TransCanada Corp. said Monday it will move ahead with the U.S. Gulf Coast portion of its contentious Keystone XL oil pipeline, a move expected to help ease a Midwest supply glut even as Washington delays a decision on the bigger project until after the presidential election this year.
The 435-mile leg, envisioned to run from the U.S. storage hub of Cushing, Okla., to refineries in Texas, will cost $2.3 billion to build, TransCanada said. The Calgary-based firm said the segment will transport 700,000 barrels of oil a day and could be completed by the middle of 2013.
The move is the latest twist in a pipeline-approval process recently embroiled in Washington politics. TransCanada officials have always said they would prefer to build the whole pipeline—aimed at moving oil-sands crude from Alberta to the Texas coast—at the same time.
But those plans were upended after President Barack Obama rejected the proposal earlier this year, saying it needed further study amid concerns about the possible environmental impact of the pipeline’s path from Canada across an aquifer in Nebraska.
The Obama administration said then that TransCanada was free to resubmit the application, and TransCanada said Monday it intended to do so. The Gulf Coast leg, however, doesn’t require Washington approval since it wouldn’t cross the U.S. border. The White House quickly endorsed the Gulf Coast portion Monday.
TransCanada executives and Canadian officials have said they expect approval for the whole project eventually. But the company has pushed back an estimated completion date until 2015, about a year later than previously planned.
The move comes amid a glut of crude in the U.S. Midwest due to surging production from Canada and from oil-shale developments in places like North Dakota. The region’s refining capacity is full, and there currently isn’t enough pipeline capacity to move the oil to other refineries, particularly those on the Gulf Coast.
The bottleneck has sent U.S. benchmark prices about $15 a barrel below international prices. The price of Canadian oil this month dropped to its lowest discount to U.S. prices in several years as the only refining market it could reach in the U.S. Midwest was oversupplied with oil.
“The Gulf Coast Project will transport growing supplies of U.S. crude oil to meet refinery demand in Texas,” TransCanada Chief Executive Russ Girling said in a press release.
Late last year, rival Canadian pipeline company Enbridge Inc. bought a 50% stake in a different pipeline, the Seaway, which had shipped oil from Texas to Cushing. Enbridge plans to reverse Seaway’s flow, sending 150,000 barrels of oil a day southward by the middle of 2012. It plans to expand that flow to as much as 500,000 barrels a day, with 400,000 barrels expected by next year.
Even the Gulf Coast leg and Enbridge’s project may not be enough to relieve the bottleneck at Cushing. Alex Pourbaix, president of TransCanada’s oil-pipelines division, said he believes at least two million barrels a day of oil will need to flow between Cushing and the Gulf Coast over the next decade to relieve the bottleneck there.
Analysts said they expect the new line to eventually help narrow the gap between U.S. oil prices and international benchmarks, like Brent crude. That could also help ease U.S. gasoline prices. U.S. oil futures settled down 1.1% at $108.56 a barrel Monday, while Brent fell 1% to $124.17 a barrel.
Many Gulf Coast refineries are forced to use more expensive Brent or other international blends, since pipeline capacity is limited from the U.S. Midwest, said Tom Bentz, an oil trader at BNP Paribas Prime Brokerage in New York. That raises the price of gasoline in the U.S. even as domestic oil prices trade lower than overseas oil, he said.