Don’t tell Harry Reid, but the Obama administration has been bankrolling the rightwing Koch brothers.
How can that be?
President Obama’s refusal to allow construction of the Keystone XL Pipeline has meant a rising surplus of heavy Canadian crude available to Midwestern refiners – outfits like Pine Bend in Minnesota, which is owned by Koch Industries. Too much oil with no place to go translates into a glut, and lower prices.
That’s great news to the buyers of that oil, like the Kochs, who are expected to shell out some $125 million to conservative causes this year in an attempt to help the GOP take control of the Senate, among other ambitions. All of which must give Harry Reid, who famously considers the philanthropic Kochs “un-American,” serious heartburn.
Because the proposed 800,000 barrels a day (b/d) Keystone XL Pipeline continues suspended in political lava, Canada continues to ramp up exports of oil from tar sands mainly through the only pipelines available – which primarily serve the U.S. Midwest. Some 70 percent of oil sands crude imported into the U.S. in 2012 was refined in the Midwest area.
Between 2010 and 2012, the volume of heavy Canadian crude imports into that region rose nearly 45 percent. As a result, the price of that heavy oil sells at a significant discount, giving refiners in the region a windfall spread between their feedstock costs and the price they can charge for the products (like gasoline and fuel oil) they produce. Last year the gap approached 40 percent in some months; recently the differential has been closer to 20 percent.
As an example, in December, the price of Canada’s heavy oil was $58.96 per barrel, compared to the benchmark light West Texas International (WTI) price of $97.89, a discount of $39 per barrel. Various types of crude oil command different prices because of processing costs and location, and comparative values can shift, depending on the markets for end products like gasoline or fuel oil. However, analysts agree, if the Keystone Pipeline were built, the gap between the prices of oil sands crude, denoted as Western Canada Select or WCS, and WTI would narrow.
The Pine Bend refinery, owned by Flint Hills Resources, a division of Koch Industries, can process 320,000 barrels of oil each day. About 80 percent of the oil it processes comes from Canada’s tar sands making it the largest refiner of Alberta heavy crude in the U.S.
Last year the average price gap between oil sands crude and WTI was $ 25, meaning the Kochs’ plant raked in as much as $2 billion of extra revenues – in just one year. That buys a lot of political attack ads.
Development of Canada’s oil sands has grown markedly over the past decade, despite the refusal of the Obama administration to approve construction of the Keystone XL Pipeline. In 2002, production totaled 823,418 barrels per day; by last year, output had more than doubled, to 1.9 million barrels a day.
Today, with production capacity continuing to grow, the industry is stymied by a shortage of transportation options to refineries in the U.S. and in Canada. In recognition of the pipeline shortage, and the rising cost of capital projects associated with moving and processing the heavy oil, the Canadian Association of Petroleum Producers just recently lowered its forecast of future production. However, CAPP still forecasts oil sands output to increase by nearly three million barrels a day, to 4.8 million, in 2030. Some of that crude will be moved by rail, and some is expected to flow through pipelines yet to be built in Canada.
As authorities in Canada and in the U.S. bow to environmentalists hoping to shut down tar sands production by blocking transportation options, the surplus of Canadian heavy crude may grow. The price discount on that oil – and the benefit to refiners processing oil sands, including the Kochs - will continue.
It should be noted that oil sands crude is cheaper than some other types of oil not only because of transportation issues. Heavy oil is generally more expensive to refine and move because it requires diluents to thin its sludge-like consistency and because of its high sulfur content. However, WCS also sells at a substantial discount to competing heavy oil from Mexico, so-called Mayan crude, indicating the impact of bottlenecks on its price.
Last fall that premium amounted to $40 per barrel. Overall, for 2013, the price of WCS averaged $72.77, $24.41 cheaper than Mayan crude. The reason for the gap, according to the Alberta Office of Statistics and Information: “Maya is not land-locked and is available to international markets in the U.S. Gulf Coast.”
So, the Kochs and other Midwest refiners are sitting pretty. The pricing distortion, of course, is not the only unexpected consequence of blocking the Keystone XL Pipeline. Consider this: California, the greenest state in the union, has jacked up its imports of oil from Canada -- via train, the transport method that is arguably the most threatening to the environment.
According to Bloomberg News, California imported more than 700,000 b/d of Canadian crude in Q1, up from 90,000 b/d last year. It is not clear what type of Canadian oil is being shipped into California. However, with Alaskan light crude production dropping, and Alaska output fetching more than $107/bbl recently, Golden State refiners capable of processing heavy oil might well have been attracted by Canada’s $82/bbl oil sands price.
As reported by Business News Network, it is illegal for companies to export U.S. crude. Still, an exception is made for 25,000 b/d heavy crude produced in California, or other heavy crude “originating from outside the U.S.” Some speculate that companies in California are exporting heavy Canadian crude to Asia, taking advantage of the cheap price.
Tom Steyer, the environmentalist billionaire who is fighting tar sands production tooth and nail, might want to explore these peculiarities stemming from the continued stall on approving the Keystone XL Pipeline. Does he really want to support policies that fatten the Kochs’ war chest?
Top Reads from The Fiscal Times: