Everything You Need to Know About Keystone XL: Why Other Countries Care

By now, you have probably heard about TransCanada's  (NYSE: TRP  )  Keystone XL pipeline. For even the most casual observer of the energy industry, this project has been the spark that has ignited political debates ranging from environmental hazards, emission of greenhouse gasses, and North American energy independence. In his recent speech on climate change, President Barack Obama made a point to speak about Keystone XL and what it means for the U.S

There are clear environmental concerns regarding the construction of this pipeline, but the story is so much more than that. To help better understand the entire story of the Keystone XL pipeline, we at the Motley Fool want to give investors a better look at what the Keystone XL means for all parties involved. In this part, we will take a look at some of the countries other than the U.S. and Canada that have a marketed interest in the outcome of the Keystone XL.

Getting squeezed out
Over the past couple of years, the U.S. has been reducing its oil imports. Rather than shaving a little from every place we previously did business, we have actually consolidated our imports. Now we import over 60% of our oil from four countries: Canada, Saudi Arabia, Venezuela, and Mexico. It's not happenstance that these countries have remained the sources of our primary oil imports, either. Aside from the geographic benefits of importing from Canada, all four countries are the primary sources for heavy oil around the world, a product that has been very difficult to find in the U.S.

Source: U.S. Energy Information Administration, author's calculations

With Keystone XL potentially delivering 830,000 barrels per day to the Gulf of Mexico, and Enbridge's (NYSE: ENB  ) pipeline expansions adding another potential 400,000 barrels per day, the piped oil would essentially replace the more expensive heavy crudes that we are receiving from Saudi Arabia, Venezuela, and Mexico. These three countries would most likely see their shares of crude exports to the U.S. significantly diminish.

For these three countries, a lot is on the line. While the total share of oil from Mexico and Venezuela represents 7% and 8% of total U.S. imports, respectively, the U.S. represents 40% of oil exports for Venezuela and 85% of oil exports for Mexico. Although Saudi Arabia is highly dependent upon oil revenue to support the kingdom, it also has the luxury of selling its products to other nations just as easily as it does to the U.S.

If Keystone XL gets built
Not only would Keystone XL likely reduce imports from both Venezuela and Mexico, but the price for their oil delivered to the U.S. could drop as well because refiners would have more options in choosing their crude sources. This could put a big dent in these countries' economies. For example, Venezuelan oil exports represent 33% of the country's GDP. It is likely that if the U.S. cuts its shipments of Orinoco belt heavy, the country will need to find other demand centers.

Of all the countries, though, Mexico has the most to lose, not only because so much of its oil is sent to the U.S., but also because it does not have the same partnerships with Gulf Coast refiners that Saudi Arabia and Venezuela do. Saudi Arabia's national oil company, Aramco, has a 50/50 joint venture with Royal Dutch Shell  (NYSE: RDS-A  ) for Motiva Enterprises. Also, Venezuela's national oil company, known as PDVSA, wholly owns the refining and retail business Citgo

Company Owners Total Gulf Coast Refining Capacity (Mbpd)
Motiva Enterprises Saudi Aramco (50%) and Royal Dutch Shell 1,069
Citgo Petróleos de Venezuela (100%) 591 
Deer Park Refining Limited Partnership  Royal Dutch Shell (50%) and Petróleos Mexicanos (50%)  327

Source: U.S. Energy Information Administration 

These partnerships could be crucial connections with the U.S. Gulf Coast and could help these countries maintain a certain amount of exports to the U.S. as Canadian crudes look to supplant them.  

If Keystone XL is rejected
Other than a big sigh of relief from these countries, it is very likely that business as usual will continue for the Gulf Coast regarding refinery operations and import sources. Another thing to consider, though, is that both Venezuela's and Mexico's national oil companies have struggled to grow production in the past couple years. If this trend were to continue, it would more than likely mean prices for these types of crude would climb even higher, making the incentive to build a Keystone XL-type pipeline even greater. 

What a Fool believes
Looking back on all the different aspects of the Keystone XL pipeline, there is much at stake for companies across the oil industry. For the U.S. and Canada, the upside benefits of the project being built are great, but the downside of it not being built is not an industry-killer like some claim it to be. Though, for certain countries the threat of losing an even greater amount of business from the U.S. could result in not only a need to find new customers, but also in the prices for their crude products dropping below what they once were.

This multi-part investigation into the Keystone XL is not intended to convince that it should or should not be built. Instead, I hope that the information presented gives the least biased view possible and offers every angle of the project it's fair assessment so that the reader may decide. If you missed any previous part of this series, be sure to check back here at Fool.com for what the late, great Paul Harvey called "the rest of the story".

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Read/Post Comments (3) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 08, 2013, at 4:34 PM, qwellian wrote:

    thoughts:

    A) PADD3 production is already being used for export... ...to venezuela and mexico. they're already sending us crude that we refine and send back to them. that would only change if they can refine it more cheaply elsewhere.

    B) While I agree that increased Canadian export to PADD3 would hurt Mexico and Venezuela does it really drop the price of oil refined in PADD3 unless Mexico destabilized or Venezuela refuses to ship oil to PADD3? Even if Canadian production overwhelms PADD2/4 capacity and then is available for cheap despite transport into PADD3 it doesn't do anything unless there is instability in supply as this is a global commodity. Only a company that has upstream and downstream ownership benefits. Everyone else is charged the prices that Canada, Venezuela, and Mexico charge globally based on global availability. Since this oil is already available and being utilized in PADD 2 & 4 wouldn't PADD3 prices already account for that?

    C) Keystone XL was only proposed because after it became clear despite years of negotiations the Canadian Native Americans wouldn't let Sino-pac build a pipeline to the Pacific for export to Asia after the Exxon Valdez. If that's the key purpose of Keystone, decreasing the cost of transport to Asia (because again prices are already based on global availability), does it really change cost of oil at PADD3?

    What it does do is increase the profit for an oil producer if they have decreased shipment costs. It also makes a lot of money for the midstream transporter.

  • Report this Comment On July 08, 2013, at 4:36 PM, qwellian wrote:

    correction

    "While I agree that increased Canadian export to PADD3 WOULD hurt Mexico and Venezuela"

    should read

    "While I agree that increased Canadian export to PADD3 COULD hurt Mexico and Venezuela "

  • Report this Comment On July 08, 2013, at 5:17 PM, HomeGamer1856 wrote:

    Solid analysis.

    One small problem, there is a built-in assumption that this oil would be for US consumption.

    When asked by Congress if the US would have first right of refusal or if the US would be given access, Transcanada never explicitly promised that the oil pumped through this pipeline would stay in North America. More than likely, this oil would be China bound.

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