Natural Resources Minister Joe Oliver said on Thursday that the United States, already Canada’s largest oil market by far, can expect far better service than it has received from the South American OPEC member that currently feeds a large chunk of oil demand in the Gulf Coast region.

“Venezuela may be a major supplier of heavy crude to the U.S., but it has also threatened to cut supplies five times in as many years,” Oliver said in a speech to business people and academics in Calgary.

“That’s not a reliable partner. That’s not a stable source of oil. And that’s not how Canada will ever treat the United States.”

Despite frequent threats, Venezuela has not shut off exports to the United States, but Oliver’s remarks underline how high the stakes have become for Canada as a U.S. decision on Keystone XL looms.

Prime Minister Stephen Harper’s Conservative government and Alberta Premier Alison Redford have aggressively lobbied U.S. politicians ahead of the Obama administration’s decision, likely this summer, whether to approve the $5.3 billion TransCanada Corp proposal.

Oliver is scheduled to travel to Washington and New York next week to meet with Republican and Democratic lawmakers as well as the media.

Canada and its oil industry say the project will bring energy security, jobs and growth to both countries as oil sands-derived crude flows to the largest refining market in the United States.

The project faces strong opposition from environmentalists, who say it would vastly increase greenhouse gas emissions and risks of oil spills.

According to U.S. Energy Information Administration data, the United States imported 2.5 million barrels of oil a day from Canada last week, versus 709,000 from Venezuela. However, the lion’s share of the Venezuelan crude was used by Gulf Coast refineries, and only a fraction of the Canadian crude flowed to that region due to limited infrastructure to get it there.

Tight export pipeline capacity in the United States has helped create a glut in Canada, and is cited as a key reason that Canadian heavy oil is deeply discounted in the fight for space to transport it.

Oliver said he was not specifically seeking to cast aspersions on the competing oil supplier.

“I’m not taking a shot. The reason I mention Venezuela is that Venezuelan oil is a large part of the oil that comes into the United States,” he told reporters following his speech. “If our oil comes down, it will be displacing Venezuela oil. I’m just simply commenting on that economic reality.”

He said he mentioned the threats of supply disruption as “historical fact.”

Canada was also less than laudatory this week following the disputed election of Venezuelan President Nicolas Maduro. Ottawa congratulated Venezuelans for voting in large numbers but failed to mention that Maduro, a protégé of late President Hugo Chavez, was declared the winner.

(Reporting by Jeffrey Jones; Editing by Gary Hill)

Alberta Environment Minister Diana McQueen offered the levy
proposal at a meeting in Calgary last week with oil executives
and federal Environment Minister Peter Kent, the Globe and Mail
newspaper said on Thursday.

Such a move would be in line with comments that the Canadian
province’s envoy to Washington made in a February interview with
Reuters. David Manning said Alberta may adopt more stringent
environmental policies to help producers in the oil sands
increase access to lucrative markets such as the U.S. Gulf
Coast.

In the subsequent weeks, the government brushed aside media
queries about what new moves were under consideration.

Wayne Wood, McQueen’s spokesman, did not dispute that the
minister had floated the idea of a higher carbon levy, but would
not comment on the details and said no decision had been made.

“The minister is looking at any number of options, and it’s
really premature to speculate on any kind of option that might
be settled on,” Wood said.

The Globe and Mail said McQueen proposed an increase in that
levy to C$40 a tonne, as well as a requirement to cut per-barrel
emissions by 40 percent over time.

Alberta currently charges C$15 per tonne for carbon
emissions above limits and puts the money into a technology
fund. The program has generated C$312 million, though
environmental groups have said the levy is far too small.

ALBERTA WANTS PIPELINE

Speculation on new moves by Alberta to improve its record on
meeting emission reduction targets has increased since U.S.
President Barack Obama named John Kerry, seen as a supporter of
tougher climate policy, as secretary of state.

His department is responsible for ruling on TransCanada
Corp’s 830,000 barrel-a-day Keystone XL pipeline from
the oil sands to the Gulf Coast, which has been under regulatory
review for more than four years.

Keystone XL has met with staunch opposition from U.S.
environmentalists, who say it will encourage more
carbon-intensive production in Alberta’s vast oil sands, the
world’s third largest crude deposit, at a time when Americans
should be making a wholesale shift to green energy.

The government of Alberta has faced big problems in recent
months as a shortage of spare export pipeline capacity has
pressured prices for the bitumen produced from its oil sands,
lowering the revenue take, and as the Obama administration has
pushed back a decision on whether to approve the $5.3 billion
pipeline. It is now expected to rule during the summer.

Alberta Premier Alison Redford is set to visit Washington
next week for the fourth time in 18 months to press U.S.
lawmakers to support Keystone XL. Last month, a State Department
environmental assessment concluded that the project in itself
would not drive a major increase in greenhouse gas emissions.

