- Canadian oil sands production - as much as 400,000 barrels a day - could be flowing into Texas by late 2010, dramatically shifting the market for domestic crude output as new projects begin pumping north of Fort McMurray.
Enbridge Inc. announced a preliminary partnership with giant Exxon Mobil Corp. Wednesday to create by far the biggest link yet with Texas, connecting Illinois with Enbridge's sprawling pipeline network that originates in Alberta, and further marginalizing a plan to ship oil to refineries in China.
While a significant amount will be processed in Alberta, producers and pipeline companies foresee a surplus of raw bitumen.
The Houston region and the Gulf Coast are home to about half the refining capacity in the United States, including two facilities owned by Exxon, one of which is the biggest in North America, handling more than 500,000 barrels a day. Current supply for the region's refineries comes from Texas and the Gulf, as well as from Mexico and Venezuela - which are the two competitors Canadian producers are trying to partly displace.
Negotiations brokered by Enbridge between domestic producers and Chinese refiners to build a pipeline to the west coast of British Columbia for export stalled last year.
"Exxon Mobil has said to us it makes no sense to ship crude away from this continent," said Steven Paget, an analyst at FirstEnergy Capital in Calgary.
"This continent needs more oil than it produces - it should not be shipping crude overseas." He added that Mexican production could slide sharply in the next years. Bitumen production from the oil sands could rise to 1.9 million barrels a day by 2010 and 3.1 million by 2016, up from 1.25 million last year, according to new numbers yesterday from Alberta's energy regulator.
It is a "round one" victory for U.S. refiners over competitors in China, according to Stephen Calderwood, a Raymond James Financial Inc. analyst.
"It's not a permanent victory," Mr. Calderwood said. "Never underestimate the potential for growth in China, but it is a fact that it's easier to replace [Mexican and Venezuelan]barrels in the U.S. with Canadian crude than try to access new markets in China."
Enbridge had considered building a pipeline on its own to the Houston area, including a $3.6-billion (U.S.) idea to directly link Alberta and Texas, but decided its best first move was to join with Exxon.
The companies said they are starting by assessing the commercial potential of the project - but the big advantage is the new 1,100-kilometre pipeline would run alongside a small Exxon Illinois-Texas link that opened last year, Canada's first connection to the Gulf Coast.
Exxon was also considering building a pipeline on its own, said Richard Bird, an executive vice-president at Enbridge.
"Yes, we could conceivably go it alone but they do have the [existing pipeline route] which is an important ingredient," Mr. Bird said.
The new line could be moving oil sands output by late 2010 at the earliest. The first major new pipeline, in late 2009 or 2010, will likely be TransCanada Corp.'s proposed Keystone project, which would connect Alberta with Illinois, with a possible arm to Oklahoma and possibly Texas.
An outside contender is privately held Altex Energy Ltd., which wants to build a direct Alberta-Texas pipeline.
Like the Enbridge line and Altex lines, the TransCanada's Keystone is likely going to ship mostly raw bitumen, which would be upgraded into synthetic crude in the United States, before being refined into gasoline.
A review of Keystone by the National Energy Board began this week. Groups including the Alberta Federation of Labour and the Communications Energy Paperworkers Union are opposed to Keystone, arguing that it does nothing more than ship jobs to the U.S.
Mr. Bird said Alberta's labour shortage prevents all upgraders from being built in Alberta. The majority of bitumen is still expected to be upgraded in the province, with major new projects or expansions.