Canada badly needs to find a way to get its crude to customers in Asia and avoid the oversupplied North American market to fetch a better price for its oil.
Surging output of light sweet oils from North Dakota and Texas is crowding out demand for heavier, sourer crudes from Alberta - pushing the price of blends such as Western Canadian Select (WCS) to a $25 discount against West Texas Intermediate (WTI) and down as much as $45 against Brent.
Until recently, TransCanada's Keystone XL pipeline appeared to be the most promising option. If it is eventually given the go-ahead, Keystone will take crude from Alberta south across the United States to the U.S. Gulf Coast, from where it is likely to be loaded onto tankers for export via the expanded Panama Canal or the Cape of Good Hope to refineries in China, Korea and Japan.
Enbridge's Northern Gateway pipeline is the main alternative. It would carry 525,000 barrels a day of Albertan crude west into British Columbia and across the Rockies to a marine terminal at Kitimat, where it would be loaded onto tankers bound for refineries in California or North East Asia.
The problem for Keystone is that its original rationale of exporting oil to the United States has disappeared. The replacement aim of exporting to China can be met more sensibly by developing a western pipeline across the Rockies.
The complicated relationship between the rival companies and rival pipelines was illustrated by an article in Canada's Globe and Mail newspaper last year.
"What if crude could move to Asia without building huge, expensive and controversial pipelines to the West Coast (of Canada)? What if instead of feeding China through Northern Gateway, Canada sent oil across the Pacific through TransCanada's proposed Keystone XL line to Texas?" the Globe and Mail asked ("Why Keystone XL might be Canadian oil's best route to China" Sept 2012).
Keystone appeared nearer to winning final regulatory approval. Obama initially refused its application for a presidential permit in January 2012, demanding more time to study the pipeline's health and safety as well as environmental impact.
Until recently, however, it appeared the pipeline would be approved once the 2012 presidential election was out of the way, especially once the state of Nebraska pronounced itself satisfied with changes to the route through the environmentally sensitive Sand Hills region.
Meanwhile Northern Gateway's approval has been stalled in a thicket of submissions, hearings and objections before a government regulatory panel in Canada.
Problems in securing approval for Northern Gateway had caused many observers to see Keystone as the simpler and more advanced option.
The U.S. State Department originally said it would complete its evaluation of Keystone by the end of the first quarter of 2013. But that deadline has now been pushed back to the middle of the year.
With environmental groups continuing to mount an intense campaign for the pipeline to be blocked on global warming grounds, and the Obama administration apparently in no hurry to finish its national interest review, confidence in Canada that the pipeline will eventually be approved has fallen sharply. .
So now hopes for developing an export route have swung back towards Northern Gateway.
OPPOSITION AND DELAYS
Both pipelines have run into stiff opposition from environmentalists and communities along the proposed routes.
Keystone appears to have satisfied state governments in all the U.S. states through which the pipeline would pass.
But it faces continuing strong opposition from environmental groups who want to block any pipeline at all in the hope of starving Canadian crude of markets and keeping much of it in the ground.
Northern Gateway faces opposition from environmentalists. Many environmental groups are lobbying on both sides of the border against both pipelines. In addition, it faces strong objections from First Nations aboriginal tribes such as the Wet'suwet'en, Cree, Gitxaala and Haisla, over whose lands and hunting areas it would pass.
Keystone still needs to secure a U.S. presidential permit to cross the U.S.-Canada border from President Barack Obama before it can go ahead.
Northern Gateway must still convince a Joint Review Panel (JRP) of Canada's National Energy Board (NEB) and the Canadian Environmental Assessment Agency (CEAA) to give it a certificate of public convenience and necessity (CPCN) and an environmental assessment authorising construction.
TO CHINA VIA TEXAS
In some ways Northern Gateway is the simpler and more logical option for exporting to China and the rest of Asia.
Keystone was never intended to take oil to China. It was meant to take Canadian crude to the complex U.S. refineries along the U.S. Gulf Coast able to process the bituminous and sulphurous oil into valuable light products.
But with the unanticipated upsurge in domestic U.S. output, there is much less demand for heavy Canadian crude.
New U.S. crude streams from North Dakota's Bakken and Texas' Eagle Ford have a much lower sulphur content and yield a much higher proportion of low-boiling point molecules suitable for making gasoline and diesel than Alberta's heavy crudes, making them much easier and cheaper to process.
Domestic U.S. crudes cannot be exported (except to Canada) under current U.S. law. So U.S. refineries have a strong incentive to refine them in preference to Canadian oil. If Keystone is eventually built and Canadian crude reaches the U.S. Gulf Coast market, it is likely Canadian crude will be exported while U.S. oil is refined locally.
Gulf refiners have invested heavily in cokers to handle heavier crudes such as those produced in Alberta. But those investments were made before the extent of the shale revolution became clear, when U.S. refiners expected to source an increasing proportion of heavy oils from places such as Canada and Venezuela.
Coking units consume a lot of energy and are expensive to run. The investment in building them must now be considered a sunk cost.
Gulf refiners will only buy Canadian crude if it is priced at a significant discount to shale oils, which would leave Canadian producers with the same problem albeit probably not quite as bad as at present.
There is no point trying to export Canadian crude to Europe where refineries are not equipped to cope with heavy crude. The only way to unlock the full value of Canadian crude is to export it to modern giant coking refineries in Asia.
CANADIAN OIL, CANADIAN PIPES?
If Canadian crude is going to end up in Asia, it makes much more sense to send it west through the Rockies.
The route from Alberta west over the Rockies and across the northern Pacific is far shorter than taking oil south to Texas and then putting it on a tanker through the Panama Canal or around the Cape of Good Hope.
More importantly, it avoids the transit problems of crossing a third country. While an export pipeline is of clear strategic importance to Canada, it is not to the United States.
As TransCanada has discovered to its cost, U.S. and Canadian interests are not aligned on Keystone. In contrast, Northern Gateway would take Canadian crude across Canada and straight onto an ocean-going vessel to the final customer.
Canada's federal government, headed by Conservative Prime Minister Stephen Harper, has indicated it favours the development of new export pipelines to erase some of the heavy discounting on Canadian crude - while being careful not to pre-empt the JRP's regulatory review of Northern Gateway.
Opposition from aboriginal leaders remains intense. Northern Gateway has become a lightning rod for broader concerns about the treatment of First Nations by both federal and provincial governments.
British Columbia's Liberal provincial government is not enthusiastic either and worried about spills. Northern Gateway has revealed political divisions between Harper's Conservative heartland in Alberta (which has virtually no Liberals in its provincial legislature) and British Columbia (which has no Conservatives in the provincial assembly).
But given the central role Alberta's oil and gas industry plays in the Canadian economy, it must be easier for the federal government to force a pipe across the Rockies than south through a foreign country.
Pursuing both pipelines would give Canada more export options and help realise more value for its crude. But if only one pipeline is going to be built, Northern Gateway might be the more sensible option.