HIGHER LEVY “NOT INCONSEQUENTIAL”

In a note to clients, TD Securities analyst Menno Hulshof
estimated that such new regulations would add less than $2 per
barrel to the cost of producing a barrel of oil sands-derived
crude, an amount he called “not inconsequential”.

The Canadian Association of Petroleum Producers, the
industry’s main lobby group, declined to comment.

Cenovus Energy Inc, one of the largest oil sands
producers, said a hike would not be surprising, given that the
initial program was seen as a first step. Executives have run
the numbers on its business model assuming both a C$15 and a
C$65 per tonne payment, Cenovus spokesman Brett Harris said.

“Every company is different, but for our business we think
we’re pretty well positioned to compete at either of those
levels,” Harris said.

Kent is also expected to announce long-anticipated new
federal emission rules for oil and gas at some point. His
spokesman declined to comment on McQueen’s remarks.

Wood said Alberta is looking at a range of options to meet
carbon reduction targets as part of a review that began earlier
this year. He had no timing for the results of the review.

Keystone XL opponent Danielle Droitsch, a director at the
Natural Resources Defense Council in Washington, said Alberta’s
proposal was lacking, as C$100 to C$150 a tonne would be needed
to make a serious dent in emissions.

The fate of Keystone remains undecided, yet Canadian crude will become an increasing part of the U.S. energy mix, despite growing competition from new U.S. production.

U.S. thirst for Canadian crude has shot up nearly 30 percent over the past five years as refiners opt to buy from the north instead of bringing in more expensive OPEC oil, thanks to a boom in production from the vast Alberta oil sands.

Midwest refiners have invested billions of dollars to tweak plants to take more of the heavy crude from the region, and a small but growing network of rail routes have sprouted up to augment existing pipelines.

So even as environmentalists seized on oil spills last week in Arkansas and Minnesota to warn about the impact of expansion in the tar sands — the world’s third-largest crude deposit — it appears only a crash in the price of oil or unexpected regulation will derail the growing energy interdependence.

“Short-term, this is not good for producers, it’s not good for Canadian oil going south, it’s not good for Keystone,” John Stephenson, vice-president and portfolio manager at First Asset Investment Management in Toronto said of the two spills.

“But I think the reality is this oil is going to make it south of the border, quite likely by rail or one of the other pipelines across the Canadian-U.S. border, so I see it as a short-term hiccup at worst.”

Canada’s black gold has allowed the Obama administration to crow about dwindling reliance on oil from less-friendly suppliers in the Middle East and elsewhere. In addition, a glut of the Canadian heavy oil has tempered higher gasoline prices, especially in the U.S. Midwest.

That may trump increasingly bad PR for Canada’s oil, much of which is produced by energy- and carbon-intensive methods such as mining or steaming, making it a prime target in the battle over policies to fight global warming.

Yet the growing role of Canadian crude in the U.S. economy cannot be denied. Overall U.S. oil imports fell to 8.5 million barrels a day last year from over 10 million in 2007, but supplies from Canada jumped to 2.4 million barrels a day, from just under 1.9 million, over the period, according to the U.S. Energy Information Administration.

That puts Canadian crude at nearly 29 percent of foreign supplies in the United States, despite the remarkable increase in U.S. domestic light oil output from regions such as the North Dakota Bakken that has fueled predictions of North American energy self-sufficiency in 15 years.

In fact, the two types of crude compete little for refinery space, as Canada’s heavy crude is being directed at U.S. Gulf Coast plants that are configured to process heavy oil, which now arrives in dwindling volumes from Venezuela and Mexico.

“If that’s the case, then Obama’s left with not an energy choice — he’s left with a geopolitical choice,” said Michal Moore, director of energy and environmental policy at the University of Calgary’s School of Public Policy and a former California energy regulator.

“Do you want to piss off Canada by not letting oil into the refineries that can handle it most easily? I don’t know how he makes that judgment but I will say that this doesn’t help.”

Other refiners have also invested to process more feedstock from Canada, with BP sinking $4 billion into its Whiting, Indiana plant to take more of the heavy, sour oil.

In addition to heavy tar sands oil, Canada also exports large volumes of conventional lighter crude.

In January, the U.S. imported over 1.5 million bpd of heavy Canadian crude, defined by the Canadian Association of Petroleum Producers as having an API Gravity of less than 27 degrees, and nearly 1.15 million bpd of lighter, easier to refine oil, according to the EIA.

PIPELINE, RAIL ACCIDENTS

Last week’s spills both involved oil from Canada.

On Friday, Exxon Mobil Corp’s (XOM.N: Quote, Profile, Research, Stock Buzz) aging Pegasus pipeline ruptured in Arkansas, forcing a cleanup of thousands of barrels of heavy Canadian oil that leaked into a suburban neighborhood.

