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Investor: Oil Will Flow Even if TransCanada Doesn’t Build Controversial Pipeline

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The increasingly contentious debate over the environmental impact of TransCanada’s Keystone XL pipeline obscures the oil and gas industry’s pursuit of alternative means to deliver rising production from Canada’s oil sands to the United States and other markets.

Facing lower price realizations in oil-glutted western Canada, enterprising oil-sands producers have already turned to railways to deliver their output to the U.S. market. In fact, weekly car loadings of petroleum products originating from Canada hit an all-time high in mid-February.

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Utility investment guru Roger Conrad expects this trend to continue to gain momentum while the Keystone XL project hangs in limbo.

“The big money is committed to oil sands development and the market is already there,” Conrad said. “Even if the Obama administration doesn’t approve the pipeline, the oil will reach end-users by any means necessary, including rail.”

And these end-users aren’t necessarily in the United States. The oil industry has also targeted emerging-market Asia as another destination for heavy oil exports — a move that would make sense given the $40.25 billion (USD) that China’s three national oil companies have invested in Canadian energy assets over the past five years.

Enbridge’s Northern Gateway Project includes an oil pipeline with nameplate capacity of 525,000 barrels per day (bpd) that would transport diluted bitumen from Edmonton, Alberta, to Kitimat, British Columbia, for export to Asia. Fierce local opposition to this project has prompted industry participants to push back the expected start date to 2019.

Meanwhile, Kinder Morgan Energy Partners LP in early 2012 announced a $4.1 billion plan to expand the capacity of its Trans Mountain pipeline to 750,000 bpd of oil from 300,000 bpd. This system transports output from Alberta’s oil sands to the Port of Vancouver on Canada’s Pacific Coast. Management expects the project to be completed in 2018.

But with the inordinate focus on the fate of Keystone XL, the market has discounted oil-sands producers’ long-term growth prospects. Conrad regards this skepticism as an opportunity.

“Investors need to take advantage of the uncertainty surrounding the pipeline and the recent dip we’ve seen in oil prices,” he said. “I favor high-quality names such as Cenovus Energy and Pembina Pipeline Corp., a well-positioned midstream operator.”

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