The operator of pipelines throughout Alberta signed a binding shipper support agreement to ship bitumen and diluent for three major oil sands projects owned by the FCCL Partnership.
The expansion plans in northern Alberta involve the construction of approximately 840 kilometres of new pipeline and seven new pump stations.
Inter Pipeline chief operating officer Christian Bayle said the expansion will strengthen its position as a major bitumen blend transporter and dominant diluent provider to the oil sands.
"This development program has been driven by market demand and in particular, the transportation requirements from the planned FCCL projects," he said on a conference call.
However, he added, the development projects will build new capacity on certain segments of the pipeline that will "significantly exceed" FCCL's capacity requirements.
"Inter Pipeline is constructing additional pipeline infrastructure and capacity to further enhance our competitive position with respect to numerous other third-party oil sands projects either currently under construction or under consideration," Bayle said.
Under the shipper support agreement, FCCL has agreed to provide $225 million in funding for long lead-time materials, engineering costs, land procurement and regulatory activities.
FirstEnergy Capital analyst Steven Paget said there is still lots of unknowns related to the expansion plans as Inter Pipeline still hasn't signed the final service contracts, but called it positive for the company.
"This goes to their strengths, which are oil pipelines in northeast and central Alberta," he said.
Paget had a $20 price target on Inter Pipeline's units before the announcement.
"That does not include anything for this project which I would expect to be accretive to their valuation," he said.
Construction giant Aecon Group Inc. (TSX: ARE) said late Tuesday that a joint venture involving its utilities division has been awarded a $600-million contract as part of the expansion.
The contract includes the installation of 560 kilometres of underground pipeline between Edmonton and Fort McMurray, as well as engineering support. Work is expected to begin in January.
"This large award showcases the high demand for pipeline construction services in Western Canada," says Teri McKibbon, Aecon's chief operating officer.
The new operations will provide service to existing FCCL projects at Foster Creek and Christina Lake, as well as the Narrows Lake project which is under development.
Inter Pipeline said the new facilities related to Foster Creek and Christina Lake will be operational in mid-2014 and those related to Narrows Lake will be operational in mid-2016.
Under the expansion plan for Inter Pipeline's Cold Lake system, two new pump stations will be added at the Foster Creek site and a new pipeline connection will be built to the Narrows Lake oil sands development.
In addition, the existing Foster Creek extension will be twinned with a new 36-inch diameter pipeline and the Cold Lake mainline from La Corey to Hardisty, Alta., will be twinned with a new 42-inch diameter pipeline at a total cost of about $1.1 billion.
The company will also spend $1 billion on its Polaris system for a new 30-inch diameter pipeline from the Edmonton area to the Christina Lake oil sands project.
In addition to this approximately 340 km project, 100 km of smaller diameter pipelines will be constructed to provide connections to the Foster Creek and Narrows Lake oil sands projects and several diluent receipt points.
Inter Pipeline owns the Polaris pipeline system and 85 per cent of the Cold Lake pipeline system. The $2.1 billion excludes the contribution from Inter Pipeline's 15 per cent partner on the Cold Lake pipeline system.
Units in the fund were down six cents to close at $19.95 Tuesday on the Toronto Stock Exchange.