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* Indiana crude unit restart pushed back to April/May
* Delay will prolong Midwest crude glut, weigh on prices
* BP says overall $4 bln project still on track for H2
* No delays as a result of lawsuit over flawed fireproofing-BP
Dec 14 (Reuters) - A $4 billion project to upgrade BP Plc's 337,000 barrel per day (bpd) Whiting, Indiana, refinery hit unexpected snags this month, including a more than one-month delay in restarting its biggest crude oil unit and a lawsuit against contractors.
BP has pushed back the start-up date of its revamped 260,000 bpd sour crude unit by 30 to 45 days until mid-April, industry intelligence group IIR Energy reported.
Specialty newswire Energy News Today also reported the delay, saying the unit would now be restarted in May instead of March.
Both reports also said that the postponed restart of the unit, which was shut in early November for an overhaul initially expected to take just three or four months, would also push back the commissioning of a new 120,000 bpd coker unit that is key to BP's plan to process more cheap, Canadian sour crude.
The delays will depress demand for Canadian crude in the mid-continent area, prolonging a supply glut and weighing heavily on benchmark U.S. crude as production from North Dakota and Canada expands more quickly than the new pipelines that are set to deliver it to Gulf Coast refiners.
Canada's benchmark heavy crude oil differentials tumbled this week to their lowest in five years, putting local prices at under $50 a barrel -- a point that could begin to force oil companies to consider paring investment or cutting back output.
"This is bearish for WTI," says Amrita Sen, chief oil analyst at Energy Aspects in London.
"It looks like the glut around Cushing is now going to last at least another quarter, which is no help at all for Canadian or inland producers in the United States, some of whom are already suffering from cash flow issues."
BP declined to comment on the timeline for individual units, but said the overall project at the Whiting refinery remained on track.
"The project to convert the Whiting refinery to sour crude is on schedule for completion in the second half of 2013. The project is 80 percent complete," BP spokesman Scott Dean said.
IIR said that the revamped Pipestill 12 crude distillation unit would be running sweet crude until the completion of the coker, which could require up to a month of testing after the CDU is finished. ENT said the coker would start up in August. Both said the overall project timeline was unchanged.
BP filed a lawsuit in federal court last week against a handful of its contractors that alleges defective fireproofing and negligence, including damage claims for "loss of use." The IIR and ENT reports made no mention of the lawsuit.
The lawsuit, in the U.S. District Court, Northern District of Indiana, alleges that some of the thousands of tons of new structural steel that was required for the overhaul was coated with a fireproofing material called Pyrocrete 241, which was "degrading prematurely and causing damage to BP's property."
BP said it was not aware of "any safety concerns or structural integrity issues" as a result of the fireproofing material. The company said it did not expect the remediation efforts to delay the commissioning schedule.
The Brent/WTI spread, seen as a gauge for the glut of crude trapped in the U.S. Midwest, widened on Friday by 40 cents to $16 a barrel for next June as traders priced in an extended period of reduced demand, although it was still stronger than mid-November when it stood at around $18.
And although the Whiting delay should not affect near-term demand, Western Canada Select heavy blend for January delivery slumped this week to $42 per barrel under WTI, according to Shorcan Energy Brokers, the lowest in five years. A week ago, WCS sold for $32.75 under the benchmark.
Though the spread typically widens in the winter, limitations on the Enbridge Inc pipeline system, which carries the bulk of Canada's oil exports to the United States, and the planned opening of Imperial Oil Ltd's Kearl oil sands project, which will produce 110,000 bpd of pipeline-ready bitumen, have weighed on prices.