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Bakken crude, Canadian oil sands battle for pipeline space

North Dakota's unexpected oil boom has triggered a surprising development that people outside the industry have yet to grasp: U.S. domestic crude oil must now compete with Canadian imports for space on the nation's pipeline system.

That new reality is at the core of an escalating battle between Canadian pipeline giant Enbridge Inc. and a tiny U.S. pipeline operator that's trying to get North Dakota's newfound oil riches to more U.S. refiners.

High Prairie Pipeline LLC wants to build a pipeline to carry oil east out of North Dakota's prolific Bakken oil formation. Oil producers there outgrew North Dakota's few pipelines long ago, and the bottleneck is forcing them to use pricier rail cars and truck fleets to deliver their crude. That limits their potential customers and cuts into profits.

For High Prairie's $650 million project to succeed, it must connect with Enbridge's 1,900-mile Lakehead system, which carries oil to refineries in the Midwest and to pipelines headed farther south. According to complaints High Prairie has filed with the Federal Energy Regulatory Commission and two other federal agencies, Enbridge initially said it had enough capacity to accommodate High Prairie oil at its hub in Clearbrook, Minn. But later Enbridge said it didn't have room for the oil and would allow the Clearbrook connection only if, among other things, High Prairie assumed the financial risk of a $1 billion expansion on a section of the pipeline system, according to the FERC complaint.

"It's clear that the country is in need of additional pipeline infrastructure, but building the pipeline infrastructure doesn't get you very far if you cannot then connect with the other pipeline infrastructure, and that's exactly what's happening here," said Greg Ward, general counsel for Durango, Colo.-based Saddle Butte Pipeline LLC, High Prairie's parent company. "There's more and more domestic production being discovered all the time. This is going to be an issue that's going to pop up over and over again."

Andrew Lipow, a Houston-based consultant and former oil trader, agreed.

"Everyone's competing for space as far as shippers go, and that's going to continue, just given the huge increases we're seeing in Bakken crude oil production," he said. "The High Prairie pipeline would consume capacity [on Enbridge's Lakehead system], which would prevent some Canadian oil from making its way downstream of Clearbrook, unless Enbridge did another expansion."

High Prairie has accused Enbridge of illegally reserving capacity for Enbridge-affiliated pipelines and for the surge in Canadian crude oil shipments that's expected in a few years. Enbridge, which is already dealing with negative publicity from two large spills on the Lakehead system, denies the claims.

"In this case, it is High Prairie which is attempting to have the playing field changed in their favor simply because they chose to reject several reasonable alternatives presented by Enbridge which would have allowed High Prairie to connect to the Lakehead System," Enbridge spokeswoman Terri Larson said in an emailed statement.

Opponents of oil sands imports -- and the pipelines that carry them -- see the High Prairie case as an important reminder that major pipeline projects are undertaken solely for the benefit of their owners, and that those interests may not be in sync with those of domestic oil producers, U.S. consumers or anyone else.

"The Enbridge situation shows the danger of relying on these Canadian tar sands crude oil pipelines to move domestic crude to market," said Anthony Swift, an attorney with the Natural Resources Defense Council, which opposes the importation of Canada's heaviest crude oil. "The overall layout of the [pipeline] system is now oriented to moving tar sands and heavy Canadian crude produced in Alberta to refiners in the U.S. Midwest and Gulf Coast. That is what's most profitable for companies like TransCanada and Enbridge to move, and that's what their businesses are focused on."

On July 31, High Prairie asked the U.S. State Department to intervene, arguing that it is in the country's national interest to ensure that pipelines in the United States "do not unduly discriminate against U.S. production or in favor of Canadian production."

From 1991 to 2009, the State Department issued a series of cross-border permits to Enbridge with the understanding that the company would operate its U.S. pipeline system as a "common carrier." Federal regulations grant common carrier pipelines sweeping powers in securing land rights-of-way for construction. In return, common carriers must operate as a kind of public pipeline utility, providing all customers with equal access to their facilities.

Enbridge Energy Partners LP, the U.S. affiliate of Calgary, Alberta-based Enbridge Inc., has a strong financial interest in carrying Canadian crude. Together, the two Enbridge pipeline systems deliver 60 percent of this country's oil imports from Western Canada - or 13 percent of total U.S. oil imports, according to company figures.

Enbridge rejects the notion that it prefers carrying Canadian crude over the U.S. domestic variety.