Editor's Note: Having probed the political and economic drivers of the Keystone XL Pipeline debate, our guest commentator, a seasoned energy industry insider, reveals which companies will benefit the most if the project goes forward – and which will thrive if it doesn't. Money Morning readers have a unique opportunity to exploit these insights for profit – whether the pipeline is approved or not.
You might think the entire oil and gas industry is behind the Keystone XL Pipeline. And at the surface level that may be true. After all, the big oil industry lobby, the American Petroleum Institute (API), has spent millions promoting it through advertising and outreach to members of Congress. API are the folks who brought us all of those pro-Keystone commercials a few months ago.
Since API represents the industry, with over 600 members, the project must be good for everyone in the energy space, right?
Not so fast. There will be some big winners if the pipeline proceeds – but a lot more will be either unaffected or potentially hurt by more oil sloshing into the U.S. market.
A Boon for Super Majors and Bust for Independents
You can begin to parse the winners from the losers by looking at which companies have the most sway within API. Annual dues for its hundreds of members vary dramatically… very dramatically. According to Washington Post reports, the institute's flagship members such as Exxon pay more than $20 million per year.
Considering the Post estimates that the institute brought in just $133 million in total dues as recently as 2012 (plus about $29 million in certification fees), Exxon Mobil Corp. (NYSE: XOM) and its "Seven Sisters" peers like Chevron Corp. (NYSE: CVX), ConocoPhillips (NYSE: COP), Royal Dutch Shell Plc. (NYSE ADR:RDS.A), and BP Plc. (NYSE ADR:BP) are the companies that really pull the API's strings.
There is a separate organization, the Independent Petroleum Association of America, which more accurately reflects the views of America's independent energy producers. These are smaller companies that account for the bulk of the jobs in the industry and are bearing the brunt of the crude price collapse.
While IPAA has lent token support to the passage of Keystone in the past, the Association primarily focuses these days on lifting the U.S. ban on crude exports and on fighting Federal regulation of fracking. IPAA executives recently traveled to Capitol Hill to lobby Congress personally regarding the former, and has sued the Department of the Interior over the latter.
As for Keystone, the IPAA hasn't said boo in years, and it appears not to have formally weighed in to Congress regarding its recent effort to force President Obama to approve its construction.
Why would the industry's super-majors have an apparently different view on Keystone and its near one million barrels per day of new production, when the pipe clearly appears poised to exacerbate oversupply? Aren't they still oil producers, and wouldn't they be hurt by Keystone as badly as their smaller counterparts?
Not necessarily. There are some very significant differences between the Exxons of the world and the likes of small independents such as Matador Resources Co. (NYSE: MTDR). For one thing, the majors produce oil and gas all over the world. This means they are not nearly as exposed to the price of U.S. crude as 100% domestic-focused independents.
Even more pertinent to an analysis of Keystone, some of them have rather significant holdings in Canada. In fact, according to the Canadian Association of Petroleum Producers, again speaking with The Washington Post in early 2014, a full 29% of total Canadian oil sands production belongs to American-owned companies, which consist almost entirely of super-major API backers such as Exxon (via its Imperial Oil subsidiary), ConocoPhillips, and Chevron.
Another 10% belongs to European companies, again primarily super-majors such as Shell and France's Total SA (NYSE: TOT) (also an API member). So close to half of all of Canada's oil sands production can be linked to the giants of the industry which essentially control API.
As of year-end 2013, Alberta estimated total Canadian oil sands production at 2 million barrels per day, so in a coincidence that would be funny were it not so sad, the roughly 40% API stake in the oil sands would come to around 800,000 barrels per day. A familiar number, no?
While it would be a stretch to suggest that the super-majors had a hand in planning Keystone's capacity in order to precisely extract their own production, the bottom line is that unlike shale wells, oil sands projects are major undertakings with millions and millions in sunk capital.
As a result, their owners are unlikely to shut down development or production until prices improve, and Western Canada oil prices have sunk even lower than U.S. crude – in recent weeks, Western Canada Select (WCS) traded at close to a $15/barrel discount to the already depressed U.S. benchmark WTI, or roughly around $30/barrel.
A major reason for this discount is the comparatively isolated location of the oil sands, so creating a fast-track like Keystone to alleviate local bottlenecks and send Canada's oil gushing to the Gulf Coast would serve to increase local prices in Canada – but no doubt at the expense of prices for American oil in the Gulf Coast.
What happens to the resulting crude which cannot be refined any further and becomes a large pile of black dust in Texas. This pile is present in Detroit Mich and is hauled by lake freighter to points where it can be burned to create heat and power but it has large pollution capabilities.
Regarding Keystone,
Alberta's newly elected socialist Premier has stated that she is against the Keystone Pipeline, now there is opposition from the very place it starts.
Oil royalty rates will be under review, business tax increase just to get started. Nothing heard yet about carbon tax. Everyone in Alberta oil is holding their breath.
