TransCanada to Build Keystone XL Leg (TRP, ENB)

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When President Obama killed the application from TransCanada Corp. (NYSE: TRP) to build the 1,700-mile Keystone XL pipeline, the move did not kill the idea of the pipeline. The president said Transcanada could reapply — and the company said yesterday that it would. TransCanada also said yesterday that it will build the southern-most leg of the pipeline, from Cushing, Oklahoma, to Port Arthur, Texas, and that the 423-mile long segment could be in service by mid-2013. The pipeline will transport 700,000 barrels/day.

Another Canadian pipeline company, Enbridge Inc. (NYSE: ENB) has purchased a majority share in the existing Seaway pipeline, and the company plans to reverse the flow of crude in that pipeline to transport oil from Cushing to Port Arthur and Houston. The plan would move 150,000 barrels/day to begin with, but added compression would boost the total to 400,000 barrels/day by next year.

Enbridge has also announced plans to build a new pipeline from Flanagan, Illinois, to Cushing along the existing right-of-way of its 650-mile Spearhead pipeline. Capacity has not yet been announced, but the original plan called for a 30-inch line but that is likely to get larger as demand for transportation grows.

None of these lines is going to have much effect on gasoline prices. The purpose for building them is to move the crude from the oil sands of Alberta and the Bakken shale to the Gulf Coast, where the price of crude is much higher.

Right now crude from the oil sands and the Bakken are heavily discounted to the price of Brent — as much as $40/barrel. If that nearly-stranded crude can get to the major US refining area along the Gulf Coast, it will be worth a lot more. The Gulf Coast currently receives just over half of the 9 million barrels/day of crude that is imported into the US. Getting 1.1 million barrels/day — or potentially more — will cut down on the amount of oil imports, particularly because demand for transportation fuel in the US is stable or falling.

What happens to prices? Well, they could fall a little, but the whole purpose of the Keystone XL and the other pipelines aimed at the Gulf Coast is to increase the price of North American oil. It is true that by not exporting dollars in exchange for oil the US trade balance will improve, but an average American is not likely to see any sudden drop in pump prices.

The recent run-up in crude prices is mostly due to an improving US economy, the appearance of a solution to the Greek debt crisis, some signs that China’s economic activity will increase, and, not least, the tensions over Iran’s nuclear development program. These factors are real, but they are also temporary. Oil is, after all, just another commodity, and commodity prices react quickly to events and rumors.

Paul Ausick