Keystone Oil Pipeline Seen Raising Gas Prices in Midwest: Energy

By Bradley Olson - Mar 1, 2012 7:00 AM GMT+0700

TransCanada Corp. (TRP)’s Keystone XL oil pipeline, a project backers including Republican Presidential candidate Rick Santorum say will create cheaper U.S. gasoline, instead risks raising prices as much as 20 cents a gallon in the Midwest, Great Plains and Rocky Mountains.

The line would create a new way to carry Canadian imports outside the Midwest and reduce an oil surplus that’s depressing prices in the central U.S. Spot gasoline was 55 cents cheaper in Chicago than in New York on June 1, the second-highest ever. Nationwide, retail gasoline set its highest February average at $3.55 a gallon, data compiled by Bloomberg show.

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Philip Verleger, principal of PK Verleger LLC. said “the Canadian plan was to use their market power to raise prices in the United States and get more money from consumers.” Photographer: Melissa Golden/Bloomberg

The purpose of the $7.6 billion Keystone is to move 830,000 barrels of oil a day from landlocked Alberta to the Texas Gulf Coast, obtaining new customers and a higher price for heavy Canadian crude, Canadian regulators said in a 2010 report. The oil sold for $23.38 less per barrel in 2011 compared with heavy grades of Mexican crude, according to data compiled by Bloomberg.

“The Canadian plan was to use their market power to raise prices in the United States (UNG) and get more money from consumers,” Philip Verleger, founder of Colorado-based energy consulting firm PK Verleger LLC, said in an interview. Prices may gain 10 to 20 cents in central states, he said.

Producers including Exxon Mobil Corp. (XOM), Suncor Energy Inc. (SU) and Cenovus Energy Inc. (CVE) may reap as much as $4 billion more in annual revenue if prices rise as expected following the construction of the 1,661-mile (2,673-kilometer) Keystone XL conduit, the 2010 report says.

Such a change would erase the cost advantage for refiners such as Marathon Petroleum Corp. (MPC) and HollyFrontier Corp. (HFC), whose Midwest plants profited on cheaper oil supply.

Political Touchstones

The Keystone pipeline has generated a political debate before the U.S. November presidential election.

Republicans including presidential candidates Santorum, Mitt Romney and Newt Gingrich have criticized President Barack Obama’s Jan. 18 rejection of Keystone XL after Nebraskans raised concerns about the pipeline polluting their groundwater.

The three candidates and U.S. House Speaker John Boehner have said that approving Keystone, eliminating environmental regulations of hydraulic fracturing, known as fracking, and opening up new areas for drilling would lower the cost of gasoline for American consumers.

Clinton Backs Pipeline

Former President Bill Clinton backed construction of Keystone yesterday in comments at a Washington-area energy conference. As long as the pipeline avoids environmentally sensitive land, “the extra cost of running it is infinitesimal compared to the revenues” the pipeline could produce, he said.

Oil supply concerns have grown as the U.S. and Europe tightened sanctions on Iran, pushing U.S. crude prices for future delivery to $109.77 on Feb. 24, the highest in 9 months, according to data compiled by Bloomberg.

TransCanada said Feb. 27 it would reapply for a permit to build Keystone and proceed separately with a $2.3 billion segment of the pipeline that will carry crude from the storage hub at Cushing, Oklahoma, to the Texas coast.

Oil flowing through the Oklahoma-to-Texas segment of the Keystone pipeline would help remove excess supply in the Midwest and bring cheaper crude to refiners on the Gulf Coast, TransCanada Chief Executive Officer Russ Girling said in a telephone interview after the announcement.

“It will help to reduce pressure on gasoline prices,” he said.

Declines Offset Increases

As more crude flows to markets such as the Gulf Coast, prices should decline there and balance out increases seen in other places, Stephen Schork, president of the Schork Group industry consultants in Villanova, Pennsylvania, said in a telephone interview.

“Bringing these barrels to the Gulf would certainly have a dampening impact,” Schork said. “Getting more high quality, cheap oil to the market is the direction we need to go to see lower gasoline prices.”

Keystone XL might lower the average cost of gasoline across the U.S. by up to 4 cents a gallon, Ray Perryman, a consultant hired by TransCanada to assess the economic impact of the project, said in an e-mail.

The net impact of Keystone XL on gasoline prices would be minimal, said Perryman, whose research has been cited by TransCanada to back up claims on potential job growth and market impacts from the pipeline.

Consumers in Colorado and Wyoming currently pay less for gasoline than anywhere in the nation because of the supply glut in the Rocky Mountains caused by stranded Canadian imports and growing oil production from onshore fields. Denver’s average price of $3.13 a gallon today was 43 cents lower, or 12 percent, than Houston’s $3.56 average, according to AAA.

Charging More

Canadian producers will be able to charge more for their oil after Keystone XL is built, boosting revenues by $2 billion to $3.9 billion, Canada’s National Energy (TAQA) Board said in the 2010 report approving of TransCanada’s pipeline plan.

The discount on Canadian crude “should be avoided in the future” if the pipeline were built, according to the report.

Completion of the entire pipeline would raise prices at the pump in the Midwest and Rocky Mountains 10 to 20 cents a gallon, Verleger, the Colorado consultant, said in an e-mail message.

The higher crude prices also would erase the discount enjoyed by cities including Chicago, Cheyenne and Denver, Verleger said.

Gasoline Prices

Retail gasoline in Chicago today averaged $3.91 a gallon, 13 cents lower than the $4.04 New York price and more than double the 6-cent difference between the two cities a year ago, according to AAA. The average gasoline price of $2.99 a gallon in Cheyenne, Wyoming is the same as a year ago and the price in Minneapolis is $3.65, according to AAA data.

Canada exported 66 percent of its total crude production in 2010, almost all of which went to U.S. markets, according to the C.D. Howe Institute, an Ottowa-based think tank. The biggest pipeline systems moving crude southward include Enbridge Inc. (ENB)’s mainline system and TransCanada’s first Keystone line, both of which transport oil to refineries in the Midwest, including in Wisconsin and Illinois.

To contact the reporter on this story: Bradley Olson in Houston at bradleyolson@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net