Oil sent through new pipeline likely to end up in China

November 1, 2011

By year’s end, the U.S. State Department (or possibly, President Obama himself) will decide whether TransCanada Corp.’s Keystone XL pipeline is in the American national interest. The proposed 2,673-kilometre pipeline would bring tar-sands diluted bitumen (or “dilbit”) from Hardisty, Alberta, to Gulf Coast refineries in Texas and Louisiana, crossing through the states of Montana, South Dakota, Nebraska, Kansas, Oklahoma, and Texas.

Nebraska has become the epicentre of opposition to Keystone XL, with heated debates during public hearings, especially because the pipeline would endanger the Ogallala aquifer which provides fresh water for millions. Unlike some other states on the pipeline route, Nebraska has no plans to transport oil from the Bakkan oil fields via Keystone XL.

In his October 1 article called Battlefield Nebraska, the Globe & Mail’s Nathan Vanderklippe noted: “Many opponents believe Keystone XL is ultimately an export pipeline; that the end products will be shipped overseas to fuel Chinese, rather than American, cars. TransCanada calls those arguments nonsensical.”

But a year ago (Dec. 23, 2010), a senior writer for CNNMoney.com, Steve Hargreaves, wrote that by transporting dilbit from Alberta to the Gulf Coast refineries, Keystone XL would provide “the oil sands’ first major access to a deepwater seaport, opening up access to worldwide markets.” CNNMoney.com is a feature of CNN, Fortune Magazine, and Money Magazine. 

A Route To China? 

Two months later, U.S. energy economist Philip Verleger Jr. published an article called “The Tar Sands Road To China” in The Petroleum Economics Monthly (Feb. 2011), arguing that, if Keystone XL is approved by the U.S., it will give refiners in the U.S. Gulf Coast “market power of enormous proportions,” along with the ability to buy low and sell high because of a glut of crude.

TransCanada Corp.’s refining consultant, Purvin & Getz, identified 15 potential Gulf Coast refiners for possible purchase of tar sands dilbit – information which Verleger found in TransCanada’s filing with Canada’s National Energy Board (which approved Keystone XL in 2010). Verleger argued that seven of those Gulf Coast refiners already have long-term supply agreements with Saudi Arabia, Venezuela, and Mexico, and would be “unlikely buyers of Canadian crude,” forcing it to be exported.  

“Furthermore, it would be in the interest of these refiners to see Canadian oil shipped to China,” he wrote. China has invested billions in Alberta tar sands projects.

More recently, InsideClimate News.org reported (Oct. 5) that Koch Industries subsidiary Flint Hills Resources Ltd. “has been upgrading its Corpus Christi [Texas] refinery” to handle tar sands dilbit. 

On May 23, Jeremy Symons of the National Wildlife Federation told the U.S. House Energy and Commerce Subcommittee on Energy and Power, “Big Oil’s claims that this pipeline will help our energy security are a carefully fabricated mirage.” Citing Verleger’s article, Symons said that tar sands companies want Keystone XL built “so they can access the deepwater ports of the Gulf Coast refineries” for export.

“Increasingly, America is becoming the middleman in the global oil business,” Symons said. “We import vast amounts of crude oil, but are exporting more and more refined oil products such as diesel and gasoline from Gulf Coast refineries owned by global oil companies. Exports have doubled in the past five years.”

By mid-summer, Verleger’s article had generated enough controversy that the U.S. Department of Energy (DOE) sent a nine-page memorandum about it to the U.S. State Department on June 22.  Noting that crude oil supplies from Venezuela and Mexico are declining at Gulf Coast refineries, the memorandum stated: “With these supplies in decline, there is a significant market opportunity for competitively-priced Canadian dilbit to offset lost heavy oil supplies. There is no reason to believe, as Verleger asserts, that PADD III [Gulf Coast] refiners would not use the Canadian oil shipped in the Keystone XL pipeline.”

The DOE memorandum estimated that “the expected volume of Canadian dilbit” carried by Keystone XL would be “450-630 thousand barrels/day,” while “200-250 thousand barrels/day [of the pipeline’s capacity] would be devoted to Bakken and Midcontinent crude.” On that basis, the DOE memorandum argued, “without a surplus of heavy oil in PADD III, there would be no economic incentive to ship Canadian oil sands to Asia.”

Tar sands producers, however, are expecting to at least double production over the next decade, adding another 1.5 million barrels per day in output. 

Shell/Saudi Aramco 

On Aug. 5, the National Journal Daily reported: “Shell, Valero and ConocoPhillips are expected to ship oil via the Keystone XL pipeline if it’s approved, according to the companies and TransCanada... Two Canadian companies, Canadian Natural Resources Limited and Cenovus Energy [EnCana], also have signalled interest in using the pipeline... Shell is more than doubling its refining capacity – from 275,000 to 600,000 barrels of oil a day – at a refinery [the Motiva refinery] in Port Arthur, Texas,” which is “half-owned by Saudi Aramco, the state-owned oil company of Saudi Arabia.” (According to Verleger, the Motiva refinery is “jointly owned by Saudi Aramco, Shell, ExxonMobil and, to a lesser extent, Marathon.”)

