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U.S. delay pushes Canada oil pipeline choke points upstream

By Nia Williams

CALGARY, Alberta (Reuters) - Enbridge Inc is on the brink of breaking through oil pipeline bottlenecks in the U.S. Midwest that have dogged the company for nearly four years, potentially ending a need to ration space at the heart of its network.

But here's the rub: Relieving congestion downstream is simply likely to expose choke points further upstream, traders say, as unexpected delays in securing a U.S. permit to expand a major segment of its 5,363km (3,333 mile) Mainline system leaves Canada's heavy crude bottled up for months more.

Several critical conduits in and around the Chicago area will this summer open new capacity on the Mainline, which carries the bulk of Canadian crude exports to U.S. refiners.

Those segments have regularly struggled to meet shipper demand due to a growing market for discounted heavy Canadian crude as well as pressure restrictions imposed by regulators after two high-profile spills in 2010. Demand is now exceeding capacity on some lines by more than a third.

But a parallel project to expand the northwestern leg of the system called Alberta Clipper, which runs from Alberta's oil sands to just south of the U.S. border in Minnesota, has been delayed by as long as a year. And that line is already pumping flat-out, according to company data seen by Reuters.

As a result, traders and analysts say the bottleneck will simply shift into Canada, leaving cash crude prices under pressure well into 2015. Last November, when export constraints were particularly severe, benchmark Canadian heavy crude traded at a discount of more than $40 a barrel.

"Unless the export system has lots of spare capacity any increase (in one line's capacity) just moves choke points from one spot to another," said Steven Paget, analyst at FirstEnergy Capital in Calgary. "You could argue the system is running at close to effective capacity."

The mismatched timing is the latest complication in the Canadian oil industry's effort to get its crude to global markets. The Mainline system has been hamstrung by limited space in recent years as oil sands production raced ahead of pipeline capacity and alternative export projects, such as rival TransCanada's Keystone XL pipeline, ran into hurdles.

As a result, Enbridge is often forced to engage in a monthly "apportionment" of space on its line, a regular source of frustration for crude traders.

For example, in March Enbridge received nominations to ship in excess of 360,000 bpd of crude on its Line 6B from near Chicago to Sarnia, Ontario, just across the Michigan border, according to a March 13 Enbridge presentation seen by Reuters.

But it could accommodate only 209,000 bpd, the line's maximum capacity, the document showed. Line 6B is due to be more than doubled to 500,000 bpd when work is completed in May.

Enbridge spokesman Graham White said the company would not speculate publicly on future apportionments. In February, the company's president of liquids pipelines Guy Jarvis said pinch points in the system move all the time.

Easing congestion on the eastern end of the network will be welcome news for some integrated producers and refiners, particularly a handful in and around Sarnia, including Suncor Energy Inc and Royal Dutch Shell .

But it may do little to boost prices for independent producers such as Canadian Natural Resources Ltd and MEG Energy Corp that are pouring investment into more costly crude-by-rail infrastructure in an attempt to bridge the gap left by lack of pipeline space.

EXPORT BACKBONE

Enbridge's Mainline system currently transports around 2.2 million barrels per day of crude, accounting for the vast majority of Canada's 2.7 million bpd U.S.-bound exports. Just under 1 million bpd of that is shipped on its "light" lines.

The growth is coming from the heavier oil sands, however.

Western Canadian output is expected to more than double to 6.65 million barrels per day by 2030 and existing pipeline capacity out of the region only totals around 3.5 million bpd, according to the Canadian Association of Petroleum Producers.

Although much of that oil is still years away, the strains of getting it out of landlocked Alberta are already showing.

In March alone, oil producers, traders and refiners asked to ship a total of 1.37 million bpd of heavy crude through Enbridge's Western system, according to the Enbridge presentation from last month. But the firm could only accommodate 1.18 million bpd, the data show. Enbridge only publicly reports apportionments in percentages, not barrels.

Many traders in Canada's oil capital Calgary were therefore dismayed by news earlier this year that phase one of the Alberta Clipper expansion would be delayed from mid-2014. Boosting capacity by 350,000 bpd from Hardisty, Alberta, and Superior, Wisconsin, will help ease congestion on that part of the system.

Earlier this month Enbridge Energy Partners President Mark Maki said it would likely be delayed until July 2015 as the firm works through a further environmental review by the U.S. Department of State, which must clear the project because it crosses international borders.

Alberta Clipper has not drawn the same degree of condemnation from environmentalists as Keystone XL, in its sixth year awaiting a permit, yet both would ultimately serve the same ends: getting more oil sands crude to U.S. refiners.

"There's some trepidation about whether Clipper will run into the same problems as Keystone," a trader with a major Canadian oil producer said. "Apportionment is just going to move further upstream."

Other projects are years away. A $7 billion project to replace Line 3 between Hardisty and Superior, enabling the pipe to run at its intended capacity of 760,000 bpd, is slated to be complete in the second half of 2017.

MIDWEST CONGESTION

The main choke point is currently on the 6B line to Sarnia, which can be rationed by as much as 45 percent. Enbridge has spent $1.6 billion expanding the line to 500,000 bpd, which should end apportionment when it starts up in May, traders say.

Line 6B has operated below capacity since regulators imposed pressure restrictions after a rupture in 2010 spilled more than 20,000 barrels of oil into the Kalamazoo River.

Another line that has struggled to meet demand is 6A from Superior to Griffith. In March, shippers sought over 920,000 bpd but Enbridge accepted only 590,000 bpd. While 6A itself is not going to be expanded, lines 61, 62 and 78 run along parallel routes, and will have capacity of 800,000 bpd by late 2015.

In total, a variety of projects to alleviate congestion around Chicago will add around 2 million bpd of new capacity over the next 18 months, meaning more crude overall will move through the Enbridge system.

But despite billions of dollars of investment, some traders fear growing demand will continue to outstrip capacity, particularly if the Clipper delay drags, with such pipeline projects now deeply rooted in U.S. politics.

"Pipeline regulatory processes are not what they once were but people are still attaching timelines to them based on the old world," said energy economist Andrew Leach, an associate professor at the University of Alberta.

Certain refiners such as BP Plc's 405,000 bpd facility in Whiting, Indiana, recently reconfigured to run more heavy Canadian crude, and Exxon Mobil Corp's 238,600 bpd refinery in Joliet, Illinois, could continue to see crude nominations rationed, traders warned.

(Reporting by Nia Williams; Editing by Jonathan Leff and Cynthia Osterman)

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