Analysis: To Canada and back, a new U.S. oil pipeline race

Thu Mar 29, 2012 2:20pm EDT
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By Bruce Nichols

HOUSTON (Reuters) - Even as big U.S. oil pipelines invest billions of dollars to ship booming oil production south from Canada and North Dakota, a new race is underway in the opposite direction.

Two of the country's biggest pipelines, both now underutilized, are competing to pump a special type of ultralight oil from the Gulf Coast to the Midwest, betting on growing demand from Canadian producers for the "diluent" necessary to get their heavy oil sands bitumen flowing to refiners.

The race between the Capline and Explorer lines, which may play out over years rather than months, is the latest example of how fast-growing inland oil production has roiled the U.S. market, forcing key parts of the nation's oil infrastructure to adapt -- or face obsolescence.

It is fueled by forecasts that demand for diluent from Canadian oil producers will quadruple in just over a decade.

Oil sands producers need natural gas condensate or light oils to mix with their heavier oil sands bitumen, diluting it enough to flow through pipelines to the United States. But low natural gas prices are curbing Canadian production of such liquids, causing imports from the United States to surge.

"Oil sands and Alberta natural gas (production) are going in opposite directions," said Paul Reimer, senior vice president of marketing, power and transportation at Cenovus Energy, one of the largest oil sands operators in Alberta.

"We're anticipating that as oil sands production continues to increase, we'll be requiring more and more of various sources (of diluent). It's really a case of tapping into all the light liquid sources in North America," he said.

Capline, the biggest crude oil pipeline in the mainland United States, has recently begun shipping some diluent from as far away as the Eagle Ford shale in Texas, partially filling a void left by Midwest refiners who now have cheaper alternatives to Gulf or imported crude via Capline, analysts say.   Continued...

The Syncrude tar sands plant and tailings pond at their tar sands operation north of Fort McMurray, Alberta, November 3, 2011. REUTERS/Todd Korol