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Need for Keystone XL Shrinking as Industry Looks to Export U.S. Crude Oil

A dramatic and unexpected American oil boom is transforming pipeline networks and changing the way petroleum has flowed for decades.

Oct 25, 2012
TransCanada's Keystone XL pipeline depot

The argument is familiar to just about every American by now: The United States needs to import more Canadian crude oil to secure its energy independence, and building the proposed Keystone XL import pipeline is critical to accomplishing that goal.

Within the U.S. oil industry, however, the hot topic these days is not the nation's need to import Canadian oil—it's the possibility of exporting crude oil produced in the United States. 

"A paradigm shift happens when reality smacks you upside the head, and reality is now smacking us upside the head," said Mark Mills, a senior fellow of the Manhattan Institute for Policy Research, a conservative, free-market think tank. "We're about to have a gusher of oil."

That expectation is causing the industry to make massive investments to reconfigure North America's pipeline network and change the way oil has been flowing for decades. "North America is in the process of being repiped," Al Monaco said as he kicked off his tenure as the new CEO of pipeline operator Enbridge Inc. earlier this month.

The Canada-to-Texas Keystone XL is the most visible and highly charged part of that pipeline system restructuring, even though critics are now questioning the logic of building an import pipeline when the industry is increasingly focused on exports.

The industry's growing interest in exporting U.S. oil stems from a dramatic and unexpected surge in domestic light, sweet crude production that has boosted this country's oil production to more than 6.6 million barrels per day, its highest level since 1995, according to federal data.

The flood of crude has caused a wholesale reversal of thinking within the industry, triggering predictions across the political spectrum that the United States could become not only energy self-sufficient but also a major oil exporter whose output could rival Saudi Arabia's.

Current U.S. oil output isn't nearly enough to satisfy domestic needs, but some of the newly accessible oil reserves still haven't been tapped. Already, the gush of home production has created an oversupply of light, sweet crude in the Midwest. Industry analysts expect rising production in Texas and North Dakota will create a similar surplus as early as next year in the Gulf Coast, where the nation's largest refineries are based—and where ports provide a launching point for overseas exports.

"What's obvious now is that the United States is on track to become the world's largest producer of oil," said Mills, author of a widely cited  paper pushing for the export of U.S. oil and other fossil energy resources. "No one would have talked this way 10 years ago ... even three years ago they were wringing their hands because we were going to run out of the stuff." 

The nation's unexpected petroleum boom has caught crude suppliers, traders and pipeline companies off guard. Limited pipeline capacity has caused oil supplies to build up in the Midwest, forcing oil producers from Colorado to North Dakota and Alberta, Canada to sell their crude at steep discounts.

This week, the price of North Dakota oil stood at about $75 per barrel, about 12 percent below the U.S. crude benchmark and more than 30 percent below the international crude benchmark. If that same oil reaches the U.S. coasts or global markets, it can fetch as much as $30 more per barrel. That's why some North Dakota producers are loading their oil onto rail cars, river barges and trucks for the long trip to coastal refineries.

New pipelines are even more essential for the Canadian oil sands producers. The value of their crude sank to the equivalent of less than $60 a barrel this week, well below the U.S. and international benchmark prices of $85 per barrel and $108 per barrel, respectively. They see the Canada-to-Texas Keystone XL pipeline system as essential to helping them close that gap. Getting their heavy crude to Gulf Coast refineries, or to world markets through the Gulf ports, could boost the value of their crude by as much as $48 per barrel.

Refineries are already taking advantage of higher international prices for gasoline, diesel and other oil byproducts. They've been exporting ever-increasing amounts of fuel, a trend that has made the nation a net exporter of refined products for the first time since at least 1949, the last year for which that data are available.

The same forces have led to record exports of U.S. coal, and now have many energy companies poised to send liquefied domestic natural gas to overseas customers as well.

But exporting crude oil is a different story. While there are no restrictions on exporting fuel produced by U.S. refineries, the same is not true for raw domestic crude oil.

To export U.S. crude, sellers have to contend with a patchwork of overlapping restrictions that makes it illegal to export U.S. crude to any foreign country without government permission and special licenses.

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