Pipeline adds to network

Gary Park

For Petroleum News

In grooming itself for a US$22 billion management buyout, Kinder Morgan has opened the way for high-flying Inter Pipeline Fund, IPF, to take a leading role in transporting Alberta oil sands production.

To help reduce debt ahead of going private, Kinder Morgan has agreed to sell its Corridor pipeline system to IPF for C$760 million and dump C$1.8 billion of spending obligations on expansion of the system to 465,000 barrels per day by 2012 from 278,000 bpd.

As part of the deal, IPF will assume C$485 million of debt and take on an additional C$300 million of debt related to the expansion of Corridor that started last year.

IPF Chief Executive Officer David Fesyk said he was not concerned about the risk associated with the expansion because the “reserve base behind this particular pipeline (estimated at 10 billion barrels) is extremely impressive.” In less than four years, IPF has assembled 600 miles of pipeline and 2 million barrels of storage.

Kinder Morgan Chief Executive Officer Richard Kinder said that although Corridor is “an operationally sound and strategically located pipeline, the sale of this asset will enable us to reduce debt and focus on other exciting growth opportunities.”

Corridor’s only customer is the Shell Canada-operated Athabasca oil sands operation, which expects to use the system to ship bitumen to the Edmonton refinery area over the next 25 years.

The pipeline has existing capacity of 280,000 bpd of “dilbit,” or diluted bitumen for upgrading into synthetic crude at Shell Canada’s Scotford refinery complex.

IPF said the Corridor line could be expanded to 1.4 million bpd, of which it would require 1.1 million bpd, leaving the balance for marketing to third parties.

The purchase will see IPF move about half of Alberta’s oil sands production, making it the largest Canadian gathering system.

It already owns 85 percent of a pipeline that carries 330,000 bpd of blended bitumen from the Cold Lake area of eastern Alberta for Imperial Oil, EnCana and Canadian Natural Resources.

Bill van Yzerloo, IPF’s chief financial officer, said the Kinder Morgan transaction will give “predictability and stability” to the fund’s cash flow, boosting money available for distribution to unit holders by 25 percent.

Kinder Morgan has given no indication that it is looking to dispose of its other major Canadian assets, purchased in the 2005 takeover of Terasen.