Keystone oil pipeline seen raising gas prices in Midwest

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HOUSTON -- TransCanada's Keystone XL oil pipeline -- a project that backers, including Republican presidential candidate and former Pennsylvania Sen. Rick Santorum, say will create cheaper U.S. gasoline -- instead risks raising prices as much as 20 cents a gallon in the Midwest, Great Plains and Rocky Mountains, an energy consultant predicts.

The line would create a new way to carry Canadian imports outside the Midwest and reduce an oil surplus that is depressing central United States prices.

The purpose of the $7.6 billion Keystone pipeline is to move 830,000 barrels of oil a day from landlocked Alberta to the Texas Gulf Coast, obtaining new customers and a higher price for heavy Canadian crude, Canadian regulators said in a 2010 report. Their oil sold for $23.38 less per barrel in 2011 compared with heavy grades of Mexican crude, according to data compiled by Bloomberg.

"The Canadian plan was to use their market power to raise prices in the United States and get more money from consumers," said Philip Verleger, founder of Colorado-based energy consulting firm PK Verleger. Prices may gain 10 to 20 cents in central states, he said.

Producers including Exxon Mobil, Suncor Energy and Cenovus Energy may reap as much as $4 billion more in annual revenue if prices rise as expected after construction of the 1,661-mile Keystone XL conduit, the Canadian regulators' 2010 report says. Such a change would erase the cost advantage for refiners such as Marathon Petroleum and HollyFrontier, whose Midwest plants profited on cheaper oil supply.

The Keystone pipeline has generated a political debate ahead of the U.S. presidential election in November. Republicans including three of the party's presidential candidates -- Mr. Santorum, former Massachusetts Gov. Mitt Romney and former House Speaker Newt Gingrich of Georgia -- have criticized President Barack Obama's Jan. 18 rejection of Keystone XL after Nebraskans raised concerns about the pipeline polluting their groundwater.

The three candidates and House Speaker John Boehner, R-Ohio, have contended that cost of gasoline for U.S. consumers would be lowered by approving Keystone, eliminating environmental regulations of gas extraction by hydraulic fracturing (or fracking) and opening new areas for oil and gas drilling.

Even Democratic former President Bill Clinton backed Keystone's construction in comments Wednesday at a Washington-area energy conference. As long as the pipeline avoids environmentally sensitive land, he said, "the extra cost of running it is infinitesimal compared to the revenues" that the pipeline could produce.

Oil supply concerns have grown as the United States and Europe tightened sanctions on Iran, pushing U.S. crude prices for future delivery to $109.77 on Feb. 24, the highest in nine months, according to data compiled by Bloomberg.

TransCanada said Feb. 27 that it would reapply for a permit to build Keystone and proceed separately with a $2.3 billion pipeline segment that will carry crude from the storage hub at Cushing, Okla., to the Texas coast.

Oil flowing through the Keystone pipeline's Oklahoma-to-Texas segment would help remove excess supply in the Midwest and bring cheaper crude to refiners on the Gulf Coast, said TransCanada Chief Executive Officer Russ Girling. "It will help to reduce pressure on gasoline prices," he said.

As more crude flows to markets such as the Gulf Coast, prices should decline there and balance out increases seen in other places, said Stephen Schork, president of the Schork Group industry consultants in Villanova, Pa.

Keystone XL might lower the average cost of gasoline nationwide by as much as 4 cents a gallon, said Ray Perryman, a consultant hired by TransCanada to assess the project's economic impact.

But the net impact of Keystone XL on gasoline prices would be minimal, said Mr. Perryman, whose research has been cited by TransCanada to back up claims of potential job growth and market impacts from the pipeline.


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