COLUMN-If Wrangler happens who needs Keystone XL?: Campbell

Wed Nov 9, 2011 12:07pm EST

-- Robert Campbell is a Reuters market analyst. The views expressed are his own. --

By Robert Campbell

NEW YORK Nov 9 (Reuters) - Keystone XL, the oil pipeline long seen as the key to easing the bottleneck at Cushing, Oklahoma, may be further delayed, but this development is no longer disastrous for inland North American producers.

Backed by TransCanada , Keystone XL has run up against fierce opposition from environmental groups determined to stop the growth of Canada's oil sands sector.

With the State Department thinking about altering the route of the pipeline to mollify some opponents, a delay of at least a year from its proposed 2013 start date is now a big possibility.

The environmentalists' victory, if it is one, is likely to be rather hollow.

TransCanada's rivals look set to step into the breach. And the competing pipelines will not require a presidential permit since they will not cross U.S. borders, which should reduce the political risk factor.

For instance Enbridge has been able to quietly bundle an expansion of its U.S. network into the proposed Wrangler pipeline proposal.

The expanded Enbridge line will almost certainly move oil sands crude oil and allow for greater flows of Canadian crude into the United States.

Wrangler, a joint venture between Enbridge and Enterprise Products Partners , appears to have succeeded where other pipeline proposals have failed and has secured enough customers to proceed, Enbridge's chief executive said on Wednesday.

Once operational in mid-2013, the 800,000 barrels per day capacity Wrangler would likely rapidly drain Cushing stocks if the current price structure in the market holds.

After all, new rail links are allowing producers to bypass Cushing in favor of more-profitable markets, and the end of seasonal refinery maintenance in the Midwest should encourage refiners to boost runs, particularly with the market shifting into a backwardated structure.

CANADIAN LINK

The big question is how a project as large as Wrangler has gotten off the ground where less ambitious proposals, such as Enterprise's Double E pipeline, have flopped.

Here Enbridge's participation appears to have been the key in getting the line off the ground.

While previous proposals for a big link between Cushing and the Gulf Coast have struggled for commercial backing, Enbridge already transports the majority of Canadian oil exports as well as a substantial chunk of North Dakota production.

These producers are looking for premium markets away from Cushing and Enbridge is offering it.

Thus, the second part of the Wrangler project, Enbridge's Flanagan South pipeline. Flanagan South essentially doubles the capacity of Enbridge's existing Spearhead pipeline that runs from the Chicago area to Cushing.

This will be the key to pulling even more oil sands crude into the U.S. market as well as shifting rising production from the Bakken formation in North Dakota to more-profitable destinations.

Canadian and North Dakota shippers transporting crude on the Enbridge mainline already enjoy competitive tariffs to Chicago and strong netbacks.

Moreover, with Enbridge only requiring commitments to move crude south from Flanagan, the financial burden on prospective shippers is much less than on competing lines, the company claims.

So if Wrangler really does happen in 2013 does Keystone XL even matter? In short, yes.

Over the last year the pace of development of shale and tight oil plays in North America has ramped up dramatically.

In December 2010, the U.S. government's Energy Information Administration predicted in its monthly Short Term Energy Outlook that U.S. oil production would be 5.46 million bpd in December 2011.

The latest forecast is now for 5.9 million bpd, a staggering 8 percent increase on the December 2010 estimate.

Moreover this figure understates the massive growth in onshore oil output, which has been partially offset by faster declines in Alaska and in the Gulf of Mexico.

Production from the Lower 48 states -- which exclude Alaska, Hawaii and Federal waters -- is seen in the most recent forecast reaching 4.05 million bpd by December.

A year ago the government expected Lower 48 output to be only 3.38 million bpd in December 2011.

A pipeline as big as Wrangler will reduce the imbalances in the North American market and likely boost the price of West Texas Intermediate crude relative to Brent.

But that in turn will stimulate even more shale drilling. With other plays in Ohio, Colorado and elsewhere in their infancy even more increases in inland oil production are possible.

If that happens, plenty more pipelines will be needed to accommodate this growth.

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