Keystone pipeline, not a simple political picture

[Lsbcal]

I used to think this thing was probably about environmentalists vs oilmen or maybe donkeys vs elephants (so to speak). But this Business Week article seems to indicate it's a lot about different foreign interests (Canada, Mexico, even Venezuela) and domestic US interests. And then there are oil exploration interests vs refiners. Some quotes for this Keystone Pipeline's Gulf Coast Leg Will Soon Be Delivering Oil - Businessweek

The completion of Keystone’s southern leg while its northern one remains in limbo is a big win for independent U.S. oil producers, many of which were against the idea of importing cheaper heavy Canadian crude ...

U.S. oil producers are hoping that by relieving the glut of crude built up in Cushing’s tanks over the past two years and delivering more oil to the Gulf Coast market, Keystone’s southern leg will help raise the price of domestic light, sweet crude tied to the benchmark West Texas Intermediate futures contract.

While that’s good for U.S. producers, Gulf Coast refiners are less excited. They can process Cushing’s light sweet oil, but they’ve also spent plenty to process heavy sour crude from Mexico and Venezuela. With production down in those two countries, “what we really want is the heavy Canadian crude making it down to the Gulf Coast,” ...

Seems a confusing picture to me.

 

[REWahoo]

Prediction: Porky will show up within 24 hours...

 

[haha]

And then there are oil exploration interests vs refiners. Some quotes for this Keystone Pipeline's Gulf Coast Leg Will Soon Be Delivering Oil - Businessweek


Seems a confusing picture to me.

Those heavy crudes sell at a discount to light sweet. So once a refiner has made the investment to be able to process heavy crude, he needs that cheaper, heavy crude to amortize his investment.

Ha

 

[haha]

Prediction: Porky will show up within 24 hours...

Right, we have again foolishly strayed away from a pure concentration on important topics like cats.

Ha

 

[clifp]

Right, we have again foolishly strayed away a pure concentration on cats.

Ha

Hopefully not. This was important article for somebody like myself who has numerous investment in pipeline companies, midstream processor, and storage facilities.

For the most part I've bought these MLPs and regular S corp companies on the basis of their financial and distribution yields. Unfortunately, my understanding of their business is limited to a very superficial level. "They build pipelines that carry gas and oil to refineries and such, they get paid by the volume shipped."

So I am always thankful to articles which help educate me on the realities of the business, which certainly includes politics.

 

[bld999]

Cats as in catalytic? I can just imagine the sweat, time and capital it would take to re rig a refinery to take oil it wasn't designed for.

 

[REWahoo]

Right, we have again foolishly strayed away a pure concentration on cats.

Ha

Right, we have again foolishly strayed away from a pure concentration on important topics like cats.

Ha

Is there an echo in here?

My point, if you missed it, concerns the fact that some will not be able to resist getting into a political cat fight on this thread.

 

[steelyman]

Is there an echo in here?

Right, lighten up and remember that pets can be important to retirees (I have none).

 

[Lsbcal]

Is there an echo in here?

My point, if you missed it, concerns the fact that some will not be able to resist getting into a political cat fight on this thread.

Although "political" was in the title, I do not want this to go off the deep end into politics of the "push my hot button" sort.

We can stick to the interesting regional and international picture in energy economics without getting off into the muddy ditch of hot button politics ... I hope.

I'm just interested in this from an educational perspective. I don't have specific energy investments although I'm sure my sector weighting in the energy industry is up there.

 

[Gumby]

It is always interesting to know the economic incentives of the various players.

 

[travelover]

It is always interesting to know the economic incentives of the various players.

Yea, like when Al Capone lined up with the prohibitionists...........

 

[haha]

Is there an echo in here?

My point, if you missed it, concerns the fact that some will not be able to resist getting into a political cat fight on this thread.

And it all ties together.

Ha

 

[Walt34]

Cats as in catalytic? I can just imagine the sweat, time and capital it would take to re rig a refinery to take oil it wasn't designed for.

Hoo boy, now you've done it. Forget politics, the cat lovers will be all over you for that one.

 

[pb4uski]

U.S. oil producers are hoping that by relieving the glut of crude built up in Cushing’s tanks over the past two years and delivering more oil to the Gulf Coast market, Keystone’s southern leg will help raise the price of domestic light, sweet crude tied to the benchmark West Texas Intermediate futures contract.

I don't understand this part. As I understand this southern leg will increase the supply of domestic light, sweet crude to Gulf coast refineries. If the supply of domestic light, sweet crude available to the Gulf coast refiners increase, wouldn't prices for it decrease rather than increase?

 

[FinanceDude]

Prediction: Porky will show up within 24 hours...

Porky is busy monitoring the ACA thread...........

 

[2B]

I don't understand this part. As I understand this southern leg will increase the supply of domestic light, sweet crude to Gulf coast refineries. If the supply of domestic light, sweet crude available to the Gulf coast refiners increase, wouldn't prices for it decrease rather than increase?

