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RPT-ANALYSIS-TransCanada's East Coast oil pipeline to change trade dynamics
August 5, 2013 / 4:43 PM / 4 years ago

RPT-ANALYSIS-TransCanada's East Coast oil pipeline to change trade dynamics

(Repeats to widen audience)
    By Sabina Zawadzki and David Sheppard
    Aug 5 (Reuters) - TransCanada Corp's plan to build
one of the world's longest oil pipelines has reverberations far
beyond Canadian shores.
    The planned 2,700 mile (4,400 kilometers) pipeline, which
will bring crude from Canada's energy capital of Alberta to
refineries and ports on the East Coast, has the potential to
upturn the dynamics of the North Atlantic oil trade squeezing
out some imported crude to North America and revitalizing
once-ailing refineries.
    The Energy East line could also reinforce North Sea Brent
crude as the world's oil benchmark against which giants such as
Saudi Arabia price their western-bound exports, analysts say,
while opening up the option of more Canadian heavy crude flowing
to the U.S. Gulf Coast.
    The scale of the $12 billion, 1.1-million barrel per day
(bpd) pipeline, which will extend part of an old natural gas
line, is hard to understate. Were it to start in London, it
would stretch all the way to Tehran. In the United States, it
could pump crude oil from Beverly Hills to New York City.
    And its capacity is greater than the entire oil production
of Azerbaijan, could provide 6 percent of daily U.S. oil
consumption or, put another way, has the ability to carry 30
percent of Canada's total daily oil production.
    "In the short and medium term, this isn't a project focused
on exporting heavier Canadian oil to the U.S. Gulf Coast," said
Mark Routt, a senior energy consultant at KBC in Houston, who
has a number of clients interested in the project.
    "The initial stage of this project will be primarily about
sending light sweet crude to Canadian refineries."
    That could effectively wipe out Canada's need to import
crude for its eastern refineries. They now import around 700,000
bpd from North and West Africa and Latin America because
Canada's own supplies lie across a vast wilderness in the far
West. 
    Africa and Latin America will have to find a new home for
their barrels by 2017 or 2018, if the pipeline is completed on
time.
    The twinning of the project with a plan to build and operate
a new deepwater export port in Saint John, New Brunswick will
give oil producers an outlet for the 400,000 bpd or so of
leftover, after Canada's eastern refineries consume their share.
    "The next stage would be to potentially expand the project
to ship light sweet crude to refineries on the U.S. East Coast,"
Routt said.
    Several refineries on the U.S. East Coast have shut down in
recent years due to poor economic performance. Access to
Canadian sweet crude, cheaper than European and African imports
due to transportation costs and the lower U.S. benchmark price,
could support the plants that remain. 
    
    BEYOND CANADA
    Canadian oil producers have even further-reaching ambitions
for the pipeline, with some looking at the feasibility of
exporting barrels to Asia. 
    TransCanada Chief Executive Russ Girling said oil producers
in Alberta were looking to reach markets as far away as India. 
    John Auers, senior vice president at refinery specialist
Turner, Mason & Co in Dallas, said that while it is an ambitious
goal, it could one day be possible for Canadian crude to compete
with Middle Eastern producers for market share in the Indian
subcontinent.
    "India has now built up a fairly decent base of heavy crude
capacity," said Auers. "(TransCanada) can go all sort of ways."
    Sandy Fielden, analyst at consultants RBN Energy in Austin,
said the majority of Canada's heavy crude exports from the line
would still end up closer to home.
    "The obvious competition will be with heavier Mexican and
Venezuela crudes into the U.S. Gulf Coast," he said.
    European refineries are a less likely destination, Fielden
added, as most are geared toward lighter crudes such as Brent.
    
    CONSOLIDATED BENCHMARK    
    Another outcome the East Energy line might bring is the
reinforcement of Brent crude oil as the world's premier
benchmark, analysts said, amid talk the grade is losing
relevance and could see a challenge from a rival exchange in
Asia, where demand is rising.
    "A preponderance of light sweet crude moving East could
consolidate Brent's benchmark's status," said Ed Morse, managing
director of commodity research at Citi.
    "Saudi Arabia and Iran and other Middle East producers
feeding into the European market would be increasingly dependent
on benchmarks defined in the local Atlantic Basin markets."
    Morse said heavier barrels moving on the pipeline could also
eventually provide a new "sour" benchmark for the region.
    Several analysts said the increased capacity of the Energy
East pipeline from an initial proposal of 800,000 bpd reflects
uncertainty over Canada's other grand pipeline projects.
    TransCanada's own Keystone XL project, which would expand
its ability to ship heavy crude to Gulf Coast refineries by
830,000 bpd, is yet to get off the ground after years of waiting
for U.S. approval and has become a target for environmental
groups.
    Proposals for pipelines to the West Coast, which would allow
the country to ship oil to the lucrative Asian market, are
opposed by Canadian indigenous people, or First Nations.
    "Now, there are a lot of moving parts, but if we assume
there are ongoing problems with getting approval for Keystone XL
and Enbridge's planned pipeline to the West Coast of Canada then
you can see why they've expanded this project," Fielden said.
    TransCanada said one project does not replace the other and
that it has long-term commitments for Keystone XL, which has
always been designed to carry heavier crude from the tar sand
fields.
    North America is adjusting its infrastructure to the
landscape that has been emerging in the oil industry in the past
five years with the advent of shale oil and gas and the Canadian
tar sands. Pipeline companies have spent billions of dollars
building new pipes or reversing the direction of old ones.
   Turner, Mason's Auers thinks there is always a risk of
over-building, but believes the Energy East pipeline is a major
stage in North America's adjustment to its energy renaissance.
    "We look at North America as a whole. If you export Canadian
light crude that provides room for U.S. light crude."

 (Reporting by Sabina Zawadzki and David Sheppard in New York;
Editing by Tiffany Wu and Leslie Gevirtz)

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