The Trump administration's approval of the controversial TransCanada Corp (Toronto Stock Exchange: TRP-CA) pipeline means more North American crude and fuel could ultimately flow out to the world market.
The pipeline would also further cement the bonds between the two key North American producers and increase the interdependence of the U.S. on Canada, as a source of imported oil, over OPEC and other producers. Canada supplies about half of the nearly 8 million barrels a day of oil imported by the U.S.
On Friday, President Donald Trump kept a campaign promise, as the State Department approved the 800,000 barrel a day northern leg of the Keystone pipeline. Held up for years by the Obama administration, the pipeline is planned to take oil from the Canadian sands in Alberta down to Steele City, Neb., where it could then head either to the Gulf Coast or Midwest refineries.
"No surprise here on the Keystone decision. It was clearly going to be reversed. The decision not to build Keystone by the Obama Administration was never really about Keystone. The State Department, in reviewing it, had indicated that it would have no impact on carbon emissions. Rather, the Obama decision was about symbolism and the Paris climate conference," said Daniel Yergin, vice chairman of IHS Markit.
Yergin said the question now is how much oil from the Canadian sands will be shipped by rail and how much by pipeline, once the Keystone is built.
"It does on the margin allow more of that heavy crude to make it to the refineries, which is a a positive, or be exported," said Bart Melek, head of commodities strategy at TD Securities. "Really we're just talking incremental here. It's not really moving the needle either way. It just assures some of the plans to expend the sands continues and we don't have to use trains. They're expensive, and it's not an efficient way to move crude."
The Canadian sands, including upgraded synthetic crude, is expected to expand production to 5.3 million barrels a day by 2022, from 4.5 million barrels a day in 2016, according to the International Energy Agency. Canada also plans to increase pipeline capacity with the Kinder Morgan Trans Mountain Expansion, which would take crude across Western Canada to British Columbia, for export to Asia. That project was approved by the Canadian government but is still pending local approval.
The sands has made gains in carbon emissions, though it is considered a dirtier source of crude, Yergin said. The cost per barrel is also higher than that of U.S. shale. But the additional oil would easily find a place in the world market, analyst say.
The heavy oil could displace oil that comes from other places outside the U.S., like Saudi Arabia or Iraq. Some heavy crude suppliers have seen waning production in recent years, like Mexico and Venezuela.
"If we get additional quantities of heavy Canadian crude, which is preferred by many refineries in the U.S., we might turn out to sell more quantities of [U.S.] light, sweet crude to the rest of the world," said Andrew Lipow, president of Lipow Oil Associates.
The Gulf Coast refineries mainly refine heavy crudes, whereas U.S. shale drillers pump light, sweet crude. Light, sweet crude is mainly refined on the east and west coasts.
"All this additional crude oil should keep our input costs lower, which will make our refined products even more competitive," said John Kilduff of Again Capital. The U.S. is a net exporter of refined product already. Government data shows that the U.S. last week exported 1.2 million barrels a day of distillates, which includes fuels like diesel. The U.S. also exported 592,000 barrels a day of gasoline last week.
The U.S. exported an average 520,000 million barrels a day of oil last year, and much of that goes to Canada for refininig.
The Keystone XL pipeline must get final approvals from Nebraska and local landowners. Kyle Cooper, a consultant with Ion Energy Group, said there are still groups opposed to its construction. "I think the Trump administration is going to roll over the opposition groups and it will be done," he said, adding construction is not expected to be complete until well into 2018.
"This pipeline will give the Canadian sands a better net back. It's cheaper to use a pipeline than rail or truck. Their break-even just got lowered, and their economic incentive just improved. One thing you can say is that over the last 10 years, the North American E and P producer knows how to respond to economic signals. If there's a dollar to be made, they're going to get at how to make it. The Keystone pipleline will certainly give them the opportunity to make a buck," Cooper said.
Cooper also said exports from the U.S. could increase, whether it is Canadian oil directly, or more U.S. crude or refined product.
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