By Scott Haggett and Julie Gordon
CALGARY/VANCOUVER April 21 (Reuters) - Six years after applying to build the Keystone XL pipeline, Canada's frustrated oil industry appears steadfast in its support of the plan even though Washington has again delayed a decision on whether to approve the politically charged project.
The reason is simple: A massive new pipeline to the U.S. Gulf Coast remains the most elegant solution for producers looking to export burgeoning supplies of crude from Canada's oil sands to the United States. TransCanada Corp's $5.4 billion pipeline would seamlessly pump enough crude from Alberta to Texas to meet 4 percent of total U.S. demand.
"We're definitely supportive of the project," said Brad Bellows, a spokesman for MEG Energy Corp, which produces crude from Alberta's oil sands though it has not committed to ship on Keystone. "It's good for the whole circulatory system of the energy industry."
That is not to say the latest setback for the ambitious project sits well with its backers. And the decision could build momentum behind a host of other pipelines proposals as well as plans to expand shipments of oil by rail. But those options, as currently configured, could only supplement, not replace, the export capacity of the massive Keystone project, experts say.
"There's never certainty that any one pipeline will be approved. We've made commitments to the East Coast, the Gulf Coast and the West Coast, plus rail," said Rhona DelFrari, a spokeswoman for Cenovus Energy Inc, one of the largest developers of Alberta's massive oil sands reserves. "There's always a Plan B and a Plan C as well."
"DISAPPOINTED AND FRUSTRATED"
Citing uncertainty over Keystone's route because of a legal dispute in Nebraska, the Obama administration said on Friday it would allow more time for federal agencies to weigh in on the project, setting no new deadline for comments. As a result, it is likely a decision will not occur before November elections.
In response, TransCanada said it was "disappointed and frustrated" with the fresh delay, which comes more than five years after it first applied to build the pipelines.
"Another delay is inexplicable," Russ Girling, the company's chief executive officer, said. He pointed out that the first leg of the Keystone pipeline, which runs from Hardisty, Alberta, to Cushing, Oklahoma, took only 21 months to study and approve.
Keystone XL, which could start operating two years after it gets a final approval, would run from Alberta to Steele City, Nebraska, where it will meet the project's southern stretch.
Despite the latest setback, none of the companies that have signed up for space on the line have backed out. Indeed, TransCanada says that it has a waiting list of companies that want to pounce on any available capacity.
The line's shippers have remained loyal in part because they have signed contracts. More importantly, rising Canadian production means more lines are already needed, even as their options to move crude through alternative measures expand.
In 2008, when Keystone XL was first proposed, Canada's exported 1.1 million barrels of crude per day to the United States. This year, exports are nearing 2.7 million bpd on higher oil sands production and another million bpd is expected to be added over the next few years, according to industry data.
To be sure, projects that would complement or perhaps even help make up for a Keystone rejection have proliferated.
Taking advantage of tight pipeline capacity, rail terminals are expanding so quickly they could ferry more than 1 million barrels per day (bpd) of crude to U.S. refiners in two years, more than Keystone's 830,000-bpd capacity, a survey has shown.
TransCanada itself may also be able to speed up efforts to build the 1.1 million-bpd Energy East pipeline, ranking as Canada's largest, to take Alberta crude oil to refineries and export ports in Quebec and New Brunswick. The project would sidestep the U.S. political wrangle that has ensnared Keystone.
"In the worst-case scenario, where Keystone XL is denied ... we actually imagine that the Energy East project is accelerated and by accelerated, I mean they get it online around 2017," David McColl, an analyst with Morningstar Inc.
With refiners in Canada's traditional Midwest market already sated with crude, Keystone XL is seen as an important conduit for getting crude to the Gulf Coast, where it can supply the largest cluster of refineries in the United States.
Most have turned to shipping crude by rail-tanker. Once a sideline for getting oil to market, producers such as Canadian Natural Resources Ltd, Suncor Energy Inc and MEG are pouring investment into more costly crude-by-rail infrastructure in an attempt to bridge the gap.
"Rail coming out of Western Canada is going to become more and more important in the near term, and producers and midstream companies are already really aggressively moving to increase capacity for rail," said McColl.
Still, rail is an expensive option compared with shipping crude by pipeline. A host of options that skip the United States entirely have won the support of Canadian producers anxious to find better-paying alternatives than the U.S. market, where their crude sells for a discount to global benchmarks.
"Our focus will continue to be on supporting a portfolio of market access options," said David Collyer, president of the Canadian Association of Petroleum Producers, a lobby group representing the country's largest oil producers.
Both Enbridge Inc and Kinder Morgan Energy Partners LP are planning lines to take landlocked Alberta crude to export ports on the Pacific.
Though it faces opposition from aboriginal and environmental groups, Enbridge's Northern Gateway line would carry oil sands crude to the port of Kitimat, British Columbia. Regulators have already cleared the project. It awaits final approval from the Canadian government.
Kinder Morgan plans to nearly triple the capacity of its existing Trans Mountain pipeline to carry 890,000 barrels per day from Edmonton to Vancouver, but the project is not slated to complete regulatory hearings until mid-2015. (Additional reporting by Nia Williams; Editing by Frank McGurty and Lisa Shumaker)
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