The incident followed an oil spill in rural Minnesota on Wednesday after a Canadian Pacific Ltd (CP.TO: Quote, Profile, Research, Stock Buzz) train derailed. The tanker-car leaked several hundred barrels of Alberta crude and reignited concern about oil moving by train as pipeline capacity lags production growth.

Producers shipped about 45,000 barrels of Canadian oil into the United States by train last year, up from almost nothing just five years earlier, based on Reuters calculations of data from Canada’s National Energy Board. Current shipments could be as much as 150,000 barrels a day, estimated Steven Paget, analyst at FirstEnergy Capital Corp.

The spills are the latest in a string of problems for shippers of Canadian crude that have inflamed the debate over the oil sands. The largest spill was the Enbridge Inc (ENB.TO: Quote, Profile, Research, Stock Buzz) line break in Michigan in 2010, which sent more than 20,000 barrels of Canadian oil into the Kalamazoo River system.

U.S. regulators last month ordered Enbridge’s U.S. affiliate to do more cleanup at the site, pushing the bill to near $1 billion.

TransCanada Corp (TRP.TO: Quote, Profile, Research, Stock Buzz), backer of the long-delayed $5.3 billion Keystone XL pipeline to Texas refineries from Alberta, and the line’s supporters, say oil spills highlight the need for safer energy infrastructure rather than a shift from pipelines.

“I don’t think it will have an impact (on Canadian exports and the approval of pipelines). Look, it’s being seized on by those who oppose hydrocarbon development, but if you follow their logic to its conclusion, what they’re saying, I guess, is they don’t want to see any pipelines built,” Canadian Natural Resources Minister Joe Oliver said of the Arkansas spill.

“It’s not because of Canadian crude that there was a spill. It was an old pipeline, more than 60 years old.”

Oliver has led Ottawa’s intense lobbying campaign in favor of the 830,000 barrel a day Keystone XL project, which will take Canadian crude to Gulf refineries. Washington is set to decide on the line this summer and it could be in service in 2015.

PRODUCTION PREDICTION

All predictions are for a steady climb in Canadian production, explaining the industry and government’s quest for new markets in the United States and non-traditional areas such as Asia, one of the biggest drivers engines of world oil demand growth.

Canada’s National Energy Board has predicted output will average 3.6 million barrels a day this year, up 12.5 percent from 2012, putting it nearly 400,000 barrels a day ahead of No. 2 OPEC producer Iraq’s current output.

The industry sees a jump in output to 4.7 million barrels a day by the end of the decade, with new pipelines such as Enbridge’s contentious Northern Gateway to Canada’s Pacific Coast and TransCanada’s Energy East line to the Atlantic provinces planned to move much of the increase.

Last week, Wood Mackenzie, the energy research firm, predicted output of bitumen from the oil sands, will increase by 540,000 barrels a day over the next two years.

Almost three-quarters of that will come from projects that have already been approved and have a break-even oil price below $60 a barrel, WoodMac said. The current price for Canadian heavy oil is about $80 a barrel.

(Additional reporting by Scott Haggett in Calgary and Patrick Rucker in Washington; Editing by Janet Guttsman, Matthew Robinson and Leslie Gevirtz)

The fate of Keystone remains undecided, yet Canadian crude
will become an increasing part of the U.S. energy mix, despite
growing competition from new U.S. production.

U.S. thirst for Canadian crude has shot up nearly 30 percent
over the past five years as refiners opt to buy from the north
instead of bringing in more expensive OPEC oil, thanks to a boom
in production from the vast Alberta oil sands.

Midwest refiners have invested billions of dollars to tweak
plants to take more of the heavy crude from the region, and a
small but growing network of rail routes have sprouted up to
augment existing pipelines.

So even as environmentalists seized on oil spills last week
in Arkansas and Minnesota to warn about the impact of expansion
in the tar sands — the world’s third-largest crude deposit –
it appears only a crash in the price of oil or unexpected
regulation will derail the growing energy interdependence.

“Short-term, this is not good for producers, it’s not good
for Canadian oil going south, it’s not good for Keystone,” John
Stephenson, vice-president and portfolio manager at First Asset
Investment Management in Toronto said of the two spills.

“But I think the reality is this oil is going to make it
south of the border, quite likely by rail or one of the other
pipelines across the Canadian-U.S. border, so I see it as a
short-term hiccup at worst.”

Canada’s black gold has allowed the Obama administration to
crow about dwindling reliance on oil from less-friendly
suppliers in the Middle East and elsewhere. In addition, a glut
of the Canadian heavy oil has tempered higher gasoline prices,
especially in the U.S. Midwest.

That may trump increasingly bad PR for Canada’s oil, much of
which is produced by energy- and carbon-intensive methods such
as mining or steaming, making it a prime target in the battle
over policies to fight global warming.