There are really two different markets. That's why the price for light, sweet crude in Cushing is less than the price of light, sweet crude on the Gulf Coast. The easiest was to think about it is to compare the cost of US light, sweet crude with Brent. The price of Brent crude really drives the price in Europe and on the US East Coast.

Without the southern leg, oil produced in the US interior may not have access to the Gulf Coast. The price is limited by the demand of refineries located in their region of production. Getting it to the GC refineries would have it compete directly with the lighter versions of crude from South America, Mexico and the Mid-East. This will put it into a different market where they believe that the price will go up. This will also cause the price to go up to the refineries currently using this crude. Many of these refineries are economically challenged and may not survive a significant increase in crude prices.

Fracking has greatly increased the production of US light sweet crude. All refineries have evolved to an optimized crude mix. Without getting too technical, think of it as the amount of heavy crude that it can handle. Up until fracking, there was a shortage of light crudes and discounts for heavy crudes made it economical to install coker units that allowed greater amounts of heavy crudes to be processed. A refinery can't just switch from their optimum mix of heavy/light crude without taking a production rate penalty. The Gulf Coast refineries would like the whole Keystone Pipeline so they could get access to the very heavy Canadian crudes to give more competition to the currently available heavy crudes.

Ultimately, more access to all crudes would lead to lower gasoline and jet fuel prices. From that standpoint, it seems like approving the Keystone Pipeline would be a no-brainer.

But it's never that simple. Some people just want higher energy prices to hasten conversion to alternate fuels. I won't go there because it is purely politcal.

There are people that make money off the market inefficiencies. I've already mentioned the refineries in the interior. There are also northern mid-west refineries that are currently getting Canadian crude that would probably have to pay more if the crude could be sold in the Gulf Coast. There is also a good bit of money currently being made by Warren Buffett's railroad hauling Canadian crude now. They don't have the capacity to haul all of the Canadian crude and the railroad also costs much more than a pipeline.

I think I've successfully summarized things without going political.

 

[NW-Bound]

Canada has lots of shale oil it wants to sell to us. We need oil. Seems like a win-win situation. Of course the problem is these leaky pipelines, which some people say will threaten their water supply.

Not being in the industry, I do not know why the problem is so tough to prevent. As usual, there might be a lot more than a layman like myself understand. While some propose to use evacuated tubes to transport people, others have problems keeping oil inside pipes. There's got to be more to it than I know.

 

[aja8888]

I don't understand this part. As I understand this southern leg will increase the supply of domestic light, sweet crude to Gulf coast refineries. If the supply of domestic light, sweet crude available to the Gulf coast refiners increase, wouldn't prices for it decrease rather than increase?

Very possible, and difficult to predict future pricing based on the crude slates of several refiners, but several gulf coast refineries are built to handle heavy crude oil so increasing light crude supply may not be a big cost savings in the big scheme of things.

From a supply standpoint, realize that a good chunk of imported Mexican crude delivered via pipeline to the Gulf refineries for processing is sent back to Mexico in the form of refined diesel and gasoline products. This is because the three refineries in Mexico operated by PEMEX have been in rough operating shape and have not been upgraded as demand increased. (long story there of nationalization in the 1940's or thereabouts). PDVESA crude from Venezuela is delivered (or traded) to their refinery in Lake Charles, La for distribution into the U.S. retail market also. The Gulf receives crude oil from many sources so its difficult to predict future pricing of any refined product.

Also, the new north-south line is really going to relieve the crude oil distribution bottleneck in the Cushing, Wyoming, terminal owned and operated by Enbridge Pipeline Company (a Canadian company). Cushing is a very large distribution terminal that historically was built to move western and southern produced crude oil north to midwest refiners. Over the years that slowed down and Cushing's strategic location set up for the reversal of that crude flow as Canadian and now Bakken supplies are needed south of Illinois. The pipeline (Spearhead line) from Chicago to Cushing was reversed a few years ago to send Canadian crude to Cushing, thus helped create a bottleneck because of oversupply into Cushing.

Motiva's Port Arthur refinery (formally Texaco) was upgraded two years ago to produce an additional ~800,000 barrels per day of middle distillates (fuel oil, diesel) and much of that is exported to Europe where the prices are high and the margins are great for the producers.

It's possible that the Keystone crude will replace some of the Mexican crude and other imported supplies that come into the Houston Ship Channel. Also, Eagle Ford shale crude from south Texas is arriving into gulf refineries for processing. Most of this is shipped in by rail (no big pipelines yet).

So the retail pricing picture can be clouded depending on U.S. demand for gasoline and diesel, seasonal product demand cycles, natural gas use increases, but not so much crude supplies to the Gulf refineries since things have gotten a lot better from a crude oil production standpoint.

In summary, there are a lot of factors that currently influence retail refined products pricing in the U.S., and the supply of sweet or sour crude oil is only one of them.

 

[Texas Proud]

Just a curiosity question as it seems we have the knowledge here...

