UPDATE 3-Enbridge plans new U.S. oil line, profit dips

Fri Feb 15, 2013 2:10pm EST

* 50-50 project to cost C$2.4 bln-$3.4 billion

* To move up to 660,000 bpd of oil to Louisiana

* In service target 2015

* Fourth-quarter profit drops 8 percent

By Jeffrey Jones

CALGARY, Alberta, Feb 15 (Reuters) - Enbridge Inc said on Friday it is teaming up with Dallas-based Energy Transfer Partners in the latest conversion of a natural gas pipeline to transport oil, a $3.4 billion project to move large volumes of Canadian crude to Louisiana refineries.

Calgary-based Enbridge, which also reported an 8 percent dip in fourth-quarter profit, said the conversion should help reduce the deep discount on heavy Canadian crude that has pressured producer profits and hurt the economies of Alberta and Canada.

That wide spread between the price of Alberta's oil sands-derived crude and U.S. benchmark light oil is due to growing production and limited capacity to move the crude to markets.

Under the plan, the 50-50 partners would ship 420,000-660,000 barrels a day of Canadian and North Dakota oil to St. James, Louisiana from Enbridge's pipeline network in southern Illinois. That system is undergoing C$15 billion ($15 billion) worth of expansions.

"We're taking advantage of existing pipe in the ground, so not only are we minimizing the environmental footprint, but we can get it flowing to market sooner, that's very important in terms of the price disparities we're talking about,and at a lower cost than a new build," Enbridge Chief Executive Al Monaco said in a conference call.

The project would extend about 700 miles (1,130 km) and could be in service by 2015, pending U.S. regulatory approvals.

Rival TransCanada Corp converted a stretch of Canadian natural gas line to oil use for its initial Keystone pipeline to the U.S. Midcontinent from Alberta, which started in 2010. It plans a similar project for a new oil route to Quebec and Eastern Canada.

Regulatory delay and intense pressure from environmental groups on major long-haul proposals, such as TransCanada's Keystone XL pipeline in the United States, make incremental additions using existing pipelines attractive, said UBS Securities analyst Chad Friess.

"Anything that's already in the ground is a lot easier to get done than something that needs to get built. There seems to be a bit of a trend there," Friess said.

"With natural gas, a lot of the new production is coming from where it is typically consumed or prospectively exported, so in some cases existing natural gas pipelines are no longer needed....They are available for conversion to crude oil service at fairly cheap cost."

Enbridge has already expanded access to the western U.S. Gulf refining region by reversing the flow direction, then expanding, the Seaway pipeline between Cushing, Oklahoma and the Houston area, in partnership with Enterprise Products Partners .

Canadian oil producers now have little access to the large Eastern Gulf area, which would be served by what the companies call the Trunkline conversion.

The Gulf Coast, with about half of U.S. refining capacity, offers higher returns than Canada's traditional markets, such as the U.S. Midwest. This is shown by the smaller discounts on other crudes used in Texas and Louisiana that have similar qualities, such as Mexican Maya.

"The refinery area in the Gulf Coast is configured very nicely for heavy crude, and of course, that market is screaming for heavy and will continue to do so in the future, particularly given the decline in Mexican and Venezuelan crude," Monaco said.

Enbridge's system moves more than 2 million barrels a day of Canadian and North Dakota oil to the Chicago area, other parts of the U.S. Midwest and Midcontinent and into southern Ontario.

Later this year, it will boost capacity in the Midwest by 80,000 barrels a day. It will add another 600,000 bpd of capacity to Texas next year and 300,000 bpd between North Dakota and the Patoka, Illinois, pipeline hub by 2015.

These expansions are taking place as Enbridge waits for regulators to make a decision on the contentious C$6 billion Northern Gateway pipeline between Alberta and the Pacific Coast. That is expected by the end of 2013.

PROFIT REDUCED BY CHARGES

In the fourth quarter, Enbridge's earnings fell to C$146 million, or 18 Canadian cents a share, from year-earlier C$159 million, or 21 Canadian cents a share.

The result included a C$105 million impairment charge on two Gulf of Mexico gas pipelines and a C$56 million tax charge.

Excluding unusual items, adjusted earnings were C$327 million, or 42 Canadian cents a share, lagging an average estimate among analysts by 2 Canadian cents a share, according to Thomson Reuters I/B/E/S.

Revenue dropped 2 percent to C$7.2 billion.

Enbridge's Canadian Mainline transported 1.6 million barrels of petroleum a day during the quarter, up 2 percent from a year earlier.

Shares of the company, which has a market value of about C$35.5 billion, were up 38 Canadian cents at C$44.51 on the Toronto Stock Exchange. The stock has gained 13 percent in the past year.

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