Biweekly, we highlight three things going on in the energy industry that we think you should know about. This week, we take a look at a new challenge to President Biden’s suspension on new oil and gas permits on federal lands, the outlook for American and Canadian oil pipelines in the wake of the Keystone XL project getting scrapped, and a new contract for the delivery of West Texas Intermediate crude oil in the Houston area. Here’s the latest.
1. New legal challenge to Biden’s drilling permit suspension
A federal judge in Louisiana on June 15 blocked the Biden administration’s temporary ban on new oil and gas permits on federal lands, allowing lease sales to continue. Depending on the timeline of an appeal and decision, the issue could be tied up in the courts through the end of the year. Although the moratorium is on a legal halt, it is likely that we will see an appeal before any new lease sales take place, according to Bloomberg.
This decision is one of the latest developments in the battle over new oil and gas drilling permits following Biden’s suspension of such permits and leases on federal land in January. Republican senators from several oil-producing states then introduced a bill in March to block the suspension, calling it illegal and stating that it would hurt employment in their states.
While the eventual outcome of this battle will affect some states more than others (such as those with heavy production on federal land, like Wyoming, New Mexico, Colorado, Utah and North Dakota), the decision will have a significant impact on the development pipeline to replace inevitable production declines and of course on employment and state economics. Given the current global rebound in oil demand, the review of the federal leasing program will likely become more complicated. Stakeholders should consider the ability to meet demand both now and long term.
2. The state of Canada-U.S. pipelines
With the Keystone XL pipeline project now officially scrapped after over a decade of starts and stops, the outlook for Canadian oil export pipelines is precarious. Canada is the third-largest oil exporter and fourth-largest oil producer globally, yet Keystone XL now joins TC Energy’s Energy East pipeline and Enbridge’s Northern Gateway pipeline as the third major export pipeline to be cancelled in the last five years. Canada continues to face challenges in transporting its oil to tidewater and U.S. refineries, with opposition increasing to Calgary-based Enbridge’s Line 3 pipeline in Minnesota and Line 5 pipeline in Michigan.
Enbridge’s Line 3 pipeline currently runs at approximately half of its capacity due to corrosion and deterioration; the pipeline has been in operation since 1968, and a replacement of the pipeline would double current capacity to 760,000 barrels per day. On June 14, the Minnesota Court of Appeals ruled that permits and approvals granted to Enbridge for the construction of the Line 3 replacement were required and justified. Also this month, approximately one thousand activists gathered at construction sites calling for the pipeline to be cancelled along with Keystone XL, and about 250 people were arrested.
These headwinds are in addition to the opposition from Michigan Governor Gretchen Whitmer to Enbridge’s Line 5 operation and reinforcement, which we wrote about in May. Additionally, the federally owned Trans Mountain pipeline expansion, which the Canadian government acquired from Kinder Morgan, has faced numerous delays due to opposition and legal challenges from activists.
With political pressures mounting, it has become evident that approved permits and invested construction costs do not guarantee the completion of a pipeline project. Keystone XL had completed approximately 150 kilometers of pipeline in Alberta, along with construction in several U.S. states. The Alberta provincial government estimates losses of approximately $1.3 billion related to the pipeline’s cancellation, and it hopes to recoup those losses in part by liquidating any salvageable assets.
The near-term demand for crude oil by U.S. Gulf Coast refiners continues to have a positive outlook, and Keystone XL was estimated to reduce U.S. dependence on Venezuelan and Middle Eastern heavy crude exports by approximately 40%. Instead, transporting oil by railcar from Alberta to U.S. refiners can be expected to increase, which is both more expensive and riskier. Greater carbon emissions from alternative transport methods versus pipelines are also a factor that governments and the private sector will need to take into account as we progress towards carbon neutrality.
3. New WTI futures contract
Three companies this week announced a new futures contract for the physical delivery of West Texas Intermediate crude oil in the Houston area, a little more than a year after the historic fall of WTI futures contracts to minus-$38 per barrel.
Magellan Midstream Partners LP, Enterprise Products Partners LP, and Intercontinental Exchange Inc. established the contract “in response to market interest for a Houston-based index with greater scale, flow assurance and price transparency,” the companies said in a news release.
Crude oil is priced at benchmark indices, with well over 150 published indices that vary according to API gravity, sulfur content, and source/delivery location. Some of the more well-known North American crude oil indices are WTI, West Texas Sour (WTS), Louisiana Light Sweet (LLS), and Western Canadian Select (WCS). Note that WTI is priced at three separate locations:
- Midland: generally considered the source location and typically trades at a discount to the others, though not always
- Cushing: this is the price per barrel of WTI from the Permian Basin once it reaches Cushing, a major pricing hub, and this is used as the benchmark WTI price
- Houston: price to purchase a barrel of WTI in Houston
The development of a futures contract for WTI Houston provides greater price transparency and trading liquidity, over and above existing instruments and spot price indices.
“On April 20 last year, when the Cushing, Oklahoma, WTI contract traded down to negative $38, it was a wake-up call to the oil industry that the storage constraints and landlocked location of the Cushing contract could no longer be ignored,” Harold Hamm, a founding member of the American Gulf Coast Select Best Practices Task Force Association, said in the news release. He went on to say that he started the task force “to develop specifications for a new U.S. light sweet crude oil price benchmark in the American Gulf Coast, and to advocate for its implementation and adoption as the main pricing point for the U.S. oil markets.”
Prior to recent pipeline capacity additions from the Permian, there were significant constraints hampering the ability to move a barrel from the Permian to the Gulf Coast; barrels had to go through Cushing, or down to the Corpus Christi area. But over the last few years, companies have constructed significant takeaway capacity, allowing crude oil producers, buyers and traders a wider range of destination options. A WTI Houston futures contract is significant, and a welcome milestone for the U.S. shale sector.
