COLUMN-Canada opts for $12 bln oil path of least resistance: Campbell

Thu Aug 1, 2013 10:40am EDT

By Robert Campbell

NEW YORK Aug 1 (Reuters) - If Canadian oil producers had their way, the last place they would pumping their Alberta crude would be to Canada's East Coast. But TransCanada Corp's Energy East pipeline project is emerging as the path of least resistance for booming oil sands output.

If only local opposition was not a factor, Canada's No.2 pipeline operator must be lamenting. From a marketing standpoint, the logical place to ship Canada's growing oil surplus is the West Coast. It is closer to Alberta, so shipping costs would be less, and the oil would be going to high-value Asian markets.

Failing that, shipping crude through the United States to the Gulf Coast would be the next best option. The big refineries in Texas and Louisiana are able to handle the heaviest grades although marketing power is diminished by the abundance of U.S. domestic crude output.

The East Coast, on the other hand, is a dying market. Shrinking U.S. light crude imports are cutting into the premium value of Atlantic basin crudes. Refinery closures in Europe and North America have also been concentrated on refineries that consume these crudes.

Asian buyers will take barrels from the Atlantic basin but have a strong negotiating position over price given the relative oversupply and the high cost of shipping further undermines what producers can expect to receive from Asian customers buying crude from the east coast of Canada.

But sometimes the path of least resistance is the most expensive. Without Soviet-style powers to dictate the location of a pipeline, producers have to accept what they can get. Still, Alberta producers will be paying a hefty tariff to pump crude up to 2,600 miles (4,200 km) before Asian buyers start lifting cargoes.

With the Keystone XL pipeline to the United States still in limbo and little sign the Obama Administration is prepared to act quickly, Canadian oil producers have little choice but to opt for Plan B, a $12 billion pipeline to the least attractive market.

The delay will be painful, however. With no new pipeline until 2017, they face a few years of poor pricing as rising output runs up against increasingly saturated inland North American markets.

NATIONAL ENERGY POLICY

The whole Canadian pipeline saga is replete with irony. The Alberta oil producers' assumption that the United States would always buy as much Canadian oil as could be produced has been exposed as dangerously naive and short-sighted.

Moreover, Alberta's hostility to any form of federal energy policy has for years put off the Canadian federal government from any active efforts to promote oil export routes. Under Canada's constitution, the provinces are the owners of natural resources and have jealously guarded their prerogatives.

The last attempt to use federal power to promote a national energy policy is loathed to this day in Alberta. The 1980s National Energy Program forced the province to share its oil income with the federal government to help redistribute the country's oil wealth. The NEP also sought to improve energy supply security in eastern Canada and keep domestic oil prices below export world prices.

Now in the face of opposition from environmental groups in the United States and Canadian aboriginal people whose lands lie athwart routes to the Pacific Ocean, the Alberta oil producers need to go east.

But getting Energy East approved may require a reversion of sorts to the National Energy Program. Quebec's provincial government has already raised concerns about the project. But many observers suspect Quebec's concerns are motivated as much by a desire for a slice of the revenue pie as by environmental stewardship.

Hard bargaining likely lies ahead for Alberta even if Canada's conservative government has taken steps to curtail the powers of the national pipeline regulator by reducing the scope of its reviews of pipeline projects.

That said, Energy East, for all of its economic headwinds, now looks like the most likely pipeline megaproject in North America to go ahead on time.

TransCanada already owns or controls much of the right of way on the pipeline making the review process much easier. Canada's pro-oil policies will also ease the regulatory review and the eastern provinces are likely to be swayed by the prospect of cheaper oil and a slice of the revenue pie.

Keystone XL, on the other hand, may well languish for years of further review, perhaps even until U.S. President Barack Obama completes his presidential term in early 2017. Proposals to build pipelines to the Pacific aim to be built towards the end of the decade but opposition from aboriginal groups is fierce in places and likely will stall the process.

One thing is for sure. The Energy East proposal will not end the pipeline sagas. If anything, they are set to intensify.

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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