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Oil May Flow From Canada to Gulf

July 17, 2008

By Tom Fowler, Houston Chronicle

Jul. 17–A $7 billion pipeline project planned by TransCanada and ConocoPhillips could bring Canadian crude to Gulf Coast refineries as early as 2012.

The project, an expansion of a previously announced joint venture to move Canadian oil to the Midwest, will be the first time oil has flowed from the north all the way to the Gulf of Mexico. That’s a reversal of what has been decades of south-to-north shipments

It would also deepen U.S. reliance on Canadian oil imports, which averaged about 2.5 million barrels per day in 2007, or 20 percent of all imports, according to Department of Energy data.

“I think we’d all prefer to import more from Canada than other less reliable regions of the world,” said Jeff Dietert, an analyst with Simmons & Company International.

The 36-inch pipeline, called Keystone XL, would begin in Hardisty, Alberta, and run 1,980 miles through Montana, South Dakota, Kansas and Oklahoma before ending in Texas near Port Arthur.

A 50-mile spur could also extend the pipeline to the Houston area.

TransCanada said it already has commitments for 300,000 barrels per day for 18 years from producers, but the pipeline will be able to handle up to 590,000 barrels per day.

The remaining capacity will be made available through an “open season,” a process pipeline companies use to gauge interest in a project, that started this week and continues through Sept. 4.

Future expansions would increase capacity to 1.1 million barrels per day.

The increased Canadian shipments will likely offset declining imports from Mexico’s quickly shrinking Cantarell field and from Venezuela, which is aiming more of its exports to China, analysts note.

Oil sands fertile Development of the Canadian oil sands in a massive region that consulting firm Wood Mackenzie estimates holds more than 170 billion barrels of oil means similar projects like Keystone XL may follow.

Oil sands output is expected to increase from 1.2 million barrels per day to 3.5 million barrels by the end of the next decade, according to the Canadian Association of Petroleum Producers.

In addition to being from a nation on good terms with the U.S., Canadian crude is also less expensive. Dietert notes Canadian heavy crudes usually trade at about a $20 discount to West Texas Intermediate, which is the price of oil most commonly quoted.

So-called Maya crude from Mexico and Venezuela trades at about a $13 discount to WTI.

TransCanada and ConocoPhillips signed an agreement to build the Keystone Pipeline to deliver crude to the Midwest.

Construction has begun in Manitoba and North Dakota for that project, which will cost an estimated $5.2 billion. Delivery to refineries in Wood River and Patoka in Illinois are expected by late 2009 and shipments should be able to reach the key storage hub of Cushing, Okla., by late 2010.

Construction on Keystone XL could start by 2010 pending regulatory approvals.

Fits with strategy ConocoPhillips spokesman Bill Graham said the Keystone expansion fits into the company’s strategy of bringing together its North American assets.

ConocoPhillips is already one of the largest players in the oil sands, with more than 1 million acres under lease.

“It fits our strategic plan connecting our exploration and production assets in Canada with our refineries in the U.S.,” Graham said.

While ConocoPhillips and TransCanada are joined on this project, the two companies are positioned as foes in Alaska, where both have proposed massive natural gas pipelines to bring that stranded fuel off the North Slope to other markets.

“That’s just the nature of the business, where you can be both partners and competitors from one project to another,” Graham said.

tom.fowler@chron.com

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