Yet the growing role of Canadian crude in the U.S. economy
cannot be denied. Overall U.S. oil imports fell to 8.5 million
barrels a day last year from over 10 million in 2007, but
supplies from Canada jumped to 2.4 million barrels a day, from
just under 1.9 million, over the period, according to the U.S.
Energy Information Administration.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Interactive Graphic: Changes in U.S. oil imports

link.reuters.com/cyn46t
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

That puts Canadian crude at nearly 29 percent of foreign
supplies in the United States, despite the remarkable increase
in U.S. domestic light oil output from regions such as the North
Dakota Bakken that has fueled predictions of North American
energy self-sufficiency in 15 years.

In fact, the two types of crude compete little for refinery
space, as Canada’s heavy crude is being directed at U.S. Gulf
Coast plants that are configured to process heavy oil, which now
arrives in dwindling volumes from Venezuela and Mexico.

“If that’s the case, then Obama’s left with not an energy
choice — he’s left with a geopolitical choice,” said Michal
Moore, director of energy and environmental policy at the
University of Calgary’s School of Public Policy and a former
California energy regulator.

“Do you want to piss off Canada by not letting oil into the
refineries that can handle it most easily? I don’t know how he
makes that judgment but I will say that this doesn’t help.”

Other refiners have also invested to process more feedstock
from Canada, with BP sinking $4 billion into its Whiting,
Indiana plant to take more of the heavy, sour oil.

In addition to heavy tar sands oil, Canada also exports
large volumes of conventional lighter crude.

In January, the U.S. imported over 1.5 million bpd of heavy
Canadian crude, defined by the Canadian Association of Petroleum
Producers as having an API Gravity of less than 27 degrees, and
nearly 1.15 million bpd of lighter, easier to refine oil,
according to the EIA.

PIPELINE, RAIL ACCIDENTS

Last week’s spills both involved oil from Canada.

On Friday, Exxon Mobil Corp’s aging Pegasus pipeline
ruptured in Arkansas, forcing a cleanup of thousands of barrels
of heavy Canadian oil that leaked into a suburban neighborhood.

The incident followed an oil spill in rural Minnesota on
Wednesday after a Canadian Pacific Ltd train derailed.
The tanker-car leaked several hundred barrels of Alberta crude
and reignited concern about oil moving by train as pipeline
capacity lags production growth.

Producers shipped about 45,000 barrels of Canadian oil into
the United States by train last year, up from almost nothing
just five years earlier, based on Reuters calculations of data
from Canada’s National Energy Board. Current shipments could be
as much as 150,000 barrels a day, estimated Steven Paget,
analyst at FirstEnergy Capital Corp.

The spills are the latest in a string of problems for
shippers of Canadian crude that have inflamed the debate over
the oil sands. The largest spill was the Enbridge Inc
line break in Michigan in 2010, which sent more than 20,000
barrels of Canadian oil into the Kalamazoo River system.

U.S. regulators last month ordered Enbridge’s U.S. affiliate
to do more cleanup at the site, pushing the bill to near $1
billion.

TransCanada Corp, backer of the long-delayed $5.3
billion Keystone XL pipeline to Texas refineries from Alberta,
and the line’s supporters, say oil spills highlight the need for
safer energy infrastructure rather than a shift from pipelines.

“I don’t think it will have an impact (on Canadian exports
and the approval of pipelines). Look, it’s being seized on by
those who oppose hydrocarbon development, but if you follow
their logic to its conclusion, what they’re saying, I guess, is
they don’t want to see any pipelines built,” Canadian Natural
Resources Minister Joe Oliver said of the Arkansas spill.

“It’s not because of Canadian crude that there was a spill.
It was an old pipeline, more than 60 years old.”

Oliver has led Ottawa’s intense lobbying campaign in favor
of the 830,000 barrel a day Keystone XL project, which will take
Canadian crude to Gulf refineries. Washington is set to decide
on the line this summer and it could be in service in 2015.

PRODUCTION PREDICTION

All predictions are for a steady climb in Canadian
production, explaining the industry and government’s quest for
new markets in the United States and non-traditional areas such
as Asia, one of the biggest drivers engines of world oil demand
growth.

Canada’s National Energy Board has predicted output will
average 3.6 million barrels a day this year, up 12.5 percent
from 2012, putting it nearly 400,000 barrels a day ahead of No.
2 OPEC producer Iraq’s current output.

The industry sees a jump in output to 4.7 million barrels a
day by the end of the decade, with new pipelines such as
Enbridge’s contentious Northern Gateway to Canada’s Pacific
Coast and TransCanada’s Energy East line to the Atlantic
provinces planned to move much of the increase.

Last week, Wood Mackenzie, the energy research firm,
predicted output of bitumen from the oil sands, will increase by
540,000 barrels a day over the next two years.