Stay tuned.
Ian Brown's May 7, 2015 comment that "Alberta's newly elected socialist premier has stated that she is against Keystone" is 100% in error. The premier he is referring to was Allison Redford who was forced to resign over financial scandals. She has been replaced by a conservative premier where he and his govt are very supportive of Keystone. Obviously.
This is completely false. The conservative premier you speak of is Jim Prentice who lost the election. Now a socist leader is in charge and is very much against the Keystone pipeline project. I dont know where you get your info from Rod but you need to do a better job of learning the facts. Also regarding Ian brown's comment about everyone in Alberta "holding their breath" on what the new leader will do. Why is that? The majority of Albertans voted for the new NDP leader. Why are they now surprised. People are getting what they voted for and so they are getting what they deserve.
You are approximately a year behind in your Alberta politics. The two leaders you refer to were leaders of the right wing Conservative party. They have been in power for 44 years. Until May 5. The people of Alberta have elected a left leaning Socialist party (NDP) for the first time in its 110 year history.They take control in leads than a month!
The leader has stated that she is against pipelines, wants to increase corporate tax rate and the royalty rate of reserves in the ground. It is a dark period coming for the next four years.
How do the results of the recent Alberta provincial elections affect the issue of Keystone XL?
Good article by the 'Guest Contributor' as to opportunities for investors whether Keystone Pipeline is yea or nye!
There was passing reference to security of supply but no emphasis on the project adding to American delivery infrastructure!
Keystone is an infrastructure project and will leave a permanent structure in place to transport oil many decades hence.
It seems to me that this additional secure supply in addition to USA home grown supply will insure that voters cars are not lined up at gas stations across the country as in OPEC's last gambit at flexing it's muscle.
This cost to political careers has not been factored into the positivness of a Keystone yea – than again for current senators & congressmen their short term survival may minimize including the Keystone as an Infrastructure positive.
For a president sitting for 8 years and his Party there may be long term considerations ?
It's not obvious that a Keystone Okay can be disentangled completely from Political ramifications (Legacy concerns) when the countries voters once again line up for their personal gas needs because their countries infrastructure wasn't sufficient to mitigate International Oil Shortage Conflagrations!
The writers argument hinges on long term considerations not being important to most politicians and perhaps he is right in this respect but Presidential Legacy Concerns may impact?
I will try yet once again to bring more logic to the US oil issue. We now produce more light oil daily than the refiners have capacity for. Refinery retro fit for lighter oil is expensive and takes two years or so. The only resonable short term solution is to allow the export of US oil until refiners can get more capacity on line. If not, we will do damage to our chance for energy indepence.
Had the Keystone been built and complete by now, we would be blaming our surplus US oil on it and once again be wrong.
We have lost many thousands of jobs and put a lot of US upstream producers in a financial bind because we have no way to refine all of it. The excess goes to storage and the growing storage is misconstrued as a world glut which has little or nothing to do with the real problem.
I really wish someone, somewhere, would focus on the real problem and put the real issue out for serious discussion.
Ed
Last time I counted, we were still importing 7 millions barrels of crude daily, but in the same time 1 and 2 million barrels tankers are leaving Houston, Texas City and Galveston ports almost daily filled with diesel fuel, gasoline, or concentrates.
You're saying American refineries are out of capacity? That they cannot process lite crude from fracking?!!…
Well, exactly that's why we need Keystone – to bring heavy sour from Canada, mix it with WTI from fracking and keep our refineries working. Without massive retooling for them There is no reason to ship that sore crude via tanker from Persian Gulf when the same shit is available 1500 miles North, and , yet!!!, Canadians don't hate us as Arabs do!…
As Canadians we have women 's equal rights. We don't stone then in public. We pay our indigenous people (as all workers) six figures to work in the oil field. And yes, We are allies to the US.
The million barrels a day Keystone would provide would displace the same from a despot middle east country. They would not be able to convert the payments to fund terrorism.
just saying.
I said it earlier in a reply, which may or may not be posted, that we are still importing 7 millions barrels of crude every day. Most of the Gulf Coast refineries are still dependable on sour crude shipped by tankers from Venezuela, Saudi Arabia, or even the not yet recognized nation of Kurdistan!
Well, now let's think: what's the least environment damaging and energy consuming way to feed those refineries what they need? A 2 millions tanker sailing half the world? From Kuweit to the docks of San Francisco? Or only a short one, from Venezuela to Port Arthur?
For all the rattling, I think everything is overblown!… And everything is just a joke
Dear Money Morning, is Congress ever going to release our crude to the world by reversing the 70's law restricting us selling crude on the world market? It seems that if we wanted to help the whole country that would release the whole industry from this nonsensical law that is probably controlled somehow by the elites and is completely outdated? I guess the industry reps. have been trying to get it rescinded? If not, why not?