TransCanada Corp. subsidiaries TransCanada PipeLines Limited (TCPL) and TransCanada Keystone Pipeline GP Ltd. (Keystone) have filed an application with the National Energy Board (NEB) seeking approval to transfer a portion of TransCanada's Canadian Mainline natural gas transmission facilities to the Keystone Oil Pipeline project for the purposes of transporting crude oil from Alberta to refining centers in the U.S. Midwest. Excess capacity will grow for years to come on Canadian natural gas pipelines even if some of the space is switched to oil shipping, TransCanada PipeLines said in its application.
First announced in February of 2005 (see NGI, Feb. 14, 2005), the US$2.1 billion Keystone Oil Pipeline project includes the construction of a 2,960-kilometer (1,830-mile) pipeline with a nominal capacity to transport approximately 435,000 b/d of crude oil from Hardisty, AB, to U.S. Midwest markets at Wood River and Patoka, IL. TransCanada said the pipeline can be expanded to a nominal capacity of 590,000 b/d with additional pump stations.
The Canadian portion of the project involves the construction of 370 kilometers (230 miles) of new pipeline and the conversion of 860 kilometers (530 miles) of existing TransCanada Canadian Mainline facilities from natural gas to crude oil transmission service. The conversion will take place on one of seven gas pipelines in TransCanada's Canadian Mainline right-of-way across the western provinces to export points in central Canada. The U.S. portion of the project includes 1,730 kilometers (1,070 miles) of new pipeline construction. The project is driven by a combination of increasing oilsands production, persistent spare capacity on TransCanada's gas lines, and expectations that both trends will continue.
"The Keystone Oil Pipeline project is an innovative and cost-competitive proposal to transport a significant amount of new Canadian crude oil to key U.S. markets in late 2009," said TransCanada CEO Hal Kvisle. "Crude oil shippers have recognized the value of our proposal by committing to long-term transportation contracts. The conversion of a small segment of our extensive natural gas pipeline system to crude oil transmission service maximizes the use of an existing asset while maintaining sufficient capacity on our Mainline system to serve forecasted demand for gas transportation."
In January 2006, TransCanada announced it had secured firm, long-term commitments from shippers for transportation of 340,000 b/d of crude with an average duration of 18 years (see NGI, Aug. 10, 2005; Feb. 6). Shippers have also expressed strong interest in a proposed extension of the Keystone Oil Pipeline south to the refining hub of Cushing, OK. The company said a binding open season will be held on the Cushing Extension later in 2006.
As part of the transfer application from gas to oil, TCPL is also seeking approval to reduce the Canadian Mainline rate base by the net book value (NBV) of the transferred facilities and Keystone is seeking approval to add the NBV of the facilities to the Keystone Oil Pipeline rate base. The transfer application is the first of two major regulatory applications required to obtain approvals necessary to construct the Canadian portion of the Keystone Oil Pipeline. Keystone will apply to the NEB for a certificate of public convenience and necessity to construct the required new facilities later this year once environmental assessment work is completed during the summer.
Earlier this year, TransCanada also filed with the U.S. Department of State an application for a Presidential Permit authorizing the construction, operation and maintenance of the cross-border facilities associated with the proposed Keystone Oil Pipeline. The pipeline will also require approvals from a variety of U.S. agencies at the state and local levels. TransCanada said it hopes construction can begin in late 2007, with commercial operations to commence by the fourth quarter of 2009.
TransCanada, in its construction filing with the NEB, forecasts the gas space surplus -- even after the oil switch -- will be 1.2 Bcf/d to 3.6 Bcf/d in 2009 and up to 6.3 Bcf/d by 2015.
The projections vary depending on assumptions chiefly about Alberta gas demand for oilsands plant fuel and the infant Canadian coalbed methane industry. But the pattern of rising excess capacity is consistent in all except the scenarios rated least probable.
Alaskan gas, which theoretically could cure the excess capacity headache by refilling Canadian pipelines as routes to the Lower 48 states if decades-old dreams of an Arctic gas megaproject at last came true, is still "too speculative" to factor into realistic industry projections, TransCanada told the NEB.
As the oldest system serving the Western Canadian Sedimentary Basin, facing expiry of long term transportation service contracts, TransCanada's 7.2 Bcf/d eastbound mainline out of Alberta is projected to lose by far the most traffic. Rival Alliance Pipeline, barely six years old, continues to be fully booked under long term shipping contracts.
Gas capacity on the TransCanada mainline is projected to drop by 500 MMcf/d, or 7%. But even after the conversion, TransCanada predicts excess capacity on its mainline will still be 1.1 Bcf/d to 1.9 Bcf/d in 2009, the targeted in-service date for the oil project, then 1.3 Bcf/d to 4 Bcf/d by 2015.
The proposed conversion is forecast to reduce tolls to central Canadian domestic markets and export points by 1 cent per gigajoule or about 1%. But the savings are expected to be largely eaten up on other fronts.
TransCanada predicts its annual total revenue requirement will go down by C$113 million (US$102 million). But annual costs to shippers of gas compressor fuel, paid in kind out of deliveries in the system, are expected to go up by C$98 million (US$88 million), leaving a net savings of only C$15 million (US$14 million).
TransCanada, echoing supply forecasts by the Alberta Energy and Utilities Board and the NEB, predicts Western Canadian conventional gas production will be flat to declining for the next five to 10 years. Fledgling unconventional output, led by coalbed methane but including some "tight" gas from dense rock formations, is expected to multiply 15-fold to 3.1 Bcf/d by 2020, but still fail to offset a looming decline in total western productive capacity.
Oilsands plants are projected to be by far the biggest factor in declining requirements for long-distance gas pipeline capacity out of Western Canada. TransCanada, in projections that vary only in detail from NEB and AEUB forecasts, predicts gas use by oilsands developers will nearly triple to into the range of 2 Bcf/d by the 2015-20 period. The consumption figure matches the consensus forecast of oilsands production growth to three million bbl/d from one million.
In a spring oilsands assessment report, the NEB predicted new technology and efficiency improvements to old methods will gradually reduce gas use in thermal recovery of bitumen and upgrading the tarry material into light synthetic crude oil. But as of 2015, the NEB predicted the industry will still on average use 0.7 Mcf/d of gas for every barrel of oilsands production.
TransCanada's Keystone plan, a joint venture with bitumen developer ConocoPhillips Canada, is one of about 12 oilsands pipeline projects. While four are regional pipelines tied to particular Alberta production projects, eight are long-distance shipping plans competing for shippers.
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