Pipeline Plans Are A Big Win For The Oil Sands

By Aaron Levitt | April 16, 2012 AAA

There's a virtual ocean of oil in Alberta. Situated in the Athabasca region, the site is one of the richest petroleum deposits on the planet. Locked within the sand and clay, analysts estimated that the oil sands could hold more than 175 billion barrels of petroleum. Extracting it is expensive and dirty, but with demand and oil prices rising, this vast stretch of countryside could be an oily bonanza. Unlocking that bounty may have just gotten easier. A few major moves by some pipeline elite could be exactly what the oil sands sector needs, and investors should position themselves accordingly.

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A Lifeline South
Canada already produces nearly 1.5 million barrels per day from the Alberta oil sands region, and that number could to grow exponentially as new pipelines will be able to tap the field. While TransCanada's (NYSE:TRP) $13 billion Keystone XL pipeline as a single entity has been shelved, pipeline rival Enbridge (NYSE:ENB) seems to be picking up the slack. Amid all the political turmoil surrounding the Keystone Enbridge, along with partner Enterprise Products (NYSE:EPD), recently announced plans to create a rival system in order to move oil sands crude from Canada down to the refiners on Gulf Coast.

SEE: Oil And Gas Industry Primer

The duo will spend around $2.8 billion to build another pipeline, stretching from Flanagan, Illinois to the Cushing storage hub. That pipeline would connect to an existing route from Canada and offer access to oil producers in the northern United States, such as the rich Bakken shale. Ultimately, the Flanagan South pipeline will have capacity of about 585,000 barrels a day when it is completed in mid-2014. The key is the fact that since the pipelines will not cross national borders, they won't require federal approvals. They can be built without many of the problems facing the Keystone. In addition, Enbridge's Northern Gateway Pipeline system, which would take crude westward from Alberta to the Pacific Coast for export, is still on the drawing board. Both of these pipeline systems would produce dramatic benefits for oil sands producers.

Just how dramatic? Canadian oil benchmark, Western Canada Select (WCS), has sold for about a $42 per barrel discount to world prices throughout the year. That's due to the backlog of oil stuck in Cushing. Analysts estimate that these pipelines will help reduce that spread and make both WCS and West Texas Intermediate (WTI) crude oil international standards once again. By just cutting the discount in half, oil sands producers will see more than $15 billion in extra revenue. By expanding exports to the U.S. and tapping markets in Asia, Canadian producers could see an additional $13.60 per barrel gain by 2030.

Betting on the Bitumen
With the various major pipeline projects vying for Canada's energy reserves, the growth of its oil sands industry is almost assured. For investors, playing the region can provide gains for years to come. The Guggenheim Canadian Energy Income ETF (ARCA:ENY) has been the standard bearer as a broad play on Canada's oil sands industry. The fund follows 33 different energy producers, including many that oil sands assets, like Baytex Energy (NYSE:BTE). The fund's expense ratio is 0.65% and yields 3.24%. Likewise, the new Market Vectors Unconventional Oil & Gas ETF (ARCA:FRAK) can be used as well. (L3)

For a direct oil sands play, Suncor Energy (NYSE:SU) remains one of the premier producers in the region. As the first firm to develop bitumen as a petroleum field, the producer gave birth to the industry. Suncor has since expanded into other production regions, but recently collaborated with Total (NYSE:TOT) to reinvest into its oil sands properties. Analysts expect the firm to grow oil sands production-capacity by 10% through 2020. That will result in total production growth of about 8% per year, well above other integrated firms. Likewise, Canadian Natural Resources (NYSE:CNQ) continues to expand into the Athabasca.

SEE: A Guide To Investing In Oil Markets

The Bottom Line
The recent pipeline moves by Enbridge and its partners will undoubtedly benefit those producers in Canada's oil sands region. These new energy logistic systems will enable producers to move their products with more efficiency and help reduce the discount at which they trade. For investors, this could be the best time to add these energy firms. The previous picks, along with Cenovus Energy (NYSE:CVE), make ideal choices to play the region's growth.

SEE: What Determines Oil Prices?

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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.

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