Say the pipeline is completed.... can they pump both the heavy Canadian crude and the lighter US crude in the same pipe

Seems that this would not work as you could not separate it at the end.... this would also seem to have a group of people that would not want the rest of the pipeline finished as it would take away from a transportation method they currently have....

Now, if you can put both through... then this goes away....

 

[aja8888]

Just a curiosity question as it seems we have the knowledge here...

Say the pipeline is completed.... can they pump both the heavy Canadian crude and the lighter US crude in the same pipe

Seems that this would not work as you could not separate it at the end.... this would also seem to have a group of people that would not want the rest of the pipeline finished as it would take away from a transportation method they currently have....

Now, if you can put both through... then this goes away....

Pipelines can generally carry different products as long as an interface between the two products is maintained. I would suspect this line is designed to handle any crude product. Routinely, gasoline and diesel are sent through the same line and the interface is pulled off and sold back to refiners as "transmix" product for separation.

Ethanol can't be easily pipelined since it is corrosive and causes leaks in pipeline joints, therefore, it is trucked to distribution terminals for blending (thank you Mr. Government).

 

[2B]

Pipelines can generally carry different products as long as an interface between the two products is maintained. I would suspect this line is designed to handle any crude product. Routinely, gasoline and diesel are sent through the same line and the interface is pulled off and sold back to refiners as "transmix" product for separation.

Ethanol can't be easily pipelined since it is corrosive and causes leaks in pipeline joints, therefore, it is trucked to distribution terminals for blending (thank you Mr. Government).

This is common practice for many pipelines especially those transporting refined products. This becomes a problem with the low sulfur specs for diesel and gasoline.

Europe has dedicated pipelines for diesel and gasoline which reduces their contamination with other products. This allows the sulfur spec to be 10 ppm in Europe but has the US market struggling with 15 ppm. The product is made to the same <10 ppm spec at the refinery.

We could put dedicated pipelines in the US for these products but it's only money and government permits.

 

[explanade]

I used to think this thing was probably about environmentalists vs oilmen or maybe donkeys vs elephants (so to speak). But this Business Week article seems to indicate it's a lot about different foreign interests (Canada, Mexico, even Venezuela) and domestic US interests. And then there are oil exploration interests vs refiners. Some quotes for this Keystone Pipeline's Gulf Coast Leg Will Soon Be Delivering Oil - Businessweek


Seems a confusing picture to me.

All those oil interests are on the oilmen side of the debate.

There are of course environmental concerns.


My understanding is that these heavier crudes, especially from Canada, depend on the price of oil being at a certain level because of the higher extraction costs.

So while the prospect of lower oil and gas prices is being dangled to push for the approval of the pipeline, the economics won't work if there is indeed greater supply than demand and prices fall drastically.

Also, I had heard that they have to use a lot of energy to get this thick crude extracted, that at the end, you might end up using more energy than you get out of the end product?

 

[samclem]

So while the prospect of lower oil and gas prices is being dangled to push for the approval of the pipeline, the economics won't work if there is indeed greater supply than demand and prices fall drastically.

I'll let the investors worry about their investment and whether it makes sense. Personally, I like the idea of having a ready supply of oil that becomes economically viable if prices exceed a certain level (a level that has been seen before). That's a good way of reducing the power of existing producers/cartels.

Also, I had heard that they have to use a lot of energy to get this thick crude extracted, that at the end, you might end up using more energy than you get out of the end product?

And they make it up on volume? Ridiculous (unless there's a government subsidy involved, ala ethanol).

 

[aja8888]

All those oil interests are on the oilmen side of the debate.

There are of course environmental concerns.


My understanding is that these heavier crudes, especially from Canada, depend on the price of oil being at a certain level because of the higher extraction costs.

So while the prospect of lower oil and gas prices is being dangled to push for the approval of the pipeline, the economics won't work if there is indeed greater supply than demand and prices fall drastically.

Also, I had heard that they have to use a lot of energy to get this thick crude extracted, that at the end, you might end up using more energy than you get out of the end product?

Canadian heavy crude is one one part of the equation. Athabasca tar sands extraction and processing is only one supply source. There are a lot of other crude producing companies in Canada that produce much different products.

Also, check the map and you will see that the Bakken shale play is really 2/3 in Canada.

Canada is (or will be) building new refineries and that will aid in them processing more of their own supplies.

The oil business is complicated and very fragmented and understanding the dynamics is very challenging, to say the least.

 

[unclemick]

Is there an echo in here?

My point, if you missed it, concerns the fact that some will not be able to resist getting into a political cat fight on this thread.

Right! I watched Frontline on PBS last night on retirement - somehow the producer belatedly semi discovered math, Saint Jack(aka Bogle) index funds, the effect of expenses and there was a dearth of the academic and scholarly data we ex engineers so crave.

Political! Political! You bet - I wanted to scream and throw sometime at the TV.

heh heh heh - oh wait we're taking what? Pipelines? Yawn. Saint's won. Chief's are doing good. Saint Louis is another story.