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File photo of the Keystone pipeline construction project.

Javier Blas is commodities editor at the Financial Times





Canada's oil industry urgently needs an export route that cuts its reliance of its sole customer: the United States.



The search is becoming urgent as the price of the low quality heavy, sour Western Canadian Select crude, a regional benchmark, plunges against other oil yardsticks due to lack of storage, inadequate pipelines and an emerging oil glut in the U.S. Midwest.

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Canada has significantly boosted its production over the last decade as companies have developed Alberta province's oil sands. From 2.7 million barrels a day in 2000, output surged to 3.4 million b/d last year.



But almost all the increase has flowed into the congested U.S. Midwest. When supply overwhelms demand in the area, oil production starts to back up all the way from the U.S. into Western Canada, until the storage hub of Hardisty in Alberta fills up. When that happens -- as it did during several weeks of the the winter and spring of 2010 -- WCS prices collapse relative to other benchmarks and producers have to shut in.



So far, attention has focused on TransCanada's proposed 700,000 barrels a day pipeline extension called "Keystone XL" as a way to by-pass the Midwest and reach the critical U.S. refining hub of the Gulf of Mexico by 2013. The proposal, which faces environmental approval delays, would ease the problems. But it would not resolve Canada's reliance on the U.S. market.



What politicians have realized is that Canada urgently needs to reach the so-called "waterborne" or "tidewater" market. In other words, it needs to pipe oil to a point where it can meet super-tankers to ship it across the Pacific into the energy-hungry markets of Asia.



Thus, Canadian political and business interest is now shifting in favour of another project: the 525,000 b/d Northern Gateway Enbridge pipeline from near Edmonton to Kitimat, B.C..



Joe Oliver, Canada's federal natural resources minister, has recently said that opening up a new supply route to Asian markets, which Northern Gateway would serve, will cut Canada's reliance on the U.S.



"Asia is growing - China in particular is now the largest consumer of energy in the world - and so we are supportive specifically of the Gateway project because it will open up exports to Asia and to China," Oliver said, according to Reuters newswire.

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Analysts believe that selling Western Canada's oil to Asia would make economic sense as the industry is likely to achieve higher prices than in the U.S.. Until now, WCS is sold at a discount against West Texas Intermediate. For years, the U.S. benchmark traded at more or less at the same level as other yardsticks, such as Brent or Dubai. But over the last two years WTI has itself fallen to a steep discount, hurting oil producers in Canada.



Yet the Northern Gateway pipeline -- with a price tag of $5.5-billion and a length of 1,172 km -- faces many obstacles, in particular environmental objections and concerns about the rights of First Nation indigenous Canadian groups. The extent of these difficulties make It is unclear if the project will ever be built.



Another company, Kinder Morgans, has proposed its own alternative: the expansion of the Trans Mountain pipeline to the Pacific, also reaching an oil terminal in British Columbia. But this project also faces obstacles.



Ron Liepert, Alberta energy minister, summarized the views of the government: it would not show any favouritism for any project. But added: "We will support any and all projects that will meet the environmental and regulatory standards that are set out for them, because we need to get our product ... to tidewater."

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