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Keystone Pipeline Approval Could Shift Dynamics of Crude Export Debate

Tom Pennington/Getty Images File Photo
Environmental concerns, such as climate change, and economic and energy security concerns are the major issues surrounding Obama’s decision whether to approve the Keystone XL project.

The debate over lifting the nation’s restrictions on exporting crude oil centers on refinery capacity and the types of available crude, complexities that could shift if the Keystone XL pipeline is approved.

“We have to be very aware and sensitive of the investments that have been made by our refineries,” said Sen. Mary L. Landrieu, D-La., describing a mismatch in the capacity of the nation’s refineries, many of which added expensive technologies to process heavy oils from Venezuela and Mexico.

Having made those investments, refiners stand to make more by processing heavy crude — like the oil produced in the Western Canadian tar sands that would be shipped through Keystone — because it commands a lower price on the market than light oil, which is easier to process.

With production of light, sweet crude from shale formations in North Dakota and Texas booming, some lawmakers are pushing to lift decade-old export restrictions to provide market flexibility and encourage further oil field production.

But that muddles a political argument for the Keystone XL pipeline. Supporters of the project argue the pipeline is needed to promote U.S. energy security, which is a tougher sell if domestic crude is being shipped abroad.

Michael McKenna, a Republican strategist and president of lobbying firm MWR Strategies, said there will be increased pressure on President Barack Obama to lift the restrictions, which were enacted after the oil embargo in the 1970s.

“If you don’t start exporting here shortly, you’re going to wind up in a situation where you’re going to have to shut in some production,” McKenna said. “It’s going to be difficult for the administration to explain why that’s a good idea.”

Still, McKenna acknowledged that Obama is “going to get enormous pressure from his environmental crew not to do that.” He described the president’s conundrum as “psychologically similar” to the Keystone XL pipeline decision.

McKenna expects that if the administration does not act and oil production lags, mayors and governors will complain about lost tax revenue and oil workers will be laid off. “It’s going to be Keystone with a ferociously domestic angle,” he said.

While some Gulf Coast companies have announced plans for limited expansions in processing light oil, refining capacity in the region is viewed as largely static, according to Jorge Piñon, director of the Center for International Energy and Environment Policy at the University of Texas at Austin.

If approved, the Keystone XL pipeline would deliver heavy oil, which would fit with refining capacity in the Gulf Coast, he said.

“The Keystone pipeline gives the United States a huge flexibility,” Piñon said. “The pipeline is going to allow us to negotiate a much better price” with heavy oil producers in Mexico and Venezuela.

“By having access to that Canadian crude, you have now a new economic incentive to export crude oil,” which would most likely be the lighter shale oil, he said.

But even if the export ban is lifted, it is not clear that there would be sufficient demand on the world market to relieve a glut of light sweet crude in the United States.

Imports of light crude from Nigeria and the North Sea have fallen in recent years as U.S. shale production has increased, and with the exception of Brazil, most countries in Central and South America are set up to refine the region’s heavy crude, Piñon said.

Nations across the Pacific might be attracted to light oil, which could pass through the expanded Panama Canal or trans-Panama pipeline, he said. But China would prefer to take tar sands from a planned Canadian pipeline to the Pacific, Piñon added, because its refineries are configured to handle heavy oil.

Given global demand and refining configurations, it is likely the United States will continue to be a leading refiner, he said.

“We’re going to be exporting refined products for quite a while,” Piñon said. “That’s where the need is.”

Arguing for crude oil exports while saying that Keystone would provide the United States with energy security is trying to have it both ways, said Daniel J. Weiss, senior fellow and director of climate strategy at the Center for American Progress.

“That makes no sense,” he said.

Given that Energy Information Agency figures suggest the oil boom will taper off in the next decade, it “makes little sense to enter long-term contracts or begin exporting this commodity,” Weiss said, arguing that the nation should stockpile its oil reserves and make better use of its abundant natural gas.

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