Almost three-quarters of that will come from projects that
have already been approved and have a break-even oil price below
$60 a barrel, WoodMac said. The current price for Canadian heavy
oil is about $80 a barrel.

(Additional reporting by Scott Haggett in Calgary and Patrick
Rucker in Washington; Editing by Janet Guttsman, Matthew
Robinson and Leslie Gevirtz)

He was 70.

Klein, a one-time television reporter who was also mayor of Calgary, had been suffering from dementia and chronic obstructive pulmonary disease, and had been out of the public spotlight that he basked in for much of his adult life.

“In his public life, while many will now debate what he stood for, he himself simply believed that public service was important, that it need not be complicated, and that it revolved around people, Klein’s wife, Colleen, said in a statement.

Klein was one of Canada’s most successful politicians, presiding over four consecutive majority governments and attracting voters with an everyman persona, tight-fisted fiscal policy and a propensity to fire sharp-tongued and sometimes off-color zingers at his critics.

One of Klein’s proudest accomplishments as leader of Alberta’s ruling Progressive Conservative party was eliminating the Western province’s public debt in 2004 after deep and often controversial cuts to healthcare, education, the civil service and spending on infrastructure.

The cuts, and steadily rising prices for Alberta’s surging oil and gas production, generated a string of budget surpluses that climbed into the billions of dollars. In 2005, he used some of the bounty to send C$400 checks to all Albertans, in a program nicknamed “Ralph bucks.”

Klein fostered a business-friendly economy by reducing corporate taxes, luring several major companies to the province to make use of what Klein called the “Alberta advantage.”

During his premiership, Alberta’s oil sands gained global attention as the world’s third-largest accumulation of crude oil and increasingly important source of U.S. supply.

Klein often grabbed national notoriety, not just for the common touch that won him popularity with Alberta voters even as he slashed public services, but also for frequent jibes at opponents.

Some of his more memorable moments on the public stage included blaming “creeps” and “bums” from Eastern Canada for straining Calgary’s public services in the boom years of the early 1980s, flipping off an environmental protester in front of TV cameras when he was Alberta’s environment minister and throwing cash at a homeless man at a shelter while premier.

After the latter incident he admitted to having a drinking problem, although he would never vow to give up alcohol.

But such foibles and his ability to move past them only endeared him to voters.

CALGARY’S MAYOR

Born in Calgary in 1942, Klein rose into the public consciousness as a civic affairs reporter for CFCN Television in the 1970s.

In 1980, he ran for mayor of Calgary, helped in his campaign by a political science student and restaurant waiter named Rod Love, who would be his strategist and chief of staff for two decades. Love came to be known as “Ralph’s Brain”.

The political rookie won the race and was mayor for nearly a decade, a period that brought the western oil city to world prominence as host of the successful 1988 Winter Olympics.

Klein made the jump to provincial politics in 1989, running for the Conservatives, and became the party’s third consecutive premier in 1992, tapping into voters’ love of common touch. First elected in 1971, the party remains in power under Premier Alison Redford.

Klein took stands against the then-ruling federal Liberal party and its support of the Kyoto Accord on greenhouse gases, arguing its adoption would hurt the oil industry and Alberta.

An initiative he championed but never brought to fruition was more privatization of Alberta’s healthcare system, which like the rest of Canada’s is publicly funded. His efforts to bring in legislation that would allow more for-profit care was met by angry protests outside the provincial legislature in Edmonton.

In the 2004 election, his Conservatives won another majority but a reduced one, and the party pulled its support for him during a subsequent leadership convention. He resigned in 2006.

(Editing by Janet Guttsman and Paul Simao)

But the chief executive of Total’s Canadian unit said on
Thursday he expects the problem of transport bottlenecks now
plaguing the northern Alberta oil sands to be ironed out by the
time his company starts up vast new mines in the region later
this decade.

France’s Total and Suncor, Canada’s biggest oil producer,
pulled the plug on the Voyageur upgrader on Wednesday because
returns would not be high enough to justify the project, which
would have transformed tar sands bitumen into lighter oil that
can be more easily used by traditional refineries.

The companies have not said how much the upgrader would have
cost, but analysts pegged the project at more than C$14 billion
($13.8 billion).

Total’s Andre Goffart told Reuters that the partnership with
Suncor is still solid as the companies evaluate the remaining
projects in their joint venture: the Fort Hills and Joslyn oil
sands mines, which will now produce bitumen diluted with lighter
hydrocarbons instead of upgraded synthetic crude. The most
recent start-up estimate for Fort Hills was 2017.

“If you look at the short term, those projects would be
challenging because of the monetary netback we see right now
because of the pipeline constraints,” Goffart said.

