Analysis: U.S. oil spills hit support for Canada mega-pipeline

NEW YORK Thu Aug 12, 2010 9:26am EDT

Jen Kazmar holds a protest sign as she joins residents in downtown Marshall to protest the oil spill on the Kalamazoo River July 30, 2010. REUTERS/Rebecca Cook

Jen Kazmar holds a protest sign as she joins residents in downtown Marshall to protest the oil spill on the Kalamazoo River July 30, 2010.

Credit: Reuters/Rebecca Cook

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NEW YORK (Reuters) - For Calgary-based TransCanada, a recent Michigan oil spill from a pipeline operated by its rival Enbridge Inc couldn't have come at a worse time.

The spill threatens to tilt public opinion against TransCanada's $12 billion pipeline system that could ultimately stretch from Alberta to Texas.

More than 800,000 gallons (3.6 million litres) of crude oil from a 41-year-old stretch of Enbridge Inc's 6B pipeline spewed into a Michigan waterway on July 26, in one of the biggest pipeline spills in U.S. history.

That has rankled U.S. safety regulators, who earlier this year ordered Calgary-based Enbridge to monitor 6B closely for suspected corrosion.

Since the incident -- in the aftermath of BP's massive Gulf spill -- U.S. lawmakers, regulators and environmental groups are increasing their scrutiny of pipelines, including those that import crude from Canada's northern oil sands fields, the top source of U.S. oil imports.

The recent spills have jarred Americans, raising concerns over pipeline safety and increasing U.S. reliance on Canada's heavy, carbon-intensive oil sands. That could delay or scuttle TransCanada's plan to expand a crude export network.

By 2013, TransCanada's Keystone system could deliver 1.1 million barrels-per-day (bpd) along a route from Alberta to coastal Texas. But that requires U.S. approval for Keystone XL, a $7 billion, 1,661 mile Montana-to-Texas addition to Keystone's existing network, which can run 435,000 bpd to Illinois. (For TransCanada's Keystone maps, click on its website: here toneXL_Map_hd.jpg)

"The recent spills probably won't derail the (TransCanada) pipeline expansion, but could add lots of bureaucracy before it proceeds," said oil consultant John Brodman, a former Department of Energy official.

"I'd expect even more scrutiny, more investigations and more pipeline inspections going forward."

U.S. lawmakers have already scheduled two sets of congressional hearings on pipeline safety for next month, one of them in response to Enbridge's Michigan spill. Last week, protesters gathered outside a Chicago event attended by President Barack Obama, demanding he nix Keystone XL.

The State Department, which must approve Keystone XL, recently extended the project's federal review period by 90 days, into December. The Environmental Protection Agency is reviewing the plans.

Proponents say Keystone XL would lock in U.S. oil supplies -- from a politically stable U.S. neighbor and top trade partner -- to refineries on the Gulf Coast, the country's main import hub. It would be the first pipeline system to span North America from north to south, and could alleviate crude gluts in the U.S. Midwest, where oil stocks reached a record, 97.7 million barrels last month.

"From the standpoint of U.S. energy security, the expansion makes a lot of sense" said Jeremy Martin, energy program director at Institute of the Americas, in California.

"But after the BP and Enbridge spills, we're in an era of regulation where the environmental impact study could drag on for a year."

TransCanada has been planning to start construction in early 2011.

Critics contend the line will transport dirty and expensive oil sands crude, and any spill could contaminate U.S. waterways and farmlands.

Even before Enbridge's spill, Keystone XL faced opposition from 50 U.S. lawmakers worried about increasing U.S. reliance on Canada's oilsands crude, whose carbon emissions are higher than conventional oil.

Last month, California Senator Henry Waxman called oilsands "the dirtiest source of transportation fuel currently available."

PRESSURE DROP

To reassure critics about safety, TransCanada last week withdrew a request to operate Keystone XL at pressure levels above U.S. norms, which would have boosted oil flow and profits.

TransCanada has already contracted out most of Keystone's future capacity to oil companies. Operating at lower pressures won't threaten those shipments, and Keystone has state-of-the-art leak detection, spokesman Terry Cunha said.

The National Wildlife Federation recently identified more than 2,000 U.S. pipeline incidents over the last decade, including scores of oil and gas spills, explosions, and several deaths.

Keystone XL will traverse Nebraska's Ogallala aquifer, which supplies water to almost 30 percent of farmland in the U.S. Midwest. The Enbridge leak, which briefly threatened to reach Lake Michigan, is a reminder of how serious a spill could be, environmentalists say.

"The spill in Michigan shows us that pipeline accidents happen, even when the industry is regulated,'' said Sierra Club's Kate Colarulli.

But other analysts doubt the Michigan spill will delay Keystone XL at all.

"We haven't seen the incident there having any direct impact on plans for Keystone, which is a very different line," said Jackie Forrest, a director at IHS CERA in Calgary.

"The Enbridge line is old and facing end-of-life issues."

An existing Keystone line, inaugurated this year, has already had two small crude spills in South Dakota, leaking around 1,000 gallons.

CANADA CRUDE BOOM

Despite U.S. concerns, Canada's U.S. crude shipments have risen almost 30 percent from a decade ago, and it is piping in 2.5 million bpd this year, or a fourth of U.S. imports.

That makes Canada the undisputed top U.S. supplier. Not all the oil comes from oilsands, but Alberta officials have said the United States may consume more than 4 million bpd of its bituminous heavy crude within two decades, assuming pipelines like Keystone XL are built.

Meanwhile, other perennial U.S. suppliers have cut their shipments. Saudi cargoes to the United States fell to a 23 year low near 1 million barrels a day in 2009.

U.S.-bound cargoes from Latin America are dwindling. Venezuela shipped 1 million bpd last year, down a third from a decade ago. Mexico supplied 1.2 million bpd, a 13-year low.

Unless U.S. policy-makers move aggressively to wean the country off foreign oil, analysts say greater reliance on Canadian oilsands crude appears inevitable.

"What if (the U.S.) doesn't take this oil? Where are they going to get the oil that the Gulf refiners need, Venezuela?" said Cannacord Genuity analyst Robert Hastings.

(Additional reporting by Scott Haggett in Calgary; Editing by David Gregorio)

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