Enbridge to provide early pipeline access to Gulf Coast

Announcement impacts oil prices

TORONTO (AP) — Enbridge Inc. said Wednesday it will provide access to U.S. Gulf Coast refineries with a new pipeline that will help unclog a bottleneck of oil in the Midwest, an announcement that helped oil prices hit $100 per barrel in North America for the first time in nearly four months.

Calgary, Alberta-based Enbridge said it agreed to pay $1.15 billion to buy half ownership in the Seaway crude pipeline system between Texas and Oklahoma from ConocoPhillips.

Enbridge said they’ll reverse the direction of crude oil flows on the Seaway pipeline to enable it to transport oil from Cushing, Oklahoma, to the Gulf Coast.

The news is a major development for the North American oil market. Oil companies are eager to ship oil to the massive refinery hub of Texas as oil is bottlenecked in Cushing because of a glut of supply that has driven down the price for oil in North America.

A lack of infrastructure out of Cushing has led to a price differential between oil traded in North America and the rest of the world. The spread in prices between West Texas Intermediate and Brent, which is used to price many foreign oil varieties, narrowed after the announcement to $8.92 from $12.38 before the announcement.

Enbridge CEO Pat Daniel said in a telephone interview with The Associated Press that he expects the spread to narrow further as the pipeline goes online next year.

The announcement sparked a three percent jump in benchmark crude prices. WTI ended the day at $102.59, the highest since May.

Enbridge’s announcement comes after the U.S. government delayed a decision on a federal permit for Enbridge rival TransCanada’s proposed pipeline that would take oil from the Alberta oil sands and Cushing to the refineries on the Gulf Coast. A decision on whether to allow it isn’t expected until the first quarter of 2013.

Daniel said his new pipeline line could be online with an initial capacity of 150,000 barrels per day by the second quarter of 2012. That capacity would be expanded to 400,000 to 500,000 barrels per day in 2013.

Daniel said the finalization of the deal and the U.S. announcement to delay a decision on TransCanada’s pipeline is “coincidental” but he acknowledged they are competing pipelines.

“We have the advantage of an existing asset,” Daniel said. “We consider it a very big advantage.”

Daniel said his pipeline will allow Texas Gulf Coast refineries to offset supplies of imported crude.

Rival TransCanada has been looking to ship oil to Gulf Coast refineries with its proposed Keystone XL pipeline as the Gulf Coast refineries look to Canada as their oil import contracts from Venezuela and Mexico expire.

Enbridge will become partners with Enterprise Products Partners LP, who own the other 50 percent and will continue to operate the pipeline system and storage facilities.

TransCanada, meanwhile, said Wednesday that it may be able to speed up the Cushing-to-Texas leg of Keystone XL, but that would require approval form the U.S. State Department. Russ Girling, TransCanada’s president and CEO, said the message he’s hearing from customers is that they would like to see the Cushing-to-Gulf-Coast phase come in as soon as possible.

Girling also said he expects the bottleneck in Cushing to continue because of new production from Canada and the Bakken field in the northern Midwest U.S and said both can be used.

Daniel also said there needs to be additional pipeline capacity.

“We know that production is growing in the Bakken and production is growing in the oil sands so there will be incremental capacity needed,” Daniel said.

Bryan Durkin, chief operating officer of the CME Group, which owns the Nymex, said in a statement that the reversal of the Seaway pipeline is a “major development for the North American crude oil market” that will “enchance the significance of our NYMEX Light Sweet Crude Oil (WTI) benchmark.”

On Monday, TransCanada agreed to change the route of its Keystone XL pipeline to avoid the ecologically sensitive Sandhills region of Nebraska. It’s a move the company previously claimed wasn’t possible, but is as part of an effort to push through the proposed $7 billion project. The Keystone XL pipeline would carry an estimated 700,000 barrels of oil a day, doubling the capacity of an existing pipeline from Canada.

New pipelines are critical to Canada which must have infrastructure in place to export its growing oil sands production from northern Alberta, which has the third largest reserves in the world with more than 170 billion barrels of proven reserves. Daily production of 1.5 million barrels from the oil sands is expected to increase to 3.7 million in 2025. Only Saudi Arabia and Venezuela have more reserves.

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