Any re-export of Canadian crude from the Gulf Coast wouldn’t make economic sense until Canadian oil replaces the roughly 4.5 million barrels a day of overseas imports currently arriving in the U.S., Girling said.
Girling said he still expects the U.S. State Department to release its final environmental impact statement on the Keystone XL pipeline “within weeks.” A 90-day public comment period is expected to precede a final decision, and Girling has said it will take about two years to build the pipeline after it’s approved.
Environmental groups and some U.S. lawmakers oppose the Keystone XL system because they say it will facilitate the growth of more carbon-intense heavy oil production in Canada, and increase the risk of pipeline spills.
Canada’s oil-sands production made up only a small fraction of one percent of global emissions, and that the extra safety measures put into the Gulf Coast project and Keystone XL will make them the safest pipelines ever built in North America, Girling said.
TransCanada was initially approached by U.S. and Canadian companies in 2007 following the nationalization by the Venezuelan government of heavy-oil operations owned by companies including Exxon Mobil Corp. and ConocoPhillips, Girling said. The goal of Keystone XL was to connect Canada’s growing heavy oil production to the U.S., where refineries were configured to process similar heavy grades from Mexico and Venezuela.
The Gulf Coast pipeline should begin to shrink the wide discount to global benchmarks that Canadian producers get for their oil at the same time as reducing costs for refineries that now rely on more expensive crudes imported from overseas, according to Girling.
It’s “a win-win-win, where producers get a higher price, refineries pay a lower price, and potentially consumers get a better deal at the pump,” Girling said. “The winners are North Americans and the losers are international suppliers.”
Western Canadian Select, a benchmark for the country’s heavy oil output, was $18 a barrel below WTI today, according to data compiled by Bloomberg. The discount has narrowed by $5 this month before the pipeline’s start.
Canada is the largest supplier of crude to the U.S., with oil-sands-derived oil from Alberta making up the largest and fastest-growing share of those imports. Canadian oil-sands production grew by an estimated 10.5 percent last year to 1.99 million barrels a day, according to the Canadian Association of Petroleum Producers.
The Gulf Coast pipeline, which is projected to average 520,000 barrels a day during its first year, will be expandable to 830,000 barrels. Construction of a lateral line extending the system from Nederland to Houston-area refineries, is under way and will start up this year, Alex Pourbaix, president of energy and oil pipelines at TransCanada, said at the conference.