Bloomberg News

Enbridge, Enterprise Join Forces to Alleviate U.S. Crude Glut

November 18, 2011

Nov. 17 (Bloomberg) -- Enbridge Inc. and Enterprise Products Partners LP said they will team up to increase the ability of U.S. refineries on the Texas coast to get oil from a storage depot in Cushing, Oklahoma, the delivery point for most U.S. crude.

Oil climbed above $100 a barrel in New York to a five-month high on the news yesterday. HollyFrontier Corp., Marathon Petroleum Corp. and other U.S. refiners declined on concern that their profits will fall.

“The producers think this is great, because now you have enhanced connectivity and enhanced transportation into the largest area and concentration of refiners in the U.S,” Darren Horowitz, an analyst with Raymond James & Associates in Houston, said in an interview.

Enbridge, based in Calgary, said it will pay $1.15 billion for ConocoPhillips’s share of a north-flowing pipeline that extends from Houston-area refineries on the Gulf of Mexico to Cushing. Enbridge and Enterprise, the line’s other owner, will then reverse the flow.

A bottleneck at the Oklahoma storage hub, created partly by increasing production from the Bakken oil-shale formation, has caused U.S. oil to trade at a discount to imports.

The 500-mile Seaway pipeline may begin shipping 150,000 barrels by the second quarter of 2012, the companies said. Its capacity may be expanded to 400,000 barrels by early 2013, they said.

The two companies said they’re abandoning a previous plan for a larger pipeline called Wrangler between Cushing and Houston.

Link to Canada

Reversing Seaway’s flow will also create the last leg of line from Canada’s oil-sands deposits in the province of Alberta. Enbridge and Enterprise will build an 85-mile extension from Houston to Port Arthur, Texas, where there are more refineries that can process heavy Canadian crude, Rick Rainey, a spokesman for Houston-based Enterprise, said in an interview.

“They absolutely are looking at the Canadian crude,” said Horowitz, who rates Enterprise a “strong buy” and owns none of its units.

Enbridge already has a pipeline that crosses the U.S.- Canada border.

Canada accounts for more than 90 percent of all proven reserves outside the Organization of Petroleum Exporting Countries. Prime Minister Stephen Harper has said he wants to make Canada a “superpower” in global oil markets.

TransCanada Corp.’s proposed Keystone XL pipeline, which would extend from Alberta to the Gulf refineries, has been delayed because the U.S. State Department asked TransCanada to study alternate routes for the line.

New Route

TransCanada had originally planned to open the Keystone pipeline in mid-2013. TransCanada Chief Executive Officer Russ Girling said yesterday it could take six to nine months to negotiate a new route.

Environmental groups that opposed the Keystone line are likely to fight any similar pipelines because they’re opposed to oil-sands production, Girling said yesterday.

If Enterprise and Enbridge “can fill that gap without the uncertainty, then XL is likely to lose those shippers,” Brian Watson, director of research at Steelpath Capital Management LLC, said in an e-mail.

Shippers may still sign up with TransCanada for competitive reasons, said John Edwards, an analyst at Morgan Keegan & Co. in Houston.

Growth in crude output from Canada’s oil sands and in shale-rock formations in the U.S., including North Dakota, will create a need for both the Keystone XL and Enbridge’s alternative, Jackie Forrest, director of global oil for IHS Cambridge Energy Research Associates, said in a Nov. 11 analysis.

Both projects are needed “in order to create enough takeaway capacity to prevent bottlenecks,” she said.

--With assistance from Aaron Clark and Mark Shenk in New York, Bradley Olson in Houston, Jeremy Van Loon in Calgary, Edward Klump in Houston and Doug Alexander in Toronto. Editors: Charles Siler, Susan Warren

To contact the reporters on this story: Mike Lee in Dallas at mlee326@bloomberg.net; Edward Klump in Houston at eklump@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net


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