SIOUX FALLS, S.D. – Two major energy companies will spend $7 billion to nearly double the amount of crude flowing through a pipeline from Canada’s tar sands through Montana to the U.S. Gulf Coast, highlighting intense demand for crude that was once too expensive to pull from the ground and process.
Alberta, Canada-based TransCanada Corp. and Houston-based ConocoPhillips Co. said Wednesday they will add 500,000 barrels of daily capacity to the Keystone Pipeline, a 1,980-mile project connecting Hardisty, Alberta with a delivery point near existing terminals in Port Arthur, Texas.
That includes a 282-mile stretch through Montana, passing from north of Malta to the South Dakota border in Fallon County. The Montana portion would cost $1 billion to build and generate $60 million annually in property taxes, Gov Brian Schweitzer’s office said.
“We are happy to participate in providing the infrastructure to bring more oil from our best trading partner to the north to domestic refineries,” Schweitzer said in a statement.
Dave Galt with the Montana Petroleum Association said the pipeline offers “more opportunity for everybody” because it will free up pipeline capacity across the region to meet growing production.
Demand for oil has driven the price for a barrel of oil up 80 percent above where it was a year ago and up about 40 percent from the start of the year.
That includes demand for crude from oil sands, previously an afterthought in the crude market.
Unlike the benchmark light, sweet crude, oil extracted from the Alberta oil sands of northern Canada is a dirty, bottom-of-the-barrel substance that is more difficult to refine into gasoline and diesel.
U.S. refiners have been converting plants to handle the thicker Canadian crude as supplies for lighter crude continue to tighten, much to the consternation of environmental groups.
The Canadian province of Alberta is home to vast reserves of oil sands. Industry officials estimate the region could yield as much as 175 billion barrels of oil, which would make Canada second only to Saudi Arabia in crude oil reserves.
In Montana, state officials have been exploring whether new refineries could be built in the state to process that oil. While Wednesday’s announcement means much of the Canadian oil in the short term will instead head to the Gulf, state and industry representatives said that does not preclude a Montana refinery
Schweitzer’s top economic development aide, Evan Barrett, said the feasibility of a Montana project will be driven by projected future increases in oil sands production. He said discussions with several northern Montana communities interested in a refinery will continue.
“The idea of refineries in Montana still exists. There’s still a need,” he said.
In western Canada, oil sands production has grown fourfold since 1990 and exceeded 1.2 million barrels a day last year, according to the Canadian Association of Petroleum Producers. That could grow to 3 million barrels a day by 2015 — not an insignificant amount, given that the current global output of oil is roughly 85 million barrels a day.
Gulf Coast refiners have traditionally processed crude oil from Mexico and Venezuela. But output from the Mexican Cantarell oil field is in decline and many Venezuelan contracts will change over the next couple years as the South American country shifts its oil from the U.S. to other markets across the world, said Russ Girling, president of TransCanada’s pipelines division.
Stephen Schork, an analyst and trader, said the potential for oil development in Canada is what allowed ConocoPhillips to walk away from Venezuela. The pipeline and its expansion offers the company a more stable crude supply.
“I think that it certainly is a welcome sign, because any sort of event that kind of mutes the geopolitical influences on oil or commodities in general is a good thing,” Schork said.
TransCanada said construction has already begun in Manitoba and North Dakota.
The company hopes to begin delivering tar sands crude through its 36-inch pipeline to refineries in Wood River and Patoka in Illinois by late 2009 and Cushing, Okla. by late 2010.
The project, which has now climbed to a total cost of $12.2 billion, will eventually move 1.1 million barrels of oil per day.
TransCanada and ConocoPhillips signed an agreement in 2005 to use the Keystone pipeline to deliver crude to ConocoPhillips’ Wood River, Ill. and Borger, Texas refineries, which are being expanded. The deal gives ConocoPhillips a 50 percent ownership stake in the pipeline.
ConocoPhillips spokesman Bill Graham said the pipeline expansion fits into the company’s strategy of bringing together its North American assets.