Some U.S. Producers, Refiners May Have Good Reason to Oppose Keystone XL Pipeline

Researched by Industrial Info Resources (Sugar Land, Texas)--The controversial Keystone XL (KXL) international crude-oil pipeline by TransCanada Corporation (NYSE:TRP) (Calgary, Alberta) has been in the news twice this week, as the company sought to have its U.S. federal regulatory review paused, then again when that request was rejected. The 500,000-barrel-per-day (BBL/d) pipeline has been protested by environmental groups, and the arguments against the project have been repeated in most every other protest against pipeline development across the continent.

However, there also are economic reasons to oppose KXL--specifically, with regard to producers and refiners. The completion of KXL could mean a cessation of, or drop in, crude swaps with Mexico, which would be a detriment to producers in the Eagle Ford Shale. This also could lead to higher crude prices in the Midwest.

The U.S. recently signed a one-year agreement with Mexico to trade some of its overabundant light sweet condensate for Mexico's heavier blend of crude oil, to the tune of 100,000 BBL/d. That is 100,000 BBL/d of light sweet crude that producers in the Eagle Ford, and perhaps the Bakken, can move to another market and reduce the oversupply of their blend of crude in the U.S. It is also 100,000 BBL/d of heavier crude from Mexico that Gulf Coast refiners are better able to process, either by itself or by blending it with the lighter domestic crudes.

However, KXL would bring Canadian heavy sour crude directly to the Cushing oil hub in Oklahoma, from where it can reach both the Midwest and the Gulf Coast refining markets. With a new source of heavy sour crude that may be more economical than Mexican heavy crude, there will be one less reason to renew these mutually beneficial crude swaps. As such, Eagle Ford producers may lose an outlet for their product.

While the KXL will bypass the Midwest, by connecting to the Cushing hub, Western Canadian Select crude oil (WCS) may still impact the Midwest market. While less economical to do so in this fashion, based on sheer distance traveled, the greater access to WCS as a result of KXL's direct route would raise the price of WCS. While this is fantastic news for producers in the costly oil sands, it means a rise in price for the Midwest refining market, as WCS gains the option to bypass the region entirely.

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