“However, within the time frame we’re looking at for both
mines, we should have the logistical issue resolved, and we
should see a more normal netback for bitumen… Taking into
account those changes, both projects would be economically
justified.”

The partners are expecting to make a decision on whether to
go ahead in the second half of this year, he said. Suncor has
said it will provide cost details by the end of June.

A decision to abandon these projects would raise serious
questions over the viability of new oil sands developments as
Canada strives to cement its role as a major world producer.

The Canadian oil sands are the third-largest crude oil
resource in the world after Saudi Arabia and Venezuela, and
rising output from the oil sands and from North Dakota and
elsewhere in the United States has allowed the United States to
reduce its reliance on oil from other foreign sources.

Bitumen production in Alberta is on track to increase by
more than half a million barrels a day in the next two years,
roughly a 50 percent increase from 2012, according to a report
this week by research firm Wood Mackenzie.

But the surging production has overtaxed pipeline networks
across the continent, creating a bottleneck that in January
pushed the price of Canadian heavy crude to more than $40 a
barrel under benchmark West Texas Intermediate.

The discount has shrunk steadily since then and was around
$15 under WTI on Thursday.

If TransCanada Corp’s gets the green light to go
ahead with its controversial Keystone XL pipeline from Alberta
to Texas refineries, some of the pipeline pressures will ease.
The Obama administration is expected to rule on it this summer,
and if it is approved, TransCanada said Keystone XL could be in
service by 2015.

The next major tranche of oil sands output is slated for the
coming weeks with the start-up of Imperial Oil Ltd’s
C$12.9 billion Kearl mining project, and the company has said it
has transport capacity and markets for the output.

ALREADY BIG PLAYERS

Suncor and Total already have large oil sands operations.
Suncor’s main business produces up to 350,000 barrels a day,
more than 10 percent of Canada’s overall oil output. It also has
a 12 percent stake in the nearby Syncrude Canada Ltd project and
produced about 123,000 barrels a day in the last quarter of 2012
from its Firebug operations.

Total produces bitumen from the 25,000 barrel a day Surmont
steam-driven project in partnership with ConocoPhillips
and is expanding that to 100,000 barrels a day.

Total has committed to capacity on Keystone XL so it can
ship bitumen to its 225,500 barrel a day refinery in Port
Arthur, Texas. It is also supporting the Enbridge Inc
Northern Gateway pipeline and Kinder Morgan Energy Partners’
Trans Mountain expansion, both of which would ship
Alberta crude to Canada’s West Coast.

The ability to expand market access will dictate the
industry’s growth plans, Goffart said.

“The main question will be the timing. The other question
will be between logistics and production capacity,” he said.

Though more expensive to develop than a steam-driven
project, it is likely that Fort Hills will proceed, said David
McColl, analyst at Morningstar, but it’s unclear if the 2017
startup estimate is realistic.

“I would be absolutely shocked if that was canceled. What we
really need with that project now is to understand the time line
a little bit better, and what it’s actually going to cost,”
McColl said.

The leak – the first major spill of the modern North
American crude-by-rail transit boom – came when 14 cars on a
94-car Canadian Pacific train left the tracks about 150 miles
north west of Minneapolis near the town of Parkers Prairie, the
Otter Tail Sheriff’s Department said.

Canadian Pacific Railway Ltd, the country’s
second-largest railroad, said the company was investigating the
incident. CP Spokesman Ed Greenberg said only one 26,000-gallon
tank car had ruptured, adding it was a mixed freight train
carrying crude and other materials.

The company did not comment as to what kind of crude the
train was carrying.

But Minnesota Pollution Control Agency spokesman Dan Olson
said up to three tank cars were ruptured and an estimated 20,000
to 30,000 gallons – or 475 to 715 barrels – leaked out.

Cold weather had also made the crude thicker, hindering the
ability to recover the oil, Olson said, adding the initial
cleanup was expected to continue for a day or two.

“We are focusing on drawing up the loose (oil) … and once
that has been taken up, they will then pump up the remaining oil
in the tanks,” Olson said. “Because of the winter conditions,
the ground is frozen and there is not any damage to surface
water or ground water.”

A photo on the website of a local paper, the Duluth News
Tribune, showed two large tank cars lying on either side of the
railroad tracks in snow-covered fields.

The derailment is the first major spill of the massive
expansion of crude shipment by rail, which has increased rapidly
in the last three years as booming North American oil production
has outgrown existing pipeline capacity.

Canada is the top exporter of crude to the United States,
due to rising output of crude from its vast tar sands deposits.

Growing volumes of that oil have crossed the border via
train as production bumps up against pipeline constraints, with
around 40,000 barrels per day (bpd) on average shipped to the
United States in 2012, according to data from Canada’s National
Energy Board.

Environmentalists have complained about the impact of
developing the reserves, and have sought to blocked TransCanada
Corp’s controversial Keystone XL project, which would
carry oil produced from the oil sands to the U.S. Gulf Coast
refining center.

