OTTAWA (Dow Jones)
The risk of oil pipeline disruptions between Canada and the U.S. will remain high for at least the next year, as the network struggles to deal with growing Canadian crude volumes.
On Wednesday, Calgary-based Enbridge Inc. (ENB), which operates the major crude artery between Alberta's oil sands and the U.S. Midwest, shut down four pipelines with the capacity to carry 1.8 million barrels a day following an explosion and fire. Three lines have since been reopened while the 420,000 barrel-a-day Line 3, the site of the explosion, is expected back on stream in two to three days.
Oil prices spiked $4 a barrel in overnight trading following the news but sank on Thursday as details of the restarts trickled out, erasing nearly all of their gains at market close.
Canada's pipeline infrastructure simply hasn't kept pace with its oil production, which is expected to hit 2.9 million barrels a day this year, according to regulatory body the National Energy Board. The U.S. currently sources about a fifth of its crude oil demand, or around 2 million barrels a day, from its northern neighbor. But with no new pipelines expected to start up before 2009 at the earliest, and current capacity squeezed tight, U.S. refiners will likely be at the mercy of further glitches in the system over the coming year.
"All the (Canadian crude oil) deliveries in the U.S. Midwest are through one system," which include the Enbridge lines that were knocked out by the fire, said Colette Craig, an oil market analyst at the NEB. "Even alternative routes, those are full too."
Buckling Under Strain
Enbridge operates the biggest oil pipeline network in North America and the bulk of U.S.-bound Canadian crude flows through its pipelines. Kinder Morgan Canada, a subsidiary of Kinder Morgan Inc. (KMI), also has a 282,000-barrel-a-day system running from Hardisty, Alberta, to Wood River, Ill., via Wyoming.
This summer, an NEB report said Canada's pipeline system could buckle under the strain of growing oil exports, potentially limiting Canadian producers' access to pipeline capacity until new infrastructure came on stream.
Craig noted that Enbridge had already been rationing its spare pipeline capacity south of Superior, Wisc., though this will likely be lifted during December following the fire. Richard Bird, executive vice president of Enbridge's liquid pipelines division, said in a conference call that the line affected by the fire would return at full capacity, contingent on regulatory approval.
Enbridge is working on several pipeline projects, notably Southern Access and Alberta Clipper, which will add a combined 850,000 barrels a day of capacity between Hardisty and the Chicago area by early 2009 and 2010 respectively. Meanwhile, TransCanada Corp.'s (TRP) Keystone pipeline will add 590,000 barrels a day between Hardisty and the U.S. Midwest in late 2009.
The age of Canada's existing pipeline network, largely constructed between the 1950s and mid-1970s, could also be a factor.
"You've got a system that's tired and old and prone to breakdowns, and that's a problem," said Adam Sieminski, chief energy economist at Deutsche Bank. "Until we can get that fixed, we're going to continue to have accidents... but this is going to take years, not months."
However, the trend for pipeline incidents has actually been going down in recent years, thanks to programs to monitor "age-related defects," according to the NEB. Paul Trudel, the acting head of NEB's division that oversees industry operations, said older, worn-out sections are replaced as needed, and so any problems are unlikely to be related to age.
But as long as Canada remains the biggest crude exporter to the world's biggest crude importer, any incidents like the Enbridge fire will cause "a bit of a ruckus" on the oil futures markets, the NEB's Craig said.
She added: "I don't think there's any solution until we see new capacity."
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