This is the first of a four-part collaborative series by StateImpact Texas and Oklahoma on the economic and environmental impact of the Keystone XL pipeline.
Oklahoma is in an unlikely economic predicament: It has too much oil.
AUDIO BY LOGAN LAYDEN
Cushing is the price settlement point for West Texas Intermediate crude on the New York Mercantile Exchange. It’s also an important blending station, where crude oil from the mid-continent is mixed to the specific grades required by different refineries.
The city’s historic role in the energy industry was secured in 1912 when a Pennsylvania wildcatter named Thomas B. Slick made a frantic final effort 12 miles east of town, according to Oklahoma: Where Energy Reigns, a book on the history the industry in the state published by the Oklahoma Energy Resources Board.
After years of land-buying followed by unsuccessful drilling attempts, the wildcatter — who’d come to be widely lampooned as “Dry Hole Slick” — had his hands on a productive discovery well in what became the Cushing Field.
News of the strike spread, as did other drilling operations in the Cushing-Drumright Field, which was celebrated by wildcatters and investors for its high-quality crude and highly productive wells.
Production peaked during World War I. In August 1914, the field was producing 58,000 barrels a day. Six months later it had ballooned to 90,000 barrels a day, and by 1919 Cushing was producing 300,000 barrels a day, which amounted to 17 percent of all oil marketed in Oklahoma and about 3 percent of global production, according to the book.
This concentration attracted investors, who added storage capacity and built refineries. By the time the area’s oil production started drying up in the 1940s, the fields were a snarl of storage tanks and Cushing had adopted the identity as the pipeline crossroads of the world.
Refining and Reliability
Cushing’s vast pipeline network first transported oil from the field to the town center, where the crude was refined and shipped out on rail cars.
Much of the nation’s oil surplus was consumed by World War II, and policy makers turned to foreign reserves to supplement domestic production.
The last of Cushing’s big refineries closed in the 1980s, but the pipeline network and tank farms remained — and expanded.
Cushing is one of the world’s biggest oil hubs, but its network of pipelines wasn’t built for the modern market, industry officials, researchers and economists tell StateImpact Oklahoma. While oil was once transported through Oklahoma on its way to refineries in the north-Midwest, the market now needs it in the Texas Gulf Coast, where about one-quarter of the country’s oil is refined.
“It’s reliability of supply,” says Larry Springer, a senior manager for Enbridge Energy, the Alberta-based oil and natural gas transport and distribution giant.
Basically: Gulf Coast refineries can’t count on a reliable supply of West Texas Intermediate, so they’ve been buying its more expensive competitor, the Brent crude.
Because of booming production in Canada and from oil-shale plays in North Dakota, refineries in the Midwest are maxed out. West Texas Intermediate has been stockpiling in Cushing, and the price has been flagging. Brent was selling for $16 more per barrel than WTI when the markets closed on Monday.
Economically, that’s bad for Oklahoma oil producers and royalty owners, says Cody Bannister with the Oklahoma Independent Petroleum Association. With the current oil price gap, Oklahoma is losing more than $60 million a year in tax revenue, he says.
Mid-continent producers want to drain Cushing’s oil glut and reduce the price gap between their product and its chief competitor.
Cushing today is a constant construction site. A lot of old tanks — some on the Enbridge lot date back to the 1920s — are being updated or replaced, but much of the construction is new, and massive.
In Cushing, tanks and pipelines go hand-in-hand, and neither are built on spec, Springer says. He won’t go into detail about the breakdown of Enbridge’s customer base — a mix of refineries, producers and investors — but Springer says much of the frenzy is pipeline-related.
“A lot of it is being built in anticipation that there are going to be additional access to markets with these new pipelines,” he says.
Pipeline reliability comes with a price. It means monetary investment and political exposure. And the bigger a pipeline project gets the more political it becomes.
TransCanada’s Keystone XL pipeline — which would have transported crude from the oil-sands of Alberta through Cushing on its way to the Gulf Coast — became a policy football when President Barack Obama rejected the company’s proposal in January.
Obama said it needed more study because it would cross the ecologically sensitive Sand Hills region of Nebraska. Republicans and energy executives said Obama was bowing to pressure from environmental activists.
In February, TransCanada announced plans to continue with the 485-mile Cushing-to-Texas portion of the pipeline while it worked out the northern segment’s route, which Nebraska lawmakers are now on the verge of approving, the Associated Press reports.
In March, Obama made a rare visit to a muddy pipe yard in Oklahoma and pledged his support for Keystone Gulf, the southern pipeline segment.
“I’m directing my administration to cut through the red tape, break through the bureaucratic hurdles, and make this project a priority,” Obama told the crowd at the event, which was closed to the public and consisted largely of supporters and news media.
Obama issued an executive order to create a steering committee to improve permitting processes in general, and a memo that directed federal agencies to coordinate and expedite their reviews to speed up decisions on domestic pipeline projects.
Republicans, like Oklahoma Gov. May Fallin, said Obama was just giving speeches and taking undue credit.
“The president is here in Oklahoma taking credit for successes in oil and gas production that his administration has nothing to do with and, in many cases, continues to actively obstruct,” Fallin said.
The Keystone Gulf pipeline alone isn’t enough to drain Cushing’s crude clog, experts say.
There’s already an oil pipeline between Cushing and the Gulf Coast, but it was built to move oil north. That could change as early as mid-May. The Seaway pipeline — a joint project of Enbridge and Enterprise Products Partners — is being configured to run in reverse. Seaway is expected to move 150,000 barrels per day this year and expand to 400,000 a day by next year. TransCanada says Keystone Gulf will be transporting about 700,000 barrels a day by mid-2013.
Enbridge’s Springer says it’s not a race. Seaway wouldn’t be reversed and Keystone Gulf wouldn’t be built if the two companies didn’t already have transport contracts in place and customers in line.
“There’s going to be need for more than one or two pipelines out of Cushing to meet the market demand,” he says.