Some experts have argued oil-by-rail carries a higher risk
of accidents and spills.

“It is good business for the rails and bad safety for the
public,” said Jim Hall, a transportation consultant and former
chairman of the National Transportation Safety Board.

“Railroads travel through population centers. The safest
form of transport for this type of product is a pipeline. This
accident could – and ought to – raise the issue for discussion,”
he added.

Others note that spills from rail cars are rare, and that
delivering crude by rail has opened up opportunities in recent
years for producers to develop huge volumes of oil production in
areas of the United States that are not connected to markets by
pipeline.

“It’s not very good publicity, but railroads are incredibly
safe, they don’t spill often,” said Tony Hatch, independent
transportation analyst with ABH Consulting in New York who has
done work for major railroads. “It should not change the
opportunity railroads have to make us more energy independent.”

Supporters of the Keystone XL pipeline were quick to jump on
the derailment as a reason to build the line.

“It should be clear that we need to move more oil by
pipeline rather than by rail or truck,” said Don Canton,
spokesman for North Dakota Senator John Hoeven, who has been one
of the chief political proponents of the line. “This is why we
need the Keystone XL. Pipelines are both safe and efficient.”

Shipments of petroleum on U.S. railroads rose more than 46
percent last year to 540,000 carloads, the Association of
American Railroads said in January.

A spokesman for the Federal Railroad Administration said two
representatives of the U.S. rail regulator are investigating the
incident.

The Otter Tail Sheriff’s Department said the train was
approximately 5,700 feet in length, or 1.7 kilometers (1.05
miles) long.

“Once our crews were able to get closer to the rail cars
that were involved in the incident, it was determined that only
one had been formally compromised,” Canadian Pacific’s Greenberg
said. “We have options to reroute traffic, so we’ve been able to
continue to move trains while we do the thorough job of cleaning
up the area.”

He also said he did not know if the crude oil was from
Canada’s oil sands or the originator of the train.

Shares in Canadian Pacific ended down less than half a
percent at C$129.06 on the Toronto Stock Exchange.

Suncor, Canada’s largest oil company, said the decision to
pull the plug on Voyageur was in line with its strategy to
allocate its capital to high-return projects and accelerate the
return of cash to investors with dividends and share buybacks.

It began re-evaluating the prospects last year for the
complex plant, designed to “upgrade” bitumen from several oil
sands projects into refinery-ready light crude. The company had
cited surging volumes of cheaper crude from the North Dakota
Bakken region for the declining potential.

The upgrader was part of a larger oil sands partnership with
France’s Total SA that also includes the proposed Fort
Hills and Joslyn oil sands mines in northern Alberta.

“Since 2010, market conditions have changed significantly,
challenging the economics of the Voyageur upgrader project,”
Suncor Chief Executive Steve Williams said in a statement.

Suncor it will take charges of C$140 million ($134 million)
to earnings and C$180 million to cash flow in the first quarter
as a result of the decision.

Suncor also said it bought Total SA’s interest in
the upgrader partnership for C$515 million to gain full control
of the assets. The plant was partially constructed, but work was
halted during the financial crisis in 2008-2009.

The partnership’s other assets include a housing facility, a
storage tank farm, a heated bitumen terminal and other
facilities, Suncor spokeswoman Sneh Seetal said.

An official with Total said the company’s Canadian chief
will comment on the impact of the decision on Thursday.

The prediction comes as the Alberta and Canadian governments
struggle to find solutions to the problem of deep discounts in
prices for the country’s heavy crude oil that have pressured
public finances as well as corporate bottom lines.

In recent months the discount on Western Canada Select heavy
oil has shrunk considerably, to less than $15 a barrel under
West Texas Intermediate from more than $40 under in January, as
Imperial Oil Ltd’s Kearl oil sands project has been
slow to start up and as inventories in Canada have dwindled.

However, Wood Mackenzie analyst Mark Oberstoetter said the
improvement is likely to be short-lived as major new pipelines
to move the crude are slow to be approved and built and
production from the Bakken region of North Dakota in the United
States also jumps, competing for current space to market.

Oberstoetter said almost three-quarters of an expected
540,000 barrels a day of new bitumen production expected to
start up in the next two years will come from projects that are
already sanctioned and have a break-even oil price of $60 a
barrel.

That means they are well insulated from weaker crude prices,
and so have little risk of getting deferred.

“What our analysis shows is that point-forward economics for
the vast majority of oil sands projects planned to start-up
between now and 2015 are attractive,” he said in a statement.

Some unsanctioned projects, such as the Fort Hills oil sands
mining development proposed by Suncor Energy Inc and
Total SA, have somewhat higher break-even levels and
are at risk of being delayed given expectations of weaker
bitumen prices, he said.

