Canadian pipelines expanding involvement in foreign operations

• Supply and Disposition of Canadian Oil and Gas, 1996

Canadian pipeline companies are expanding their operations in Latin America, Asia, Africa, and other foreign markets.

Growing economies and increasing oil and gas demand in these market areas are creating high potential opportunities. A number of companies are involved in projects as joint venture partners or consultants selling pipeline expertise.

While there is a growing emphasis on expansion in new foreign markets, especially in developing countries, efforts to increase penetration for Canadian oil and gas in the traditional U.S. export market remain at the top of Canadian companies' agenda.

The Alberta government and Canadian Association of Petroleum Producers (CAPP) have recently supported additional pipeline capacity to export markets.

One driving force is planned increased production from Alberta's oilsands industry. Investments in this sector during the next 10 years totaling $5.6 billion (Canadian) have been disclosed by 18 companies. A federal task force said oilsands

investment could total $25 billion (Canadian) the next 25 years.

U.S. market

CAPP Pres. David Manning said there is a huge marketing opportunity as long as the U.S. obtains more than 50% of its oil supply by tanker from areas of the world that are geopolitically uncertain.

For example, IPL Energy Inc., Edmonton, and its U.S. affiliate, Lakehead Pipe Line Co. Inc., Duluth, Minn., are rapidly expanding their system. Their 3,728 mile line from Edmonton to Superior, Wis., and Montreal moves 1.6 million b/d of

liquids from western Canada to markets in eastern Canada and the U.S. Midwest.

In addition, TransCanada Pipe-Lines Ltd. and Alberta Energy Co. Ltd. are partners in the proposed Express pipeline, also aimed at Chicago area crude oil markets.

IPL's Byron Neiles said recent market studies by IPL, CAPP, and others suggest that markets will support both the IPL expansion and the Express Pipeline. Neiles said IPL is looking at further expansion because of expected growth in production from Alberta oilsands and heavy oil projects.

IPL completed a 170,000 b/d expansion of its main line system in 1994, then disclosed plans for additional capacity it needed to meet market demand.

IPL project status

Earlier this year, IPL received regulatory approval for a $170 million (Canadian) 120,000 b/d expansion, scheduled for completion in fourth quarter 1996.

The increased capacity is to be added mainly with new storage and pumping capacity.

The company has a new application before regulators in Canada and the U.S. for a $540 million (Canadian) Phase 2 expansion project designed to increase capacity in Canada by 120,000 b/d. The $300 million (U.S.) portion of the project would increase capacity to Chicago area markets by 170,000 b/d.

The project involves laying more pipeline between Edmonton and Hardisty, Alta., and from Superior to Chicago.

Main elements of that project include construction of 120 miles of 20 in. pipe on IPL's Line 1 and addition of compression to increase capacity by 97,000 b/d to handle natural gas liquids and light and synthetic crude and a 24 in. line between Superior and the Chicago area for all crude types.

The companies earlier disclosed agreements in principle with Mobil Pipe Line Co. and Shell Pipe Line Corp. They say the deals will cut tolls and expand market access for western Canadian crude shippers into the Patoka-Wood River, Ill., refining market area.

Lakehead agreed in principle with Mobil to establish a joint tariff covering shipments of western Canadian crude to Chicago on the Lakehead line and from there to Patoka on the Mobil line.

The joint tariff would provide reduced tariffs for volumes shipped to Patoka. There would be additional incentive discounts when throughput averages more than the current 60,000 b/d.

With an initial throughput of 110,000 b/d, the companies predict the overall charge for a shipment of heavy crude from the Canadian-U.S. border to the receipt point for a third party at Patoka would drop by 22% to $1.24 (U.S.)/bbl.

IPL and Mobil signed a separate agreement in principle under which the two companies would enter a joint venture to offer common carrier crude transport service and increase capacity from the Lakehead line to Patoka.

Capacity of the Mobil line between Lakehead's Lockport terminal and the Mobil hub at Patoka would be increased to 160,000 b/d as demand warrants. IPL or a unit would provide capital to take a 30% interest in the joint venture.

IPL has completed a definitive agreement with Mobil to form a new partnership, Mustang Pipe Line Partners, to increase capacity from Lockport to Patoka. There also is an agreement for filing of joint tariffs from the U.S. border to Patoka, effective Nov. 1, 1996.

IPL and Lakehead have signed similar agreements on tariffs and incentives with Shell Pipe Line from Patoka to Wood River on Shell's Capwood pipeline that connects with Shell Oil Co. and Clark Oil Co. refineries in the Wood River area. An agreement would reduce shipping costs for western Canada light and heavy crudes by 13% and 21%, respectively, to the two companies' refineries.

Subject to regulatory approvals, the added capacity is to be on line by mid-1998.

In early June, IPL also unveiled plans for a $50 million (U.S.) pipeline for medium and heavy crudes from Stockbridge, Mich., to a BP Exploration & Oil Inc. refinery at Toledo, Ohio (OGJ, June 17, p. 23). The 16 in. line would have initial capacity of 85,000 b/d expandable to 110,000 b/d. BP would convert 110,000 b/d of capacity to handle heavier oils. The project is contingent on regulatory approvals and approval of the Phase 2 expansion now before the NEB.

