New Enbridge line to Gulf would take on Keystone

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As North American crude oil prices continue to languish, pipeline builder Enbridge Inc. is launching a major new round of construction to push more barrels down the centre of the continent, in hopes of easing supply gluts that have kept prices low.

Enbridge said Monday evening that it intends to expand by more than five times the size of the Seaway pipeline it recently acquired, and proceed with a major new pipe that will carry new supplies between the U.S. Midwest and the continental heartland.

The projects give Enbridge pole position in the race to bring Canadian oil to the Gulf Coast, launching it ahead of Keystone XL, the Alberta-to-Texas competitor TransCanada Corp. now says won't be fully built until 2015. That is, if TransCanada can secure approval from U.S. authorities, who have delayed the pipe over the past year.

Together, the two new Enbridge pipes will cost $3.8-billion. That includes $2.8-billion for Flanagan South, which will run from Flanagan, Ill. to the major oil hub at Cushing, Okla. A further $1-billion will go to twin the Seaway pipeline between Cushing and Gulf Coast refineries. Enbridge intends to bring the existing 150,000 barrel-a-day pipe to 400,000 with extra pumps, by early 2013. The second line will bring it to 850,000 barrels a day.

Enbridge says it has enough support from oil shippers – the energy companies and refineries who pay to send crude down pipes – to go ahead with both projects, which are expected to be complete by 2014.

In a news release, Enbridge made clear that it intends the new projects to compete with Keystone XL, which was intended as an express line to carry oil sands crude to the Gulf Coast, which is looking for new barrels to replace waning supplies from Mexico and Venezuela.

"Upon completion of the reversal and expansion of Seaway, shippers can secure seamless transportation rates on the Enbridge and Seaway systems to reach refineries along the U.S. Gulf Coast," the company said.

Enbridge was also quick to point out that it faces fewer obstacles to construction than TransCanada. Where Keystone XL will largely dig into new ground – a fact that has stirred major opposition in states like Nebraska – Flanagan South will follow the route of Enbridge's existing Spearhead system. The expansion of the Seaway pipeline will take place in an existing right-of-way.

The new pipes come at a critical time for oil companies across the continent – but especially in Canada.

With a backup of crude at Cushing, North American oil prices have lagged nearly $20 (U.S.) a barrel behind international crudes. In Canada, it's been even worse. Most Canadian crude exports today flow into the U.S. Midwest. But fast-rising volumes of oil sands crude, combined with even faster-growing quantities of oil from the U.S. Bakken play that flow on the same pipes, have created such a wash of oil that prices have fallen even lower.

Canadian heavy oil is now trading nearly $30 (U.S.) below the North American benchmark West Texas Intermediate. So-called "synthetic" crude, which is a light oil made out of oil sands stock, has also traded at a discount of some $7.

Together, those discounts are costing the Canadian oil patch some $18-billion a year, according to a calculation by CIBC World Markets Inc., and the losses have spawned a tremendous race for new alternatives.

TransCanada, for example, has proposed pumping oil through some of its country-spanning natural gas pipes, discussing an East Coast pipeline with oil companies that could move 625,000 barrels a day to central Canadian and Atlantic markets.

Companies have also turned to novel means for moving oil, including sending some volumes by rail, a method rarely used in North America in the past.