Suncor has said the partners expect to make a decision on
Fort Hills by the end of June.

Major new pipeline proposals, including TransCanada Corp’s
Keystone XL to Texas refineries and Enbridge Inc’s
Northern Gateway to Canada’s Pacific Cost, would
alleviate the pipeline bottleneck, securing higher prices for
Canadian and North Dakota oil, Oberstoetter said.

He pointed out, however, that they both remain controversial
and could still face more regulatory or political delays.
TransCanada has said that Keystone XL could be in service by
2015 if approved by this summer.

Wood Mackenzie said it does not expect meaningful expansion
of North American pipeline capacity until 2014, when such
projects as Enbridge’s Southern Access and Tallgrass Energy
Partners’ Pony Express pipeline systems start up.

“The companies without a natural hedge via an accessible
downstream position are the most impacted and may seek out rail
as an alternative option,” it said.

The decision by Canada’s largest oil company on its
long-delayed and partially built Voyageur upgrading plant in
Alberta is one of a pair of major developments in the oil sands
due this week, the other being the targeted start-up of Imperial
Oil Ltd’s Kearl mining project after about four years
of construction.

The two events show the changing dynamics of Canada’s oil
sands industry as it deals with more difficult economics due to
surging production of cheaper light oil from the North Dakota
Bakken and a move away from “upgrading” the oil sands bitumen
into lighter, refinery-ready oil in Alberta.

Suncor said in February that the “economic outlook for the
Voyageur upgrader project is challenged” and it cut any
expenditures on it to a minimum pending a decision on going
ahead.

Based on the current weak financial outlook facing new
facilities built to pump out synthetic light crude, Suncor will
postpone the 200,000 barrel a day Voyageur project indefinitely,
analysts said on Monday.

“Suncor’s official comments on conference calls have been
something to the effect of, ‘The primary motivator behind the
decision will be economics,’ and the economics look challenged,”
FirstEnergy Capital Corp analyst Michael Dunn said. “And
investors don’t want them to proceed with it.”

Suncor Chief Executive Steve Williams has already warned the
proposal, once the centerpiece of a C$20.6 billion ($20.2
billion) expansion of the company’s oil sands operations, is
threatened by the U.S. light crude boom. The company began
building the project, located near Fort McMurray, Alberta, but
stopped construction during the financial crisis of 2008-09.

Upgraders are expensive tangles of pipes and vessels that
transform bitumen from the oil sands into light crude used in
traditionally configured refineries. In recent years, numerous
refiners in the U.S. Midwest have added equipment to their
plants that do a similar job.

Another big stumbling block is the tight availability of
labor in Alberta as other oil sands projects move forward, which
points to rising costs, Dunn said.

Suncor has already taken a C$1.5 billion asset impairment
charge on the assets.

Morningstar analyst David McColl wrote in a report that he
has removed Voyageur from his financial forecasts, partly citing
the impairment.

TD Securities analyst Menno Hulshof has also said the
project is “now most likely to be deferred or even canceled.” He
pointed out that the bulk of the capital would be redirected to
Suncor’s steam-driven oil sands projection operations.

Suncor spokeswoman Sneh Seetal said the company still plans
to announce the fate of the Voyageur project by the end of the
month.

Suncor shares have been under pressure, closing on Monday
down 24 Canadian cents at C$30.73 on the Toronto Stock Exchange.
That represents a drop of 6 percent since the start of 2013.

JOINT VENTURE

Voyageur and the proposed oil sands mining projects Joslyn
and Fort Hills are part of a joint venture that Suncor signed
with France’s Total SA.

Suncor, Total and a third partner, Teck Resources Ltd
, have said they will make a decision on Fort Hills,
another project that has been years in the planning, by the end
of June, though the operator is advertising for several job
positions in connection with the plant.

The current target for start up is 2017.

In absence of a new Alberta upgrader, Suncor could ship
bitumen from Fort Hills and Joslyn to its refinery in Montreal,
where a previously halted plan to build a coking unit to process
the crude could be revived, McColl said.

Meanwhile, Imperial is sticking to its target for a
month-end start-up for its C$12.9 billion Kearl oil sands
project, which is being developed without an upgrader, spokesman
Pius Rolheiser said.

The first phase of the mining project will eventually
produce 110,000 barrels a day, through production will rise
gradually and it will take as many as 90 days for the crude to
reach markets.

The startup for Kearl comes just as the price of bitumen has
been rising sharply with demand rising for asphalt production in
North America.

Western Canada Select, a widely quoted heavy crude grade,
last sold for $16.30 a barrel under U.S. benchmark West Texas
Intermediate, compared with more than $40 a barrel under WTI in
January, according to Shorcan Energy Brokers. The spread has
tightened as inventories in Western Canada have dwindled.