Express pipeline

Meanwhile, TransCanada and AEC are pushing ahead with their proposed 50-50 owned Express pipeline.

Express reactivated plans in mid-1995 for a $380 million (U.S.), 172,000 b/d pipeline from Hardisty, Alta., to Casper, Wyo. The project is similar to one proposed in 1993 that was shelved when most producers opted instead for an IPL system expansion.

AEC Pres. Gwyn Morgan says the 24 in., 785 mile line will gain access to new markets in Wyoming, Colorado, Utah, Montana, and elsewhere and provide badly needed new refinery and market access for western Canadian oil. Express got open season bookings in December for about 85% of the proposed line capacity. Producers, marketers and refiners committed to more than 145,000 b/d of the 172,000 b/d capacity with the majority of commitments for a 15 year contract period.

The 270 mile Canadian section of the line will extend from Hardisty, southeast of Edmonton, to interconnect with the U.S. portion at Wild Horse, west of the Saskatchewan/Alberta border. The 515 mile U.S. portion will run south from Wild Horse

and remain within the corridor assigned to the previously approved Altamont gas pipeline project across Montana and northern Wyoming.

Express disclosed in January that a U.S. unit of the parent companies is acquiring Platte Pipe Line Co., Findlay, Ohio, operated by Marathon Pipe Line Co. Price was not disclosed, but Express said it is significantly less than the $400 million (U.S.) cost of replacing the line. The Platte system will continue to be operated by Marathon under an existing agreement. It consists of more than 940 miles of 20 in. mainline pipe from Casper to Wood River, 335 miles of gathering lines, and tank storage capacity of more than 3.8 million bbl. The acquisition will provide access to Wood River and the

PADD II region of southern Illinois.

Express also has won several key regulatory approvals this year.

The National Energy Board gave the line environmental approval in May. The NEB recommendation is subject to final approval by the federal cabinet. The NEB still must rule on pipeline tolls and whether the project is in the public interest. These rulings will also be subject to cabinet approval.

Express cleared another important regulatory hurdle in April when the U.S. Bureau of Land Management approved the project right of way on federal lands through Montana and Wyoming.

Both the Independent Petroleum Association of Mountain States and the Wyoming Independent Producers Association oppose the Express project and say it will have adverse socioeconomic and crude oil pricing impacts. The associations sought an appeal of the BLM ruling with the Interior Board of Land Appeal.

Express may face some competition from a 75 mile oil line in Montana planned by Amoco Corp. and Chevron Corp. The joint venture line could carry as much as 50,000 b/d of crude to markets in Salt Lake City, Denver, and Wood River. The line from Billings, Mont., to Elk Basin, Wyo., is scheduled to open this summer with capacity of 20,000 b/d. Express says the project will not affect its plans.

Express hopes to begin construction in August and move crude shipments on its line at the start of 1997. AEC says the timetable is achievable if Express gets timely regulatory approvals in Canada and the U.S. It said there is a risk of postponing the entire project for 1 year if there are delays in approval.

TransCanada expansion

TransCanada's expansions head the list of projects that also are under way or in the regulatory mill to expand tight pipeline capacity to natural gas markets in the U.S.

TransCanada, which has spent $5.5 billion (Canadian) since 1989 to increase its mainline capacity, is continuing with an expansion program. Much of the rapid growth has been to serve U.S. demand. U.S. imports of Canadian gas increased to 2.7 tcf in 1995 from 1.3 tcf in 1988. The company transported a record 2.352 bcf of gas in 1995, up 5.9% from 1994. Export deliveries in 1995 were 1.159 bcf, up 13.9% from 1994.

The company filed a 1997-98 amended expansion application in May with NEB for $263.6 million (Canadian) in new mainline pipe and compression facilities. NEB will begin hearings July 22. The additions will meet requests for new long haul firm contracts totaling 126.3 MMcfd for domestic and export markets. Construction is scheduled for winter 1996-97 with all facilities to be in service by Nov. 1, 1997. TransCanada is adding 200 MMcfd capacity in 1996. Capital spending this year is estimated at $668 million (Canadian).

The company is also holding an open season ending Aug. 2 for another planned expansion in the 1998-99 heating season.

Shippers will be invited to book space for a planned 125 MMcfd expansion by Great Lakes Gas Transmission Co., 50% owned by Trans- Canada.

The open season also will be for space on the proposed Portland Natural Gas Transmission System aimed at the U.S.

Northeast gas market. Trans- Canada will have a 20% interest in the $240 million (U.S.) Portland project for a 250 mile, 20 in. line. The line would connect with TransCanada's mainline at Highwater, Que., and run to Portland, Me., to connect with Tennessee Gas near Haverhill, Mass. It would have initial capacity of 175 MMcfd, which could be expanded to 330 MMcfd with additional compression. The planned in-service date is November 1998.

