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Need for Keystone XL Erodes as U.S. Oil Floods Gulf Coast Refining Hub

Many benefits being touted by Keystone supporters are being delivered by the domestic oil rush. 'It's become a political football more than anything.'

Nov 6, 2013
An oil pump jack operates in Texas.

The ongoing U.S. oil boom has flooded the Gulf Coast with domestic crude to levels not seen in decades, creating a homegrown oil glut in the nation's refining center just as the Obama Administration prepares to rule on a pipeline that would add a torrent of heavy Canadian crude to the same region.

It's just the latest in a string of developments that have surprised and roiled oil markets since 2009, when the combination of falling fuel demand and an unexpected surge in U.S. oil and natural gas production began destroying widely held assumptions about the nation’s need for imports.

"U.S. oil production is at a point that is changing the entire globe, and this is just more evidence that the U.S. producers are far exceeding anybody’s expectations," said Phil Flynn, senior oil analyst at Price Futures Group. "This is part and parcel of the big story—the U.S. energy boom."

Conditions have changed so radically that U.S. refiners are now exporting record amounts of fuel to overseas customers, and there’s a parade of tankers delivering Texas oil to refineries on the east coast of Canada. As these and other surprising trends unfold, it's becoming increasingly clear that the controversial Canadian oil import pipeline, the Keystone XL, is not an urgently needed link. 

Many benefits being touted by Keystone XL supporters—American jobs, lower oil costs, greater energy independence through lower imports—are already being delivered by the domestic oil rush. The Canadian oil pipeline might expand some of those benefits, but its significance has been eclipsed by surging production in North Dakota and Texas.

"It's not as important as it would have been," Flynn said of the Keystone XL. "Now it's become a political football more than anything."

The pipeline's ardent backers, however, still want it built. Several of the Gulf Coast's largest refiners, for example, spent years and billions of dollars readying their plants to process large amounts of cheap heavy Canadian crude. Those refiners were counting on TransCanada's 1,700-mile Keystone XL pipeline to carry 830,000 barrels per day of that Alberta oil sands crude from the Canadian border to the Texas coast.

But these days, Texas refiners are doing fine without it. An increasing amount of the diluted tar-like bitumen (dilbit) they seek is being delivered to them by other means, such as railway car and other pipelines. Some refiners are also adjusting their equipment to process more of the domestic light crude that’s been gushing into the Gulf Coast.

Still, heavy Canadian dilbit remains the cheapest crude available. And refiners that process it end up with higher profits on all their products, underscoring why they're so eager to flood the region with tar sands imports. This is partly because they can make more diesel from dilbit due to the physical properties of the crude. Diesel fetches higher prices than gasoline in export markets. Light sweet oil grades, including the discounted types now flooding the Gulf Coast, produce a higher volume of gasoline. 

"If [Gulf refiners] have to buy the light sweet, they're paying more for the crude, and the whole balance doesn't quite work out the way they want," said David Hackett, president of Stillwater Associates, an oil industry consulting company.

Highest Stockpile Ever

For now, however, what's pouring into the Texas Gulf Coast is mostly U.S. light sweet oil from North Dakota’s Bakken formation and the Eagle Ford region of Southern Texas.

Thanks to soaring production in those regions, U.S. total oil output recently rose to 7.9 million barrels per day, the highest level in more than 24 years, according to weekly production data from the federal Energy Information Administration.

Many analysts had predicted that an oil glut would develop in the Gulf Coast, and the first signs of it emerged earlier this year. But the oversupply is particularly pronounced now, because deliveries into the region have been accelerating at a time when many refineries are processing less oil because of winter maintenance work.  

Oil inventories in the Gulf region have grown in nine of the last 10 weeks, and topped 197 million barrels on Oct. 25, the highest stockpile ever recorded for this time of year, according to EIA data.

"The Gulf Coast is being filled up with additional U.S. production," said Thomas O'Malley, executive chairman of refiner PBF Energy Inc., during an earnings conference call last week.

Evidence of a regional glut can usually be found in the price of oil, since an oversupply typically forces the cost of crude to fall in comparison to other locales. At midday last Friday, all of the nation's major crude oil varieties sold at steep discounts of at least $8 a barrel less than Europe's Brent, the international benchmark crude oil, according to figures from the Oil Price Information Service (OPIS), which tracks energy prices. While international buyers were paying $107 per barrel for Brent oil, for example, U.S. refiners could buy North Dakota Bakken crude for less than $81 a barrel.

At those prices, even East Coast refineries that were big importers of Brent crude can save money and boost profits by purchasing domestic Bakken and having it delivered by rail. The situation has created a surprising reversal of longstanding oil trading patterns between the United States and Europe, said O'Malley of PBF Energy.

"We're seeing things that we certainly wouldn't have forecast as short a time ago as six weeks or eight weeks."

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