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TransCanada has faced questions over whether it should continue with Keystone XL, a massive pipeline that would carry 510,000 barrels of crude a day to Texas.

The calculation was simple enough that Glen Perry says anyone could have done it.

In 2008, crude oil prices were flying high. Workers were flocking to Alberta from all over the world to participate in the province's stellar growth. The industry was expecting to increase annual production by an average of 180,000 barrels a day, an extraordinary 1.8 million barrels a day over the next decade, more than doubling the province's total production.

But a spreadsheet put together by Mr. Perry told a different story.

For all the Klondike-style rush to the oil sands throughout the 2000s, Alberta had not managed to post a single-year increase of more than 40,000 barrels a day, Mr. Perry found.

Then the financial crisis hit, and oil prices tanked. Mr. Perry had spent three years planning his own pipeline project to Texas, called Altex. But the historical growth figures helped convince him to walk away.

"I finally concluded that, even if no other pipes got built, it's going to take 10 years to fill my pipeline," he said. "So basically my pipeline was going to run half empty for five years. It's a $6-, $7-, $8-billion project. That's pretty tough economics."

But other major pipelines, backed by major corporations, went full steam ahead. Despite resurgent oil prices, new production isn't coming on fast enough to fill up the pipelines. The frenzied construction has left a glut of unused pipeline capacity that will take years to fill.

In a half-year span beginning last fall, TransCanada Corp. and Enbridge Inc. have opened the spigots on two pipelines that, together, have room to carry 885,000 barrels of crude oil a day. Expansion plans call for the two lines, named Keystone and Alberta Clipper, to carry 1.39 million barrels a day in coming years. That will mean new capacity roughly equivalent to the entire current output of the Canadian oil sands.

The aftershocks of that construction will rattle Canada's oil sands producers, who are already facing soaring transportation tolls. The overbuilding of pipelines has already led to legal wrangling between producers and pipeline operators, and may sour some of those highly dependent relationships.

The pipeline industry argues that it has simply built what producers said they wanted. In fact, TransCanada has sold long-term contracts for the overwhelming bulk of the capacity on its new lines, and industry was so eager for the Enbridge expansion that it made the company agree to financial penalties if it was late in bringing Clipper into service.

Producers, led by Suncor Energy Inc., disagree, arguing Enbridge should have known better than to build unnecessary capacity.

Over all, the pipeline industry says, too much capacity is far better than too little, which can cause a supply glut. In Alberta, a lack of natural gas pipelines severely depressed gas prices in the 1990s, before the Alliance pipeline - which Mr. Perry helped build - was installed. Repeating that experience could be devastating for crude producers.

"Missing the boat and being pipe short has some severe consequences," said Brenda Kenney, president of the Canadian Energy Pipeline Association. "The key is to look long-term and know that pipe capacity will not be a constraining factor in economic growth."

But Mr. Perry says a sober look at history could have prevented some of the current predicament.

"Everybody was so enamoured with the supply growth numbers … that they got caught up in it," he said.

The energy industry's ambitious growth projections back in 2008 were derailed by a myriad of problems. The economic crisis wreaked havoc on the sector. Projects faltered and timelines were extended. Technical issues, for instance, have so far kept both Husky Energy's Tucker Lake and Nexen Inc.'s Long Lake oil sands projects far from their original production goals.

Starting in late 2008, fully 1.2 million barrels a day of future projects were deferred or cancelled in the oil sands, as soaring costs and tumbling crude prices scared away investors. The economic recovery has brought some of that work back to life, but even industry projections now show a sobering new reality. According to the Canadian Association of Petroleum Producers, the volume of oil previously expected by 2011, the first full year of operation for Alberta Clipper, will now not likely flow until 2018 or later.

That seven-year delay could bring wide-ranging pain to the industry. Enbridge has already backpedalled from Texas Access, a pipeline it had intended to build from Illinois to the southern United States, and some worry about whether it will be able to proceed with Northern Gateway, a project intended to deliver oil sands crude to to the Pacific coast.

TransCanada, too, has faced questions over whether it should continue with Keystone XL, a massive pipeline that would carry 510,000 barrels of crude a day to Texas. Enbridge has fought the proposal; Canada's National Energy Board has approved it.

But even if that's good news for TransCanada, it's bad news for those pulling oil out of the ground. The majority of Canada's crude moves on Enbridge pipelines, which are operated under what's called a "common carrier" system. That system provides a set rate to move crude, no contracts required. If a producer has oil to ship, they call Enbridge and get access to the line. It's a great system for newcomers, who can't get access to already-contracted lines such as TransCanada is building.

The problem comes when there's a product shortage. Enbridge is entitled to a certain rate of return - regardless of volume. When volume drops, economies of scale work in reverse and thetolls rise. This year, the toll to ship crude from Alberta to Chicago will rise by 97 cents a barrel, a 33-per-cent bump. Analysts warn further bumps are likely when Keystone XL begins accepting crude, expected by 2012. At that time, according to current estimates, pipelines taking crude out of Canada will run 41-per-cent empty.

"I can tell you there are people that think [the toll]could triple," said Mr. Perry, who is now working with CN Rail on a pipeline-on-rails idea that could help smooth out future demand needs.

Worse, there are worries that pipelines such as Clipper, which service the Midwest, will have trouble achieving their capacity since demand for Canadian heavy oil has come increasingly from the U.S. Gulf Coast.

"There's probably no question that there will be more exit pipeline capacity leaving Alberta than there is production," said Russ Girling, president of pipelines and soon to be CEO at TransCanada, which is building Keystone XL specifically to serve the Gulf Coast. "The U.S. Midwest is fairly saturated already with Canadian crude. But there won't be excess capacity to markets that need the crude."

Is there a way to avoid a similar situation in future? The industry has its doubts.

"This whole pipeline thing is big judgment, big dollars," involving complex design and engineering, said Eric Newell, former chief executive officer of Syncrude Canada Ltd. "So it's not a perfect formula."

But Jim Carter, the former president of Syncrude, is confident the current problem will be resolved eventually - and that even a substantial increase in tolls, which currently stand at about $3 a barrel, won't severely hurt oil patch profits.

"At the end of the day, it's not going to be enough to break the bank," he said. "People will know that this is a temporary thing until the capacity gets soaked up. And after that, the toll rates will come down."

Follow Nathan VanderKlippe on Twitter: @nvanderklippeOpens in a new window

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