Tuesday, February 28, 2012

Cushing to Houston Keystone XL Pipeline to Proceed

TransCanada announced yesterday that it will proceed with the portion of the Keystone XL pipeline running from Cushing, OK to the Houston, TX area.  This now stand-alone Gulf Coast Project will cost about $2.3 billion and should be in service in mid to late 2013.  It will be subject to typical regulatory approvals but not the same permit process as the whole controversial Keystone XL pipeline project (the orange dashed line below).

This is a smart move on many fronts.  First, it is an economic project.  As TransCanada notes, the Gulf Coast portion "has its own independent value to the marketplace."  Second and more importantly, the Cushing-to-Coast project attacks one of the biggest problems we have in the U.S. oil market:  the choke point that has been created in Cushing, which is the settlement point for West Texas Intermediate crude on the New York Mercantile Exchange (much like Henry Hub is for natural gas).  There is too much oil flowing into Cushing and not enough pipeline capacity to get it out.

To me, this is the project that needs to be built.  I'm rather ambivalent about the Canada to Cushing portion of the project.  It has become a huge political football, but the combatants miss the point.  While it is better to import oil from Canada than Saudi Arabia, much of the oil in the XL would still count as an import from a macroeconomic perspective.

Second, tapping the oil sands gives me pause.  Turning that bitumen to oil is not easy or cheap, and it requires quite a bit of energy.  The process may improve over the years, but right now oil from the sands of Alberta has a more negative environmental impact that regular crude.

I am of the belief that Obama (or the winner of the 2012 election) will ultimately approve the XL pipeline after the route is shifted, but the controversy isn't going away any time soon.

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