10/29/2012 07:29 EDT | Updated 12/29/2012 05:12 EST

TransCanada, Phoenix Energy Form 50-50 Partnership To Build Alberta Pipelines


CALGARY - TransCanada Corp. has entered a partnership with a Chinese-owned company to build a new $3-billion oilsands pipeline in Northern Alberta, pushing further into a business that has traditionally been dominated by rival pipeline giant Enbridge Inc.

TransCanada (TSX:TRP) and Phoenix Energy Holdings Ltd., a unit of state-owned China National Petroleum Corp., would each own half of the Grand Rapids project, which would carry up to 900,000 barrels of crude per day along with 330,000 barrels per day of diluent, which helps thick oilsands bitumen to flow through pipelines.

The pipeline would run about 500 kilometres between an emerging oilsands area northwest of Fort McMurray, Alta., to the industrial heartland near Edmonton. It's expected to be in service by early 2017.

"As Alberta crude oil production continues to grow, it's critical to have the infrastructure in place to move oil to market from emerging developments west of the Athabasca River," said TransCanada CEO Russ Girling in a release.

"This is the first major pipeline project to meet the needs of this fast-growing area."

Crude production in Alberta is expected to grow by three million barrels a day over the next 15 years, nearly all of which will be from the Athabasca oilsands region, said Paul Miller, TransCanada's senior vice-president of oil pipelines.

And of that growth, about half is expected to come from the west side of the Athabasca River, he added.

"We see ourselves as being a significant player in the inter-Alberta transmission business," he said in an interview.

TransCanada will operate the system. Pheonix has committed to ship crude from its Dover and MacKay River oilsands projects south and diluent from the Edmonton area north to the mine sites.

"Given that transportation in the Athabasca region has become a bottleneck, working with TransCanada to build a pipeline system in a timely fashion is crucial to implement our development strategy," said Pheonix CEO Zhiming Li.

"This transportation solution will be important to Phoenix and other potential producers in this area to monetize their huge resources."

In 2009, Athabasca Oil Corp. (TSX:ATH) sold a 60 per cent interest in its MacKay River and Dover oilsands leases to CNPC. Earlier this year, Athabasca exercised its option to sell the rest of MacKay River, making that project the first in the oilsands to be fully controlled by a Chinese company.

The Dover project is expected to obtain regulatory approval early next year and, once it does, there will be an identical divestiture option.

In August, TransCanada announced it had been selected to build the Northern Courier pipeline — a $660-million project to connect crude from the yet to be developed Fort Hills oilsands mine to the Voyageur upgrader, where the oilsands bitumen will be processed into a type of crude refineries can handle.

The Fort Hills partners are Suncor Energy Inc. (TSX:SU), Teck Resources Ltd. (TSX:TCK.B) and Total SA. Suncor and Total, which work together on a variety of oilsands assets, are reviewing their joint projects in an effort to drive down costs.

Desjardins Securities analyst Pierre Lacroix said the partnership will bring both financial and strategic benefits to TransCanada.

"In addition to its substantial size, the project builds on (TransCanada's) recent efforts to expand in the intra-Alberta crude oil transportation market, which has typically been dominated by other large energy infrastructure players," he wrote in a note to clients.

Enbridge (TSX:ENB) is the biggest shipper of crude in the oilsands region and has undertaken a number of expansion projects to its vast network in recent years.

TransCanada is a relatively new entrant into the regional Alberta oil pipeline business and it's tough for new projects to compete with pipelines that are already in the ground, said Miller.

However, once existing pipelines fill up, TransCanada believes it's in a good position to win new business, he added.

Calgary-based TransCanada operates one of North America's largest networks of energy pipelines.

Lately, it's become best known for its controversial Keystone XL project, which would expand the company's capacity to carry Alberta crude to U.S. markets. That's an extension of an existing pipeline that currently delivers crude to Illinois and Oklahoma.

Construction is underway on the southern leg of the pipeline between a major storage hub in Oklahoma to refineries along the U.S. Gulf Coast.

A decision on the northern portion, delayed because of environmental concerns in Nebraska, is expected early in the new year.

Environmentalists are concerned a spill from the pipeline could cause ecological harm in the American heartland and increase U.S. reliance on oilsands crude, which they deem dirtier than other varieties.

TransCanada and proponents, meanwhile, say Keystone XL will help supplant oil imports from hostile regimes with crude from a friendly northern neighbour and provide a much needed economic boost throughout the country.

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