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TransCanada ramps up oil supply in new Cushing line

TransCanada Corp. has opened the spigots on a new pipe carrying Canadian oil to a major U.S. hub that's already awash with supply.

The company has begun pouring oil into its Cushing Extension pipeline, a 591,000 barrel-per-day pipe that connects Steele City, Neb., with Cushing, Okla.

Although observers believe the extra supply could further suppress the benchmark price for West Texas Intermediate crude, the company contends it is unlikely to make much of a difference.

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In a conference presentation last week, Paul Miller, senior vice-president of oil pipelines at TransCanada, showed a slide that indicated deliveries on the line began Feb. 1. The company, however, said no exact date has been set for the commencement of commercial deliveries, which are expected to start this quarter.

But the new pipe capacity comes as inventories of oil at Cushing have reached a record, with 38.33 million barrels in storage.

Those massive volumes have been partly to blame for the substantial pressure on prices of North American crude, whose benchmark WTI price is set at Cushing. WTI typically fetches a higher price than the world's other main crude blend, called Brent.

In recent days, it has lagged Brent by more than $10 (U.S.) a barrel, in part because its price has been kept lower by supply glut worries. Now, observers say, adding a major new crude source to Cushing could exacerbate that gap. "The issue right now is extremely high inventories of WTI, so if you flow more into the region it could certainly bring [its price]down," said Stephen Fekete, a managing consultant with international crude consultancy Purvin & Gertz.

"Until a line is built out of Cushing, then the discounts are likely to persist." Both TransCanada and its chief competitor, Enbridge Inc., have proposed new pipelines that would take Cushing oil to the U.S. Gulf Coast. TransCanada, however, says the earliest it can build its proposed line is 2013.

Mr. Fekete said the extreme price gap is likely to narrow with or without the new supply, however.

It's conceivable, he said, that the TransCanada line will simply displace volumes currently flowing into Cushing on other pipes, which would moderate any potential problems. "It's only if it's a net increase in flow that it could potentially have an impact."

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TransCanada itself has provided little insight into how much crude its new pipe will carry. "Our volumes will be dependent on the [shippers]. … When we see those nominations, we'll be able to determine what sort of ramp-up profile we'll have," Mr. Miller said.

He also argued that because Cushing Extension will carry Canadian crude, which tends to be heavier than the medium blends used to determine WTI pricing, it is unlikely to have an impact.

"It will be a matching, quite frankly, of the heavy Canadian crude looking to find refineries capable of running those crudes - and those refineries capable of running those heavier crudes looking for a supply," he said. "So it will probably keep the WTI-Brent activity flat."

The Cushing Extension is an expansion of TransCanada's partially built Keystone system, designed to move crude oil from northeastern Alberta to refineries in the U.S. Midwest and Gulf Coast. A further expansion designed to move oil from Cushing to the Gulf Coast is intended to be operational by 2013, subject to regulatory approvals.

The company is also pursuing Keystone XL, a major addition to the Keystone project that would add more direct access for Canadian oil to the Gulf Coast.

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About the Author
Asia Bureau Chief

Nathan VanderKlippe is the Asia correspondent for The Globe and Mail. He was previously a print and television correspondent in Western Canada based in Calgary, Vancouver and Yellowknife, where he covered the energy industry, aboriginal issues and Canada’s north.He is the recipient of a National Magazine Award and a Best in Business award from the Society of American Business Editors and Writers. More

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