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TransCanada Proposes Converting, Extending Gas Pipeline Loop to Carry Heavy Oil

TransCanada PipeLines Ltd. has come up with a way to escape the cost and toll squeeze caused by excess capacity on its natural gas mainline -- fill up the empty space with oil.

TransCanada unveiled a C $1.7-billion (US$1.4-billion) proposal to convert a 30-inch loop along part of its 49-year-old gas system to carry crude oil. Titled Keystone, the plan calls for an 1,870-mile oil export line between Alberta's principal crude terminal area at Hardisty, 100 miles southeast of Edmonton, and the Patoka-Wood River trading and refining hub south of Chicago.

The plan includes converting to oil one of up to six gas lines in TransCanada's 770 miles of right-of-way between Alberta and Manitoba. In the U.S., TransCanada proposes 1,000 miles of new pipeline across North Dakota, South Dakota, Iowa , Missouri and Illinois.

The Keystone oil conversion would reduce the maximum natural gas capacity of TransCanada's pipelines by 500 MMcf/d or 7% to 6.5 Bcf/d, spokesman Hejdi Feick said.

But more than enough space is available to make the switch to oil without causing losses of gas service. TransCanada currently carries about 5 Bcf/d, Feick reported. The gas system has been plagued by overcapacity since rival Alliance Pipeline was completed five years ago.

"We see this as a win-win," Feick said. In addition to providing new oil shipping service and revenues, Keystone would ease pressure on tolls on TransCanada's gas lines by reducing extra costs owed to unused surplus facilities. TransCanada is currently embroiled in a lengthy toll case before the National Energy Board.

TransCanada also would still be able to transport new arctic gas supplies after the partial conversion to oil deliveries, Feick said.

By the time the C$7-billion (US$5.6-billion) Mackenzie Gas Project is scheduled to begin deliveries in 2009-10, more space is expected to open up on TransCanada, she said. Alberta gas output is expected to stay flat or drop while industrial consumption rises, especially for heat processes and power generation in oilsands plants. Alberta industry projections indicate oilsands gas consumption could hit 1.8 Bcf/d within about 10 years -- or as much as the entire proposed capacity of the Mackenzie line.

The Alaska gas megaproject, partly sponsored by TransCanada, and currently forecast by the U.S. Energy Information Administration to take until 2016 to finish, will require additions to the Canadian gas grid even if the Keystone oil conversion is not made, Feick said.

TransCanada set a target of 2008 or '09 for completing Keystone following construction starting in 2007 if shipping contracts and regulatory approvals can be obtained over the next two years. TransCanada will be holding an open season in the next few months to line up contracts before making a final decision to proceed with the project.

Keystone is a response to a growth market rather than just another entry into a crowded field, Feick said. TransCanada's proposal is not meant to be a rival against a pair of $2.5-billion projects competing to build a new route to the West Coast for oilsands production. "Considering the supply growth over the next 10 years a number of export projects will be required."

TransCanada is designing Keystone to deliver 400,000 b/d. New routes proposed by Enbridge Inc. and Terasen Pipelines, across British Columbia to tanker terminals to be built at Kitimat or Prince Rupert, would carry about 1 million b/d if they were both built.

Total Alberta production, taking into account declines in aging conventional fields, is forecast to increase by 1-1.5 million b/d over the next 10 years as a result of oilsands development.

Oilsands output will nearly triple to 2.8 million b/d in 2015 and the total could quadruple to 4.1 million b/d if prices stay high and international markets are favourable, say forecasts by the Canadian Association of Petroleum Producers.

Oil producers are underlining needs for new export service by co-operating this winter, through CAPP, to put US$10 million into an American import project known as Corsicana and sponsored by a pipeline arm of ExxonMobil Corp. Corsicana involves reversing flows in an aging, mostly empty line to deliver Canadian oil to the refining and trading region on the Texas coast of the Gulf of Mexico.

Keystone is TransCanada's third foray into oil. In the 1990s the firm was a partner in the Express Pipeline export route from Alberta to Wyoming and Ocensa Pipeline in Columbia, but sold both interests to pay off debt after its merger with Nova Corp.

TransCanada, which says it already has received some support for the project, will continue to meet with oil producers, refiners and industry groups to gauge additional interest. When it has sufficient support the company will proceed with the necessary regulatory applications to a variety of Canadian and U.S. agencies.

To view a map of the proposed pipeline route and other information about the Keystone project go to www.transcanada.com/keystone.

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