The Value of Canadian Oil Sands - to the United States

December 1, 2010 | 00:00

The Value of Canadian Oil Sands - to the United States

An assessment of the Keystone Proposal to expand oil sands shipments to Gulf Coast refiners

A proposal is pending before the U.S. Department of State to authorize the Canadian company, TransCanada, to proceed with construction of a cross border crude oil pipeline, called the Keystone XL project. The proposed pipeline route is shown in Figure 1 below and is a planned expansion of the original Keystone pipeline. The pipeline would permit the shipment of increased volumes of heavy crudes to U.S. Gulf Coast refiners from expanded oil sands production sourced from the vast reserves located in the Western Canada Sedimentary Basin in Alberta. Under U.S. law, all cross border oil pipelines entering the United States require final approval from the U.S. Department of State. The State Dept. has delayed a decision on the expansion project to allow more time to assess whether the project is in the interest of the United States. The decision on whether or not to issue a permit for the proposed pipeline is expected to be made in early 2011.

The pipeline extension would permit the shipment of an additional 509,000 b/d (barrels per day) of Canadian oil to Gulf Coast refiners. Most of the expanded import volume would be in the form of blended bitumen which is similar to heavy crude oil. Because of production declines in Mexico and Venezuela, U.S. refiners are receiving reduced shipments of heavy crudes. Higher volumes of heavy crudes from Canada offer considerable potential to improve operating margins for U.S. refiners, many of whom long ago made expensive upgrades in complex facilities that favor heavy oil. Additionally, TransCanada is looking to expand the Keystone XL capability by offering Bakken oil producers, located in North Dakota and Montana, a chance to link into the pipeline and send their crude to Gulf Coast refineries for the first time. By increasing transport efficiency and allowing Bakken producers to tap into new refinery markets, the Keystone XL project will have the added benefit of improving wellhead values for oil production from the Bakken formation.

Economic benefits from the project are therefore in two categories: (i) greater efficiency in the production of transportation fuels by matching heavier crudes to the abundant and complex technology prevalent in the U.S. refining fleet, particularly in the Gulf Coast region, and (ii) greater efficiency in the delivery of crude oil into and within the U.S. market. The project also provides improvement in security of supply of crude oil for the U.S. market since construction of the pipeline will also include a long-term commitment for delivery of supplies accompanied by a high degree of confidence that commercial and trade relations will be sustained.

EPRINC estimates that the Keystone expansion would provide net economic benefits from improved efficiencies in both the transportation and processing of crude oil of $100-600 million annually, in addition to an immediate boost in construction employment.

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