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Canada's Oilsands Developers Looking to Asia

The industrial customers rated most likely to burn off Canadian natural gas surpluses -- Alberta oilsands projects -- are poised to gain expanded markets beyond North America to support their growth.

Public hearings begin Aug. 22 before the National Energy Board (NEB) on a pipeline scheme crafted to enable northern bitumen developers to secure toeholds in Asian destinations for Alberta production.

Kinder Morgan Canada Inc. is seeking permission to reserve space for 54,000 b/d destined for overseas markets in its Trans Mountain Pipe Line from the central Alberta oil trading hub at Edmonton to its Westridge tanker dock in Vancouver Harbor. The request follows an oversubscribed open-season auction of the guaranteed delivery capacity.

From 10 oil producers and merchants that offered to pay "firm service fees" for reserved capacity on Trans Mountain to fill up tankers, Kinder Morgan selected five that put up C$286 million (U.S. dollars and the Canadian loonie are at parity) for 10 years. Minimum acceptable bids were toll premiums of C25 cents/bbl for 10-year firm contracts and C50 cents/bbl for five-year agreements.

The long commitments are essential for establishing durable supply relationships at undiscounted international oil prices with overseas refineries, the NEB is being told. Among shippers that bought the overseas delivery reservations, oilsands developer Nexen Inc. says, "Having tidewater access is critical to increasing market options and reducing reliance on North American markets."

Cenovus Energy Inc., which owns the industry's biggest spread of oilsands leases, affirms it "is increasing western Canadian oil production and intends to diversify markets."

PetroChina International America Inc. (PCIA), a marketing arm of China National Petroleum Corp., describes the Kinder Morgan-Trans Mountain scheme as "a first step in developing long-term relationships with Canadian oil suppliers. It is also of great interest to PCIA to gain firm access to transportation systems that can be used to increase crude oil supply to the Pacific Basin."

Along with China, the Canadian overseas energy marketing strategy sets sights on Japan, South Korea, Taiwan, India and virtually any other big user of oil imports that can be reached by tankers.

Kinder Morgan's NEB filing includes a pledge to deposit the toll premiums paid for overseas shipments in a special account dedicated to expanding the service and reporting regularly to the board. The current application is only one move on a long-range expansion program for the 58-year-old Trans Mountain Pipe Line which advances by "incremental" stages that march in step with Alberta production growth.

As oilsands development accelerated, pump and pipe additions increased the 1,150-kilometer (700-mile) line's capacity by 33% to 300,000 b/d since 2005. Known as TMX (short for Trans Mountain expansion), the staged growth plan calls for further gradual increases to 700,000 b/d and eventually to 1.1 million b/d.

The project has a low profile compared to an entirely oilsands new line proposed by rival Enbridge Inc., titled Northern Gateway, between Edmonton and a planned tanker port on BC's Pacific coast at Kitimat. NEB hearings on Gateway are scheduled to start in 2012, following years of preliminary dueling with resisting aboriginal and environmental groups.

Trans Mountain has the advantage of already owning a route across the environmentally sensitive Rocky Mountains, where a major construction project in 2007-2008 added enough pipe to support the full long-range growth program. The additions were built across Jasper National Park and BC's Mount Robson Provincial Park under a provision in the original 1951 corporate charter and national legal approval of Trans Mountain that Canadian conservationists agreed they had no hope of overturning.

The primary markets for oil carried by Trans Mountain have traditionally been southern British Columbia and the northwestern United States. Tanker exports via Trans Mountain have been quietly increasing as dealers in Canadian oil test overseas market responses. Since 2000, the traffic has risen from negligible to three to five ships a month. In Vancouver, the Ecojustice lawsuit fighting arm of BC environmental groups predicts the tanker movements could multiply four-fold within five years. Counting interruptible shipments in unreserved space on the pipeline, Trans Mountain forecasts that deliveries into tankers will reach a total 80,000 b/d if its application is approved.

In Alberta the Trans Mountain growth program is a source of official confidence in oilsands growth prospects. The latest forecast by the province's Energy Resources Conservation Board shows production more than doubling to 3.5 million b/d as of 2020 from the current 1.6 million. The results are projected to include 133% growth in gas use for thermal oilsands processes to 2.96 Bcf/d in 2020 from 1.27 Bcf/d in 2010.

The west coast tanker export program is developing against a backdrop of U.S. environmental protests and regulatory stalling that have delayed approval of TransCanada Corp.'s Keystone XL pipeline project to increase oilsands deliveries into the United States as far as the petroleum coast of refinery and petrochemical complexes on the shoreline of the Gulf of Mexico.

As the delays lengthen, a note of anxiety has crept into the Canadian oil and gas sector. Official confidence of industry and government leaders in continuing stability for energy trading relationships with the U.S. is increasingly qualified by warnings that risks of disruption are starting to look real and that Canada needs to develop wider sales horizons.

At a recent conference of the Alberta, BC, Saskatchewan and Manitoba premiers, Alberta's Ed Stelmach won moral support for energy market diversification. Federal leaders -- from both the current Conservative government and the previous Liberal regime -- have repeatedly supported the idea and pledged to work on improving the regulatory approval process for projects that support overseas exports.

Work on translating the moral support into practical action is scheduled to begin during a federal-provincial energy ministers' conference July 16-19. The agenda includes discussions of a potential Canadian "national energy strategy" as a "framework" for dealing with issues from regulatory delays to climate change policies.

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