NEW YORK--(BUSINESS WIRE)--Ongoing delays in the pending Keystone XL pipeline expansion project (Keystone XL) are not a major concern for U.S. refiners yet, according to Fitch Ratings. Growing volumes of rail-delivered crude to the Gulf Coast have provided a transportation alternative that has increased the availability of Canadian crudes to refiners in the Gulf.
However, given the significant investments that Gulf Coast refiners have made in deep conversion capacity over the years (e.g., coking), a wide heavy/light oil discount remains important for maintaining robust processing economics. As a result, Gulf Coast refiners are likely to be significant beneficiaries from the increased supply of Canadian heavy oil on the Gulf Coast arising from completion of Keystone XL. Light-heavy oil spreads remain subdued relative to historical levels. For example, the Maya to Brent discount has averaged just 7% of the price of Brent year to date versus discounts in the 15%-20% range during 2006-2008.
Given that pipelines are generally the lowest cost option to transport crude, the completion of Keystone XL is likely to provide key benefits for upstream producers over the long run as well by maximizing the netbacks that E&P producers receive for their product. To the degree that this improves upstream realizations and improves the economics of those plays, Gulf Coast refiners indirectly benefit from more assured supply.
In addition, it is important to note that rail and related infrastructure have an increasing role to play in growth on master limited partnership (MLP) spin-offs from refiners. Beyond the direct effects on crude prices that a rail-displacing pipeline has, refiners are able to indirectly take advantage of growth in rail cars and rail logistics and handling as growth vehicles for their spun off MLPs.
Keystone XL has faced significant opposition over its potential environmental and economic impact and is seeking approval for its sixth year. TransCanada Corp. has worked toward approval, but the review process has been long and hard-fought. The plan called for the transportation of synthetic crude oil from Alberta, Canada, to refineries on the Gulf Coast. Keystone XL would extend the existing Keystone pipeline that connects Alberta oil to Illinois, IL and Cushing, OK. The proposed extension would bring the oil from Cushing to the refineries in the Gulf Coast. Another part of the extension would start in Canada and connect to the existing Keystone pipeline in the U.S.
On Sept. 17, TransCanada released a study claiming its Energy East pipeline would support an estimated 1,000 full-time jobs. That pipeline would carry a comparable amount of crude as the Keystone but is likely to meet some of the same opposition as Keystone XL but with one big difference: this project would not cross an international border and does not need federal approval.
Additional information is available on www.fitchratings.com.
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