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Pipeline firms have healthy prospects Add to ...

Canada's two major pipeline companies did not have a good summer.

Enbridge Inc. , which handles the lion's share of Canadian exports to the United States, had a series of pipeline ruptures that cut into the flow of oil sands crude to thirsty markets south of the border.

TransCanada Corp. , the country's biggest pipeline company, faced bitter opposition from critics of one of its key growth plans: the $7-billion (U.S.) Keystone XL oil pipeline from Alberta to the Gulf of Mexico.

The pipeline breaks and opposition from U.S. legislators and environmental groups looked ready to derail plans for the two companies' biggest potential source of growth - expanded shipments of oil sands crude to the United States.

But despite the headlines, the shares of both firms have emerged relatively unscathed. And analysts say this is for good reason.

The long-term need for oil sands crude in the United States - the backbone of growth plans for both TransCanada and Enbridge - remains unchecked. That's good news for the pipeline operators carrying that crude south.

"Cooler heads will prevail," said Bob Hastings, an analyst with Canaccord Genuity. "The U.S. needs the oil."

Since Enbridge's Line 6B ruptured and spilled 19,500 barrels of oil into a Michigan river system on July 26, the first but longest of its three pipeline outages over the past few months, the company's stock has held fast, rising just less than 1 per cent.

TransCanada shares have also been solid, rising 4.5 per cent since the start of August, even though early last month it withdrew a request to operate Keystone XL at higher than normal rates, which could trim back longer term expansion plans for the line.

Some environmental groups and legislators, who argue oil sands crude is more environmentally damaging than conventional oil, have pressed the U.S. State Department to refuse to allow the line's construction.

"This pipeline is a multibillion-dollar investment to expand our reliance on the dirtiest source of transportation fuel currently available," Henry Waxman, chairman of the House Committee on Energy and Commerce said in a July 26 letter.

The company has still not received final approval for the U.S. portion of Keystone XL but has said it remains confident that it will soon have that in hand.

One reason those approvals could be forthcoming is that Enbridge's 450,000 barrel Alberta Clipper line, set to begin service on Oct. 1, also faced strong opposition.

That line was approved last August because the Obama administration considered that higher imports of Canadian oil and reduced dependence on OPEC to be in the strategic interests of the United States, and TransCanada may get the benefit of the same argument.

"Keystone has become a major regulatory issue," said Stephen Paget, an analyst at FirstEnergy Capital. "But Alberta Clipper was approved and it would be hard to approve one and not the other."

Enbridge doesn't currently have plans for another big expansion of its network to the United States. But it does face increasing scrutiny from regulators after the Line 6B rupture.

The U.S. Pipeline and Hazardous Materials Safety Administration has ordered the company to fix other possible weak spots in the line and replace the portion of the line that crosses the St. Clair River, from Michigan to Ontario.

Still, Enbridge has estimated that its costs to repair the rupture will be about $6.6 million (Canadian) after insurance recoveries, though it has yet to detail the costs of complying with PHMSA's additional orders.

Expanding production from the oil sands will eventually require additional pipelines to carry the crude - a foundation for growth for the two companies.

Output from the oil sands, the largest crude reserve outside the Middle East, is expected to nearly double to close to 3 million barrels per day by 2020, according to industry estimates. Most, if not all, of that new production is destined to be shipped to the United States.

But if U.S. opposition to oil sands imports prevails and Canadian crude oil shipments are limited, other pipelines could be constructed to take the oil to export ports for overseas shipment to Asia and elsewhere.

"The oil sands are going to be developed and the lines will be built," Mr. Hastings said. "If not, the oil will go somewhere else."

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