HOUSTON (Reuters) - Even as big U.S. oil pipelines invest billions of dollars to ship booming oil production south from Canada and North Dakota, a new race is underway in the opposite direction.

Two of the country's biggest pipelines, both now underutilized, are competing to pump a special type of ultralight oil from the Gulf Coast to the Midwest, betting on growing demand from Canadian producers for the "diluent" necessary to get their heavy oil sands bitumen flowing to refiners.

The race between the Capline and Explorer lines, which may play out over years rather than months, is the latest example of how fast-growing inland oil production has roiled the U.S. market, forcing key parts of the nation's oil infrastructure to adapt -- or face obsolescence.

It is fueled by forecasts that demand for diluent from Canadian oil producers will quadruple in just over a decade.

Oil sands producers need natural gas condensate or light oils to mix with their heavier oil sands bitumen, diluting it enough to flow through pipelines to the United States. But low natural gas prices are curbing Canadian production of such liquids, causing imports from the United States to surge.

"Oil sands and Alberta natural gas (production) are going in opposite directions," said Paul Reimer, senior vice president of marketing, power and transportation at Cenovus Energy, one of the largest oil sands operators in Alberta.

"We're anticipating that as oil sands production continues to increase, we'll be requiring more and more of various sources (of diluent). It's really a case of tapping into all the light liquid sources in North America," he said.

Capline, the biggest crude oil pipeline in the mainland United States, has recently begun shipping some diluent from as far away as the Eagle Ford shale in Texas, partially filling a void left by Midwest refiners who now have cheaper alternatives to Gulf or imported crude via Capline, analysts say.

With throughput now at less than a sixth of capacity, Capline's management is considering several options, including increasing the diluent flow north or reversing it to carry Canadian and Bakken crude south, according to an industry source familiar with operations.

But a reversal appeared to grow less likely this week, after Enbridge Inc and Enterprise Products Partners LP said they will more than double capacity of the competing Seaway Pipeline to the Gulf Coast.

Capline has competition in the race to bring diluent north.

Earlier this month, Explorer Pipeline Co, which carries refined fuels from East Texas to Chicago, quietly launched a second, binding "open season" to secure customer commitments for building a new link to Enbridge's Southern Lights, improving its connection to the pipeline built expressly to carry diluent.

DILUENT DEMAND

The diluent is a thinning agent of lighter hydrocarbons that allows Canadian oil sands output to be pumped more easily through pipelines. As much as one-third of the Canadian bitumen exported to the United States is actually diluent, which can be recycled and reused or processed into marketable fuels by a refinery.

Oil sands demand for diluent hit 275,000 bpd last year, while Canadian production of natural gas condensate for diluent slipped to 130,000 bpd last year, said IHS Purvin & Gertz senior consultant John Heida. Canada produced 165,000 bpd in 2000.

Meanwhile U.S. exports of one type of diluent called "Pentanes Plus" -- principally plant condensate -- surged late last year to some 86,000 bpd, up from just 11,000 bpd in the first seven month, government data show. Heida estimates the total U.S. exports of all diluents last year at 125,000 bpd.

By 2025, the Canadian Association of Petroleum Producers (CAPP) expects oil sands output to reach 3.7 million barrels per day, of which 3.3 million barrels will be bitumen requiring 1 million barrels of diluent in order to flow.

The U.S. share of that could be as high as 380,000 bpd, three times what it is today, Heida said.

EXPLORER OPTIONS

Explorer, which starts at Houston with 850,000 bpd capacity and narrows to 350,000 bpd by the time it reaches Chicago, is no longer needed for its previous function of carrying gasoline and diesel from the Gulf Coast to the Midwest.

"There's not as much demand for refined products from the Gulf Coast into PADD 2 (Midwest)," Dolin Argo, director of business development for Explorer, said in an interview.

Midwest refineries, which have enjoyed better profit margins due to an oversupply of landlocked North American crude, have been expanding capacity to take in more Canadian crude and ramping up runs. The region is now more likely to export fuel to other areas rather than import it. Refiners there processed 4 million bpd last year, the most since 2000, even as nationwide fuel demand kept sinking.

Some analysts believe Explorer already is carrying diluent northward, taking advantage of its proximity to the liquids-rich Eagle Ford shale field just west of Houston. The company declined to comment on its operations.

Although the line does not report detailed utilization figures, it hasn't needed to ration space for shippers since before 2008, and doesn't expect to even after completing the 350,000 bpd diluent project, according to a regulatory filing.

If it receives sufficient demand during the open season, which concludes April 16, the 24-inch, 18-mile line from Wood River to Hammond, Illinois, could be finished by the fourth quarter of 2014, according to its website.

"We think there's going to be surging demand for diluent to get to western Canada. To the extent it wants to get there from Eagle Ford, Explorer's trying to position ourselves to be that option," Argo said.

CAPLINE

Another underutilized pipeline is Capline, the 40-inch, 630-mile, one-time crude oil aorta that roughly tracks the Mississippi River from Louisiana to Patoka, Illinois.

Starting in the late 1960s, Capline delivered as much as 1.2 million barrels a day of imported and offshore crude oil from the Gulf Coast to Midwest refiners. Now it pumps only every other day due to the flood of crude from the north.

Throughput fell below 200,000 bpd in February, according to Louisiana state data, the lowest rate in at least a decade and half as much as just one year ago.

Capline still has two key customers who have limited alternatives for crude supply: Valero Energy Corp's Memphis refinery and the Catlettsburg refinery owned by Marathon Petroleum Corp, also a minority owner of the pipeline.

If the Utica shale in Ohio pans out, Marathon's need for access to Gulf Coast crude supplies could diminish sharply. Utica, which is just beginning development, could flow as much as 133,000 barrels a day by 2016, Bentek forecasts.

Even as Marathon began consuming the first few barrels of Utica crude earlier this year, Catlettsburg's intake of imported crude via Capline fell in December to just over 15,000 bpd, down from 50,000 bpd in the first half, the Louisiana data show.

Meanwhile Capline has been boosting throughput with diluent shipped from Texas to the Louisiana hub by rail, three trade sources said.

"A non-trivial amount is coming from the Eagle Ford, getting to St. James, loaded onto Capline, hits Southern Lights and goes to Alberta," said Rusty Braziel, who runs RBN Energy.

A reversal to carry Canadian and Bakken crude to Gulf Coast refineries once appeared to be an option. But other projects have jumped ahead of Capline, including this week's doubled Seaway line and TransCanada's Keystone XL.

Operator Royal Dutch Shell Plc, which long ago sold its share in Capline, declined to comment on the pipeline's future. Plains All American Pipeline LP and BP Plc, who also co-own Capline, also declined to comment.

But to many it seems to have only one choice.

"If you say what can you do with Capline, the logical answer is to push more and more diluent through it to Canada. That's what's needed," said Abudi Zein of pipeline monitor Genscape. "Refiners on the Gulf Coast can't use all of it."

(Corrected Paul Reimus to Paul Reimer in 6th paragraph)

(Reporting By Bruce Nichols; additional reporting by Jeffrey Jones in Calgary; Editing by David Gregorio)