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Providing coverage of Alaska and northern Canada's oil and gas industry
February 2006

Vol. 11, No. 7 Week of February 12, 2006

Jostling among giants

TransCanada, Enbridge keep raising stakes to win support for pipelines to U.S.

Gary Park

For Petroleum News

A tussle between two of North America’s largest carriers of oil and gas to win over shippers for their oil sands pipelines projects has all the marks of a heavyweight showdown.

Just two days after TransCanada achieved a coup of sorts by announcing it has enough long-term contracts in hand to proceed with its US$2.1 billion, 340,000 barrel per day Keystone pipeline from Hardisty, Alberta, to Patoka, Ill., Enbridge was seizing the spotlight by announcing plans for Alberta Clipper — a new proposal to ship 400,000 bpd from Hardisty to Superior, Wis.

Enbridge Chief Executive Officer Pat Daniel was at pains to tell analysts that the new pipeline “is not in competition with anything” and just as quick to note that it is an “important next phase of our expansion that will be very difficult to beat.”

“We don’t see there being any alternative threat or competition,” he said.

Enbridge spokesman Jim Rennie told Petroleum News that Alberta Clipper and Keystone are not in a “head-to-head” battle, then added that “everything we do is aimed at providing a better suite of opportunities than those Keystone presents.”

TransCanada wouldn’t get drawn into commenting on its rival’s plans.

A spokeswoman said only that TransCanada was happy to have obtained the shipping contracts and was now prepared to let the market decide which pipeline will be built and when.

Many believe not all projects will be built

Rennie said Enbridge was not aware of anyone who thought all of the oil sands pipeline projects on the table — including those by Kinder Morgan Canada (formerly Terasen) and privately held Altex Energy — will be built.

That view is shared by many analysts, including Canaccord Capital’s Bob Hastings who said there are limits to how much oil can be produced and how many markets can handle the volumes.

Enbridge similarly hedged its bets, conceding that whether Alberta Clipper is in service by 2010 will hinge on whether all of the oil sands projects are completed and the ability of United States refiners to handle both bitumen and synthetic crude from western Canada.

FirstEnergy Capital analyst Brian Purdy has no doubt that Alberta Clipper and Keystone are in direct competition and he believes Keystone — a surprise entry last year from TransCanada which has little experience as an oil carrier — has become the front-runner by rounding up shippers, including ConocoPhillips, which has an option to earn up to a 50 percent interest.

But if Keystone does not survive it makes sense for Enbridge to be well-positioned to fill the gap, he said.

That could happen when TransCanada seeks National Energy Board approval to convert 520 miles of under-utilized gas pipeline in Canada for use in Keystone — a switch that might be challenged by Enbridge’s gas distribution unit, which is a customer on the gasline.

By way of bolstering their respective positions, TransCanada and Enbridge are both talking about further expansions of their two projects.

Even before it has approval to start construction in 2007, TransCanada said potential shippers have shown interest in extensions from Patoka to Cushing, Okla., and between First Saskatchewan near Edmonton and Hardisty in southeastern Alberta.

Chief Executive Officer Hal Kvisle said a binding open season for those two additions will be held later this year.

Alberta Clipper already represents a substantial expansion of Enbridge’s current projects to achieve additional deliveries to the U.S. Midwest and eventually the Gulf Coast.

Its US$190 million Spearhead pipeline from Chicago to Cushing is scheduled to come on stream in March and quickly fill its 190,000 bpd capacity, prompting new discussions with shippers on the possibility of near-term expansion.

In addition, Daniel said Enbridge has full producer backing for all three phases of its Southern Access project, a 400,000 bpd line now under construction between Superior and Chicago, and discussions are under way with the Canadian Association of Petroleum Producers to increase the diameter of the line, leading to a possible US$250 million-$320 million extension to Patoka and potentially Wood River.

Daniel also reported substantial progress towards concluding shipper agreements on its C$400 million Waupisoo pipeline, expected to start delivering 350,000 bpd from the oil sands region to Edmonton by mid-2008.

Kinder Morgan Canada yet to flex its muscles

Also in the mix is Kinder Morgan Canada, which has yet to flex its muscles since taking over Terasen Pipelines beyond saying in late January that it is identifying more opportunities than it originally anticipated when the takeover was announced.

In a recent conference call, Richard Kinder, president and chief executive officer of the parent company, outlined a broad range of plans that will keep Kinder Morgan Canada in the thick of the oil sands business and position it to make even bolder moves if TransCanada or Enbridge stumble.

Kinder said his company’s TransMountain line is “going faster than we thought and we think it’s going to provide real opportunities, not just for us but to break the bottleneck the producers have experienced.”

Based on “tremendous interest,” Kinder Morgan decided to combine the first two phases of a TransMountain expansion, including a C$600 million pump station addition to be completed in 2007 and an anchor loop across the Alberta-British Columbia border, hiking capacity to 300,000 bpd by late 2008 from the current 225,000 bpd.

An agreement with shippers and producers was announced Jan. 26 to give commercial backing to the expansion through a memorandum of understanding with the Canadian Association of Petroleum producers acting on behalf of TransMountain shippers and western Canadian producers to govern the tolling and financial parameters of the system for the next five years.

Kinder said the expansion does not rule out the possibility of a northern leg to the deepwater port at Kitimat in northern British Columbia, opening the way for Alberta crude shipments to Asia.

Kinder indicated the company is likely to accelerate Phase 2 (to 400,000 bpd from 300,000 bpd) and Phase 3 (to 700,000 bpd), delivering crude to the British Columbia Lower Mainland and Washington state refiners as well as moving crude by tanker to southern California.

Washington refineries weighing conversions

A formal open season for the subsequent phases of TransMountain’s plans will be launched in March.

He said the three big refineries in Washington, which currently process Alaska North Slope crude, are weighing conversions so that they can run Alberta heavy crude.

“I think refiners working with producers will strike a deal to move a whale of a lot of heavy crude,” to Washington state, he said.

Kinder said prospects look “very good” for Kinder Morgan’s proposed 100,000 bpd condensate import line from Kitimat to Edmonton in partnership with Pembina Pipelines — a similar system to that planned by Enbridge.

The two companies are also working on possible export pipelines from Alberta to Kitimat, opening the way to markets in Asia and California.

Out on the horizon is privately owned start-up Altex Energy, which is offering a bullet line to ship 250,000 bpd of raw bitumen from Alberta to Texas, but has said nothing in almost four months since entering the picture.

Koch’s Minnesota Pipe Line has become another player by filing an application in January to add 300 miles of new 24-inch diameter line and add 160,000 bpd of Canadian crude to its existing 300,000 bpd by early 2008.






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