There's a pipeline race happening in the oil industry, and the winner will unlock huge profits.
You see, the Canadian oil sands are missing an efficient way to get the oil from the fields to the refineries and to the customers. That means profits are trapped in areas like the Athabasca oil sands of northeasternAlberta, Canada — the second-largest crude reserves in the world with about 1.7 trillion barrels of oil.
That's why TransCanada Corp.'s (NYSE:TRP) Keystone XL pipeline, recently delayed for a year for further review by the U.S. State Department, has been such a big deal. The Keystone pipeline would bring the Canadian crude from Alberta to U.S. refineries, reducing the need for imports from distant and often unstable Middle Eastern countries.
Now several other companies have redoubled their efforts on similar oil pipeline projects, not only to move oil from Canada but also to relieve an oil bottleneck in Cushing, OK, that is helping depress prices of West Texas Intermediate (WTI) crude.
"The markets need a solution really badly to the Cushing problem," Lanny Pendill, senior energy and utilities analyst at Edward Jones told MarketWatch. "If Keystone gets deferred too long, it's highly likely that competing proposals will gain traction at TransCanada's expense."
Other companies did indeed react swiftly to TransCanada's setback.
Almost immediately after the announcement that Keystone pipeline would be delayed, Canadian pipeline company Enbridge Inc. (NYSE: ENB) said it had bought a 50% stake in the Seaway Crude Pipeline, which now carries oil from Freeport, TX, to Cushing. Enbridge plans to reverse the flow of oil next year. (Enterprise Products Partners LP (NYSE: EPD) owns the other 50%.)
"The producers think this is great, because now you have enhanced connectivity and enhanced transportation into the largest area and concentration of refiners in the U.S," Darren Horowitz, an analyst with Raymond James & Associates (NYSE: RJF), told Bloomberg.
The bottleneck at Cushing has been a major factor in opening a spread between the market price of WTI and Brent crude.