U.S. buyers of oil sands crude have joined the revolt against pipeline makers for building too much capacity too fast.
Canadian crude producers have already tussled with pipeline companies after the triple-digit oil prices of several years ago fuelled a rush to build more oil transport capacity. After the crash of the last two years, some of that capacity may not be used for many years.
Now crude buyers have entered the fray, with nearly $1-billion in lawsuits that add to the mire of problems facing Canada's pipeline companies.
A trio of small U.S. refineries are suing TransCanada Corp. in hopes of breaking contracts to ship oil on Keystone, a new pipeline they say has been beset with cost overruns.
The refineries, owned by Sinclair Oil Corp., National Cooperative Refinery Association and Coffeyville Resources Refining & Marketing LLC, together committed to shipping 95,000 barrels per day on the $5-billion line, which would deliver Canadian crude near their locations in the central United States.
Now the refineries want out. In three separate but nearly identical statements of claim - which a TransCanada spokesman called "without merit" - the refiners argue that Keystone was so expensive to build, it will no longer be a cheaper option than shipping on pipelines run by competitor Enbridge Inc.
It is the latest instance of painful fallout from the oil boom, which raised hopes of a great new flood of crude from Canada's oil sands. Those hopes foundered when markets and oil prices collapsed. But the pipelines built to ferry away the promised new oil have been built. So much extra capacity now exists that analysts believe when TransCanada completes its Keystone XL line - an expansion of Keystone that has yet to be constructed, but is expected to begin accepting oil in early 2013 - oil pipelines to the U.S. will run nearly half-empty.
"There is something that's out of kilter with the oil pipeline development process in Canada and the United States," said Paul Blackburn, a lawyer for Plains Justice, a South Dakota firm that has represented ranchers whose land TransCanada pipelines have crossed.
"The question becomes, how much of TransCanada's contracted capacity is securely committed, and who pays if a shipper has no need to ship oil?"
Mr. Blackburn is also concerned that pipeline overcapacity - and resulting toll hikes - could ultimately raise the price at the pumps.
The refiners argue that construction overruns have raised the cost of shipping on the Canadian portion of Keystone by 145 per cent while the U.S. portion has run 92 per cent over budget. They accuse TransCanada of misleading them when they signed shipping contracts in the summer of 2007. TransCanada nearly doubled its construction estimates in October, 2007, from $2.8-billion (U.S.) to $5.2-billion.
As a result, the three refiners are demanding to be released from their shipping contracts, which together form about a sixth of Keystone's capacity.
If they fail in that bid, they want $950-million (U.S.) in damages, plus interest and expenses.
So far, the overbuild pain has been borne by those who are shipping oil. Suncor Energy Inc. led a complaint by a group of industry titans to the U.S. Federal Energy Regulatory Commission, asking to be exempted from a toll hike to pay for Enbridge's new Alberta Clipper pipeline. Suncor called it unnecessary; the regulator ordered industry to abide by the toll increase.
In Canada, however, the National Energy Board has yet to rule on a similar petition, and there is little indication of when the lawsuits against TransCanada will be resolved.
Though the statements of claim were filed last fall, they have gone virtually unnoticed by the public. TransCanada has yet to file a statement of defence, though one is typically required within 15 days. Legal experts said that could indicate a settlement is in the works, or that the lawsuits were filed simply to keep legal avenues open to the refiners.
TransCanada declined to comment on specific allegations in the lawsuits.
Steve Eames, a spokesman for Coffeyville Refining owner CVR Energy Inc., said the case is "proceeding" but remains in "early stages." The other refiners did not return calls for comment.
U.S. refiners have been battered by the recession, which has hurt demand for petroleum products. Keystone shippers have not been immune from these problems. In fact, Sinclair Oil shelved plans for a 45,000-barrel-a-day expansion of its refinery in Tulsa, Okla., which it has now sold. Sinclair committed to 50,000 barrels a day on Keystone.