Sands pipeline contest heats up

Four-way contest under way; ConocoPhillips gives fresh lift to TransCanada project; Enbridge expects to lock up Gateway deals early in 2006; Terasen in discussions; Altex looks at Texas

By Gary Park

Petroleum News Canadian Contributing Writer

Getting production from the Alberta oil sands to market — whether in Asia, the U.S. Midwest, the Gulf Coast or California — is turning into a battle without parallel among four pipeline companies.

The latest flurry of action saw:

• ConocoPhillips agree to ship crude on TransCanada’s proposed Keystone system and negotiate an option for a 50 percent stake in the US$2.1 billion project.

• Enbridge sign definitive agreements to provide pipeline services for the ConocoPhillips-Total E&P Canada Surmont project and file a preliminary information package for the C$4 billion Gateway project which it hopes will see shipping commitments finalized in the first quarter of 2006.

• Terasen report it has “continued to make progress” in its discussions with potential shippers for its plan to compete with Gateway in shipping production from Alberta to the British Columbia coast.

• Little-known Altex Energy, a privately held Alberta company, made a surprise entry, with plans for a US$3-billion bullet-line from Alberta to Texas to deliver 250,000 barrels per day.

ConocoPhillips-TransCanada pact surprise

When unveiled last year, Keystone was an 1,800-mile proposal to ship 435,000 bpd from the Alberta hub at Hardisty to the Illinois refining centers at Wood River and Patoka at a cost of US$1.7 billion.

At the time it was widely seen as a last-minute bid by TransCanada, which has only limited experience as an oil shipper, to throw a wrench into Enbridge’s hopes of extending its U.S. pipelines from the Midwest to the Gulf Coast.

There were signs back in July that the wheels were wobbling, if not coming off, when TransCanada Chief Executive Officer Hal Kvisle said that if several hundred thousands barrels were locked up by the Enbridge and Terasen projects that would “reduce the need for a project like Keystone.”

“We don’t think it serves the producing sector’s best interest to overbuild a lot of pipe that people are paying unnecessarily high tolls on,” he said. “And we’re not about to build large pipeline projects like this on spec and just hope that the oil shows up.”

But, within days, Kvisle also announced plans for an open season that, depending on shipper response, would determine whether Keystone would move to the next stage.

Outlook for Keystone has improved

Another US$400 million has been pumped into the budget, largely to allow for future expansion to 590,000 bpd.

Teaming up with ConocoPhillips “leverages the strengths of the two companies,” combining TransCanada’s pipeline expertise and ConocoPhillips’ expertise in liquids pipelines, said a spokeswoman for TransCanada.

Brian Purdy, a pipeline analyst with First Energy Capital, said that taking on such a large partner “validates” TransCanada’s plans.

ConocoPhillips owns 9 percent or 22,500 bpd of Syncrude Canada, the world’s largest producer of synthetic crude, and is an equal partner with Total in Surmont, which is due to start operations in 2007 at 25,000 bpd and expand to 100,000 bpd by 2012, although Total has openly set 300,000 bpd as its long-term oil sands target.

In addition, a ConocoPhillips refinery at Wood River could serve as a magnet for potential Keystone shippers.

ConocoPhillips won’t say how much

But the Houston-based company is not yet ready to disclose how much oil it hopes to move on Keystone.

That information will emerge after an open season, launched on Nov. 3, pins shippers to binding commitments.

One possible stumbling block for Keystone, according to a research note by UBS Investment, is TransCanada’s plan to convert a portion of underused Canadian natural gas pipeline between Alberta and Manitoba to carry oil sands production.

UBS noted that one of those gas customers is a division of Enbridge, which could challenge the plan and put the issue before Canada’s National Energy Board.

Enbridge untroubled by competition

Patrick Daniel, Enbridge president and chief executive officer, told a conference call Nov. 3 that Terasen’s plans to match Enbridge by building both an oil sands pipeline to the British Columbia coast and an import gas liquids line from British Columbia to Alberta “have not slowed us at all.”

Enbridge vice president Richard Bird said his company expects to have final shipping deals — which could include 200,000 bpd for PetroChina, another 100,000 bpd for other Asian customers and 100,000 bpd for California — locked in by the end of March 2006, allowing regulatory filings in the second quarter to achieve an in-service date of 2010.

With respect to the condensate projects, he said Enbridge has “sounded out the shippers that we’re in discussion with (to fill a 150,000 bpd system) … and they’ve indicated that they don’t view (the Terasen proposal) as changing their course of direction or timing.”

Daniel also reiterated that Enbridge is willing to give up 49 percent of Gateway ownership to investors who want to become shippers.

“They really earn the right to do that by making significant commitments and from their point of view, when they make those commitments there’s a liability associated with that,” he said.

“They’re looking for some kind of an asset to offset it, which is their interest in the pipeline, so we’re doing it to accommodate them, not because we require their capital involved in the project,” Daniel said.

Terasen is counting on completion of its C$6.9 billion takeover by Kinder Morgan — a deal that needs to clear the British Columbia Utilities Commission and the Canadian government — to strengthen its hand.

Terasen President and Chief Executive Officer John Reid said in a statement Nov. 3 that during the third quarter “we continued to make progress from ongoing discussions with shippers and we are moving forward with our expansion plans.”