Sen. Wyden advocates for FTC investigation of Keystone XL

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The Honorable Jonathan Leibowitz

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Dear Chairman Leibowitz:

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I am writing to request the Federal Trade Commission investigate whether agreements exist among Canadian oil shippers that violate U.S. antitrust laws. The agreements involve transportation of tar sands oil via the proposed Keystone XL pipeline, which will span the length of the continental U.S. and allow tar sands crude to bypass existing Midwest refineries. It has been brought to my attention that documents and testimony indicate that at least seven Canadian oil shippers have agreed to incur increased near-term shipping costs on the new pipeline in order to impact market supply in the existing markets so as to drive up the overall price of their product for U.S. refiners. Because of the potential impact on US gasoline consumers and because of the long-term impacts that such arrangements and the construction of the Keystone XL pipeline could have on U.S. oil supplies, markets and energy security, I am requesting the FTC investigate whether anti-competitive practices violating U.S. antitrust laws have occurred in relation to the proposed pipeline project and related shippers’ agreements.

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On October 8, 2008, the U.S. Federal Energy Regulatory Commission (FERC) approved Transportation Service Arrangements (TSAs) between TransCanada Keystone Pipeline, LP and shippers to utilize, or pay for, capacity on the Keystone pipeline system. While the Order does not expressly state who these shippers are, it is my understanding they are members of the “Keystone Shippers Group,” which includes: Canadian Natural Resources Limited, Conoco Phillips Canada Marketing & Trading ULC, EnCana Corporation, Shell Trading Canada, Total

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E & P Canada Ltd.’ and Trafigura Canada General Partnership. Although these TSAs were approved by FERC, they remain secret, and were granted confidential status by FERC and by the Canadian National Energy Board (NEB) in a Sept. 14, 2009 NEB Order. Thus, it is my understanding the exact terms of the TSAs remain hidden and the complete nature of the agreements among these shippers has not received full public scrutiny.

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While the full nature of the arrangements agreed upon by the Canadian shippers is unclear, there is clear indication that there is a coordinated “strategy” among Canadian suppliers to gain higher prices. According to TransCanada, the proposed Keystone XL pipeline can be used by Canadian oil shippers to add up to $4 billion to U.S. fuel costs. Testimony taken on September 17, 2009 before the NEB indicates that the Canadian companies intend to incur higher pipeline tariff costs using the Keystone XL pipeline to bypass PADD II refineries in the Midwest. This will have the effect of manipulating supply levels allowing prices of oil refined in PADD II to rise and ultimately benefitting the Canadian companies with higher prices. This comes to the fore in this exchange between Mr. T. Wise of Purvin and Gertz on a panel for TransCanada Keystone Pipeline GP Ltd. and Mr. D. Davies of Enbridge Pipelines Inc.:

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“A producer who supplies a committed volume on the Keystone XL Pipeline may expect to receive a lower net-back price on this volume but this strategy would be intended to raise the price in PADD II and raise the average net-back price.”

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— (A short pause/Courte pause)

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This “strategy” apparently relates to an attempt to reverse the recent relative lowering of pricing that has occurred in Midwest refineries. The reasons for the price decrease in the Midwest are complex, but they can be reversed by Canadian shippers agreeing to bypass PADD II refineries and sending their crude to PADD III. Construction of KXL would open the Gulf Coast to tar sands crude. This would reduce total oil flows to the Midwest, in turn reducing the current crude supply and causing prices to rise in PADD II. Midwestern refiners would pass this rise in price on to consumers.

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The Canadian oil shippers appear to cooperate to use the new pipeline capacity to expand tar sands operations in Canada and then transfer some of the flows to the Gulf Coast, resulting in higher per barrel costs in the Midwest on all crude oil pipelines. The increase would be $3.00 per barrel overall and $6.55 per barrel sold in Midwest markets. This could increase revenue for the Canadian producing industry by $2-3.9 billion per year.

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The proposed pipeline will likely also encourage the eventual export of crude oil derived from tar sands from North America. Substantial investments have been made in Canadian production by foreign firms, including China National Petroleum Corporation, the Chinese state-run oil company. While it does not appear that SINOPEC or the other Chinese companies are currently included in the group of already committed shippers, the proposed pipeline expansion far exceeds the initial committed capacity. As a result, other Canadian production will likely utilize the Keystone expansion, including projects supported by foreign investment. Current pipeline capacity does not, on its face, warrant the kind of additional foreign investment that is occurring and strongly suggests that exports outside of North America are ultimately envisioned by these investors. Canadian oil would then not only bypass PADD II refineries, but also PADD III refineries in the Gulf Coast; the avowed purpose of the pipeline.

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It is therefore critical to determine whether the increased prices expected to be incurred by U.S. consumers and the potential for significant redistribution of crude oil supplies now destined to U.S. refineries due to the proposed construction of this pipeline is the result of anti-competitive practices that violate U.S. laws through agreements among the proposed shippers. For these reasons, I urge the FTC to investigate the proposed Keystone XL pipeline and related agreements.

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Thank you for your prompt attention to this important matter.

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Sincerely,

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RON WYDEN