Oil soars as Enbridge, TransCanada vie to end U.S. bottleneck

CALGARY – The race to deliver stockpiles of oil from Oklahoma to the world’s largest refining centre in Texas tightened Wednesday with rivals Enbridge Inc. and TransCanada Corp. both offering strategies that helped shoot the price of oil above $100 US a barrel.

New pipeline capacity envisioned by the Calgary firms to connect abundant oil supplies from the storage hub of Cushing, Okla., to thirsty Gulf Coast refineries promises to narrow a wide price gap this year between U.S. and global benchmark crudes that spread to $28 US a barrel last month, eating into the profits of North American energy firms.

Enbridge announced the purchase of ConocoPhillips Co.’s stake in the 350,000 barrel per day Seaway pipeline from the Houston area to Cushing for $1.15 billion US. The Calgary firm plans to reverse the pipeline’s flow with its operator, Enbridge partner Enterprise Products Partners LP, and start pushing through 150,000 barrels per day by the second quarter of next year, increasing the flow rate to 400,000 barrels per day by 2013.

The new deal cancels the proposed 800,000-barrel-per-day Wrangler pipeline from Cushing to the Texas Gulf Coast proposed recently by Enbridge and Enterprise.

“The Seaway pipeline reversal provides an early opportunity to offer Gulf Coast access to mid-continent producers and other crude oil shippers,” Enbridge chief executive Pat Daniel said in a release.

The Seaway endeavour directly competes with TransCanada’s $7-billion Keystone XL pipeline, which appeared to be delayed by a year after a U.S. federal review was pushed back last week to 2013. TransCanada upped its game Wednesday, however, with executives telling institutional investors at an annual forum in Toronto that they might do what they’d long been loathe to – split Keystone XL into two phases and start building a leg of the line from Cushing to the Houston refining centre next year.

TransCanada chief executive Russ Girling said the firm has yet to thoroughly discuss the idea with its shippers and with regulators, acknowledging the interest in increasing capacity to the Gulf Coast.

“Certainly the market dynamics at Cushing, Okla. have changed over the last 12 to 18 months,” Girling told reporters on a conference call, pointing out the price disparity between U.S. and global crudes largely caused by the supply glut in Cushing has producers bringing in less money, while Gulf Coast refiners pay full pop for feedstock.

“Our focus is on building the entire pipeline and those conversations have occurred in the past and will continue to occur as the market dynamics continue to evolve,” Girling said.

The 2,700-kilometre Keystone XL from Hardisty, Alta. to the Texas Gulf Coast would ship up to 830,000 barrels per day of oil.

Wednesday’s news from Enbridge offered a signal to the market much-needed take-away capacity is in the works for Cushing.

“It was quite good news and it did push up WTI oil prices this morning,” said Patricia Mohr, Scotiabank commodity expert.

U.S. benchmark West Texas Intermediate climbed more than three per cent to close at $102.59 US a barrel Wednesday, topping the $100 US mark for the first time in more than five months. Combined with pressure on

U.K. benchmark Brent, which closed down at $111.88 US a barrel due to fears the eurozone debt crisis will spark a recession, the differential between benchmarks narrowed to $9.28 US a barrel.

That spread has been pushing up profits for energy companies with refineries in the U.S. Midwest, whose market for refined products is tied to global prices but whose crude supplies have been tracking cheaper WTI prices.

“The margins will narrow for the refiners,” Mohr predicted.

Refining companies with Gulf Coast facilities tooled to receive heavy, sour Canadian crudes still have questions around how those volumes will reach them as supply contracts with Mexico and Venezuela end in two to three years’ time.

Each of the infrastructure companies vying for a slice of the Cushing-to-Texas opportunity are faced with the same choice, whether to also enable shipping of heavy crudes from Canada and supplies of light, sweet shale oil flowing south from the Bakken formation in North Dakota and Montana.

“The issue they’re all trying to grapple with is the financials around just moving the oil from Cushing to the Gulf or bringing other sources of oil to Cushing, including the oilsands oil or Bakken oil or other sources of production,” said Paul Lechem, CIBC World Markets research analyst who covers TransCanada.

Bill Day, a spokesman for Valero Energy Corp., said some of the firm’s seven refineries in Texas process light, sweet volumes from the Texas Eagle Ford shale but one 325,000 barrel per day complex in Port Arthur where Keystone XL would end is designed to take in heavy crude.

“We have been saying we support the Keystone pipeline specifically because of the ability to get the Canadian crude down to our Gulf Coast refinery,” Day said. Valero has contractual commitments to Keystone XL.

TransCanada had long insisted, even after the U.S. State Department review extension announced last week, that its project was a one-permit pipeline.

Lechem said in considering a two-phase build, TransCanada might need some regulatory certainty that the top leg, from Hardisty, Alta. to Steel City, Neb., will eventually get approved.

Keystone XL is a “fluid project,” Lechem said. “I think anything is on the table in terms of how they develop the pipeline.”