How to Pick the Winners in the Keystone Debate

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"There will be some big winners if the pipeline proceedsóbut a lot more will be either unaffected or potentially hurt by more oil sloshing into the U.S. market."

Oil pipelines

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 proceedsóbut 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 Washington Postestimates 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. crudeóin 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 Canadaóbut no doubt at the expense of prices for American oil in the Gulf Coast.

Money Morning

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