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Analysis: TransCanada's East Coast oil pipeline to change trade dynamics

TransCanada President and CEO Russ Girling (2nd L) announces the new Energy East Pipeline during a news conference in Calgary, Alberta, in t
TransCanada President and CEO Russ Girling (2nd L) announces the new Energy East Pipeline during a news conference in Calgary, Alberta, in t

By Sabina Zawadzki and David Sheppard

(Reuters) - TransCanada Corp's plan to build one of the world's longest oil pipelines has reverberations far beyond Canadian shores.

The planned 2,700 mile pipeline, which will bring crude from Canada's energy capital of Alberta to refineries and ports on the East Coast, has the potential to upturn the dynamics of the North Atlantic oil trade squeezing out some imported crude to North America and revitalizing once-ailing refineries.

The Energy East line could also reinforce North Sea Brent crude as the world's oil benchmark against which giants such as Saudi Arabia price their western-bound exports, analysts say, while opening up the option of more Canadian heavy crude flowing to the U.S. Gulf Coast.

The scale of the $12 billion, 1.1-million barrel per day (bpd) pipeline, which will extend part of an old natural gas line, is hard to understate. Were it to start in London, it would stretch all the way to Tehran. In the United States, it could pump crude oil from Beverly Hills to New York City.

And its capacity is greater than the entire oil production of Azerbaijan, could provide 6 percent of daily U.S. oil consumption or, put another way, has the ability to carry 30 percent of Canada's total daily oil production.

"In the short and medium term, this isn't a project focused on exporting heavier Canadian oil to the U.S. Gulf Coast," said Mark Routt, a senior energy consultant at KBC in Houston, who has a number of clients interested in the project.

"The initial stage of this project will be primarily about sending light sweet crude to Canadian refineries."

That could effectively wipe out Canada's need to import crude for its eastern refineries. They now import around 700,000 bpd from North and West Africa and Latin America because Canada's own supplies lie across a vast wilderness in the far West.

Africa and Latin America will have to find a new home for their barrels by 2017 or 2018, if the pipeline is completed on time.

The twinning of the project with a plan to build and operate a new deepwater export port in Saint John, New Brunswick will give oil producers an outlet for the 400,000 bpd or so of leftover, after Canada's eastern refineries consume their share.

"The next stage would be to potentially expand the project to ship light sweet crude to refineries on the U.S. East Coast," Routt said.

Several refineries on the U.S. East Coast have shut down in recent years due to poor economic performance. Access to Canadian sweet crude, cheaper than European and African imports due to transportation costs and the lower U.S. benchmark price, could support the plants that remain.

BEYOND CANADA

Canadian oil producers have even further-reaching ambitions for the pipeline, with some looking at the feasibility of exporting barrels to Asia.

TransCanada Chief Executive Russ Girling said oil producers in Alberta were looking to reach markets as far away as India.

John Auers, senior vice president at refinery specialist Turner, Mason & Co in Dallas, said that while it is an ambitious goal, it could one day be possible for Canadian crude to compete with Middle Eastern producers for market share in the Indian subcontinent.

"India has now built up a fairly decent base of heavy crude capacity," said Auers. "(TransCanada) can go all sort of ways."

Sandy Fielden, analyst at consultants RBN Energy in Austin, said the majority of Canada's heavy crude exports from the line would still end up closer to home.

"The obvious competition will be with heavier Mexican and Venezuela crudes into the U.S. Gulf Coast," he said.

European refineries are a less likely destination, Fielden added, as most are geared toward lighter crudes such as Brent.

CONSOLIDATED BENCHMARK

Another outcome the East Energy line might bring is the reinforcement of Brent crude oil as the world's premier benchmark, analysts said, amid talk the grade is losing relevance and could see a challenge from a rival exchange in Asia, where demand is rising.

"A preponderance of light sweet crude moving East could consolidate Brent's benchmark's status," said Ed Morse, managing director of commodity research at Citi.

"Saudi Arabia and Iran and other Middle East producers feeding into the European market would be increasingly dependent on benchmarks defined in the local Atlantic Basin markets."

Morse said heavier barrels moving on the pipeline could also eventually provide a new "sour" benchmark for the region.

Several analysts said the increased capacity of the Energy East pipeline from an initial proposal of 800,000 bpd reflects uncertainty over Canada's other grand pipeline projects.

TransCanada's own Keystone XL project, which would expand its ability to ship heavy crude to Gulf Coast refineries by 830,000 bpd, is yet to get off the ground after years of waiting for U.S. approval and has become a target for environmental groups.

Proposals for pipelines to the West Coast, which would allow the country to ship oil to the lucrative Asian market, are opposed by Canadian indigenous people, or First Nations.

"Now, there are a lot of moving parts, but if we assume there are ongoing problems with getting approval for Keystone XL and Enbridge's planned pipeline to the West Coast of Canada then you can see why they've expanded this project," Fielden said.

TransCanada said one project does not replace the other and that it has long-term commitments for Keystone XL, which has always been designed to carry heavier crude from the tar sand fields.

North America is adjusting its infrastructure to the landscape that has been emerging in the oil industry in the past five years with the advent of shale oil and gas and the Canadian tar sands. Pipeline companies have spent billions of dollars building new pipes or reversing the direction of old ones.

Turner, Mason's Auers thinks there is always a risk of over-building, but believes the Energy East pipeline is a major stage in North America's adjustment to its energy renaissance.

"We look at North America as a whole. If you export Canadian light crude that provides room for U.S. light crude."

(Reporting by Sabina Zawadzki and David Sheppard in New York; Editing by Tiffany Wu and Leslie Gevirtz)

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