TransCanada also has a 30% interest in the expanding Northern Border pipeline system that connects with the Foothills Pipe Lines system in Saskatchewan and carries Canadian gas to the U.S. Midwest via a terminus at Harper, Iowa. Northern Border has applied to the Federal Energy Regulatory Commission for a $796 million (U.S.) expansion into the Chicago market in 1998.

The expansion would increase the line's receipt capability at the Canadian border and the northern plains region by 41%, or 700 MMcfd, to 2.4 bcfd. Northern Border is also seeking approval for a second phase involving 239 miles of new line from Harper to Chicago. It is seeking rolled-in rather than incremental tolls for the line. Foothills, which connects with Trans- Canada's main line and Northern Border, will spend about $125 million (Canadian) on its system to support the Northern Border project.

The Tuscarora Gas Transmission Co. line in which TransCanada has a 50% interest began operations in December, 1995. The $130 million (U.S.) line from Malin, Ore., serves Reno, Nev., and several smaller markets in northern California. The line has delivery capacity of 111 MMcfd and was built as a joint venture with Nevada's Sierra Pacific Resources Corp.

TransCanada says Tuscarora is an example of the kind of niche market opportunities that exist for natural gas in North America.

Earlier this year, TransCanada dropped plans to buy a 50% interest in a 75,000 b/d refinery operated by Farmland Industries Inc. at Coffeyville, Kan. It said the deal did not meet its business criteria after completing financial due diligence.

New U.S. markets

Several new projects are in the feasibility and planning stage aimed at opening new markets in the U.S. and pipeline options for Canadian gas producers.

A group of 17 companies has formed the Alliance Pipeline Ltd. Partnership for a $3.4 billion project (Canadian) to move 1 bcfd of gas to export markets from huge reserves in Northeast British Columbia to the Chicago market.

Backers of the 1,864 mile project, initially known as the Northern Area Transportation Study (NATS), say a recently completed feasibility study shows the project is economic. Group member Crestar Energy Inc. says results of the $2 million (Canadian) study are positive. It said the line carrying 800 MMcfd-1.2 bcfd could give producers higher prices in the U.S. market. Ethane and propane components would remain in the gas and then be removed for sale in the Midwest or to Gulf Coast petrochemical plants. The group will hold an open season this summer to seek commitments from shippers for up to 500 MMcfd. Alliance official Jack Crawford said tolls will be competitive on the line and likely $1-1.25 (Canadian)/Mcf.

The project got a boost when IPL Energy said in May it will take a minimum 10% interest in the line. Members have budgeted $30 million (Canadian) for regulatory work and plan to file with FERC this year and with NEB in 1997. Alliance aims to move gas by about 1999 after a 1998 expansion by Northern Border.

Alliance is getting critical scrutiny from established pipeline operators because it would bypass existing trunk lines.

Another project, the Palliser Pipeline backed by PanCanadian Petroleum Ltd. and Westcoast Energy Inc., also would bypass existing lines. The 149 mile, 36 in. main line plus laterals would extend from Nightingale, north of Calgary, to export pipeline connections at Empress, Sask. The $200-250 million (Canadian) project would have capacity of as much as 1 bcfd.

It would be owned and operated by Westcoast with PanCanadian negotiating an equity interest. Developers are currently completing supply studies for system design.

NOVA Corp., Calgary, says Alberta's postage stamp toll policy, under which the same rate is charged all shippers, would not survive if it is threatened by a series of bypass lines serving producers in only one area. The uniform toll policy has been in place since 1980 to encourage gas development in all parts of the province. NOVA also says the Alliance plan to remove gas liquids in the U.S. for sale there would remove the incentive for chemical companies to invest in Alberta.

In the U.S., NOVA's international unit Novagas International Inc. (NGI) manages the company's 33.3% interest in NGC Corp., a major gas gathering, processing, and fractionating operation. NGI and NGC each own 50% of Novagas Clearinghouse,

which markets, gathers, processes, and stores gas in Canada.

On the other side of the continent, plans are under way to produce and move via pipeline gas to New England markets from the Sable Island region, about 186 miles off Nova Scotia.

A $3 billion (Canadian) project would involve about $2 billion to develop an estimated 3.5 tcf of gas and a $1 billion line to connect to the Boston area market. The 621 mile pipeline would deliver 400 MMcfd to Boston and other markets along the route through Nova Scotia, New Brunswick, Maine, and New Hampshire. Developers hope to have the project on stream in 1999.

Sable Island developers are Mobil Oil Canada Properties 41%, Shell Canada Ltd. 26%, Petro-Canada 18%, Imperial Oil Ltd.

9%, and Nova Scotia Resources Ltd. 6%. The group filed project applications with NEB, Canada-Nova Scotia Offshore Petroleum Board, and the Nova Scotia Energy and Minerals Resources Conservation Board at the end of May. It earlier reached an agreement on royalties with Nova Scotia. Details were not disclosed.

Participants in the proposed Maritimes & Northeast Pipeline project are Panhandle Eastern Corp. 32.5%, Westcoast Energy Inc. 32.5%, Mobil Oil Canada Properties 15%, Shell Canada 10%, and Eastern Enterprises 10%.

Project developers are assessing the industrial and institutional demand for gas and continuing environmental studies for regulatory submissions.