As the National Journal Daily noted, “the connection between Shell and Saudi Aramco is galvanizing environmentalists,” who argue that -- contrary to tar sands lobbyists’ claim that Keystone XL would reduce U.S. dependence on Middle Eastern oil -- the pipeline would instead deliver the crude to Shell/Saudi Aramco’s refinery, which could then ship its end products anywhere in the world. 


In September, the environmental NGO Oil Change International (OCI) released a report, Exporting Energy Security: Keystone XL Exposed, which argues that “the construction of Keystone XL will not lessen U.S. dependence on foreign oil – rather, it will feed the growing trend of exporting refined products out of the United States, thereby doing nothing to enhance energy security or to stabilize oil prices or gasoline prices at the pump. If completed, it will successfully achieve a long-term objective of Canadian tar sands producers: to gain access to export markets.” 

The report states that there is “a glut of oil in the U.S. market,” and “refiners have therefore identified export markets as their primary hope for growth and maximum profits... There are market fundamentals at work here that provide incentives for a company that is properly positioned to refine the diluted bitumen from Keystone XL into diesel for export. Several refiners are positioned like this, in particular Valero.”

Valero, the largest exporter of refined petroleum products in the U.S., is upgrading its Port Arthur, Texas refining facility to process heavy oil into diesel. According to The Tyee (Oct. 25, 2010), Valero already refines 2,300 barrels of tar sands fuel per day in Port Arthur, “or 20% of the total oil-sands fuel currently reaching Texas and Louisiana. It’s only a small trickle compared to what might come.” 

Valero CEO Bill Klesse is also chairman of the National Petrochemical & Refiners Association, one of three lobby groups suing to repeal California’s fuel standard.

Oil Change International’s report states that Valero “has a long-term contract with TransCanada to ship oil on the Keystone XL pipeline. It also has a contract with Canadian Natural Resources to take 100,000 barrels per day until 2030 via the Keystone XL pipeline. Valero has also stated that it has additional contracts with other producers.” 

The OCI report further states that Valero’s refinery in Port Arthur, Texas has a special advantage. “The Port Arthur refinery operates as a Foreign Trade Zone (FTZ), which traditionally gives tax benefits to companies that use imported components to manufacture items within the United States. Usually refineries importing oil tax-free will still pay taxes when selling the refined products into the U.S. market. By both importing into and exporting from Port Arthur, the company will avoid paying tax on the product sales.” 

Spokesmen for Valero and TransCanada Corp. told the Huffington Post (Sept. 23) that OCI’s analysis was inaccurate. 

But the FTZ angle raised by Oil Change International deserves closer scrutiny. 

Foreign Trade Zones

A Feb. 2011 report called “Texas Foreign Trade Zones,” issued by the State of Texas Office of Governor Rick Perry and Economic Development & Tourism, says that “Texas leads the nation with 31 FTZs, more than any other state.” These Zones “promote the international competitiveness of U.S.-based businesses” and “facilitate their international trade.” One of the industries that benefits from Texas’ 31 FTZs is the energy industry – “primarily oil refining” – with FTZs lining Texas’s Gulf Coast.  

According to the State of Texas document, it is not just Valero’s refinery in Port Arthur that operates as (or in) an FTZ.  In fact, at least nine Texas refineries identified as potential purchasers of Canadian dilbit are located in FTZs: BP’s refinery in Texas City, Koch Industries/Flint Hills Resources refinery in Corpus Christi, ExxonMobil’s refinery in Beaumont, Marathon Refining in Texas City, Motiva Refining in Port Arthur, Total Refining in Beaumont, and Valero’s three refineries in Houston, Port Arthur, and Texas City. BP, ExxonMobil (through its Canadian subsidiary Imperial Oil), Flint Hills Resources, Marathon, Shell, Total, and Valero are all involved in Alberta tar sands production.

These Gulf Coast refineries -- by both importing crude from Canada and exporting refined petroleum products from the FTZs - would thereby avoid paying federal/state taxes on sales. Indeed, by the rules of FTZs, only if they sell the end products domestically do they have to pay tax.     

The U.S. Dept. of Energy’s June memorandum to the U.S. State Department claimed that, “without a surplus of heavy oil” in the Gulf Coast, “there would be no economic incentive” for the refineries to export. However, it certainly seems that FTZ avoidance of U.S. taxes on millions of dollars in diesel/gas exports made from tar sands crude would be incentive enough for the global oil companies who own refineries in Texas. 

Could it be that analysts at the U.S. Department of Energy have no knowledge of Texas Governor Rick Perry’s glowing Feb. 2011 “Texas Foreign Trade Zones” report? Someone should ask Governor Perry – or his Tea Party followers – to immediately send them copies.


(Joyce Nelson is a freelance writer/researcher and the author of five books.)