Calgary’s Pembina Pipeline Corp. and Provident Energy Ltd. agreed Monday to merge in a C$3.2 billion ($3.1 billion) transaction that would create a Canadian giant with oil and natural gas pipelines to transport crude and natural gas liquids (NGL), midstream gas processing and an energy marketing arm.

The combined company would become the third largest Canadian pipeline operator after TransCanada Corp. and Enbridge Inc.

Pembina transports crude oil and natural gas liquids (NGL) produced in Western Canada and it owns and operates oilsands pipelines. Pembina also has a growing presence in the midstream, marketing and natural gas services sectors. Provident owns and manages an NGL infrastructure and logistics business with facilities in Western Canada, Eastern Canada and the United States.

“We have extremely complementary but not overlapping businesses,” said Pembina CEO Bob Michaleski, who would lead the merged company. “This means we will be able to provide a much greater level of service to our customers.”

The combined companies’ pipeline and processing infrastructure extends across growth regions of Canada and the United States, including the Montney, Duvernay, Bakken, Marcellus and Utica shales, Alberta’s Deep Basin, Pelican Lake’s heavy oil, Athabasca oilsands, and the Cardium and Swan Hills formations.

An expanded footprint would give the merged company more access to NGL processing and increased capacity to store, process and market oil and NGLs at several North American hubs including Edmonton, Sarnia and Mont Belvieu. In addition, it would have access to market areas for NGLs and crude oil that are close to pipelines, rail and truck facilities, storage, fractionation, petrochemical and refining customers.

A larger entity would be “capable of pursuing more complex growth projects at an accelerated pace including an aggregate capital program of approximately C$700 million of announced spending in 2012,” said Michaleski. Pembina plans to spend C$550 million this year while Provident has budgeted C$150 million.

“Major near-term projects” — all in Canada — are to include Saturn and Resthaven liquids extraction facilities; Peace NGL pipeline expansion; Redwater liquids storage development; and Redwater fractionator capacity expansion.

“Due to the continued success of producers drilling for liquids-rich natural gas and the increase in field liquids extraction, the amount of NGLs being produced in the Western Canadian Sedimentary Basin has increased significantly,” noted the CEO. “To meet the growing need of producers in the region, Pembina expects that on closing of the proposed transaction, it will begin development of a new 65,000 b/d fractionator at Provident’s Redwater site, which is anticipated to be in service by mid 2014 pending continued customer support and subject to required regulatory and environmental approvals.”

By increasing its reach, the bigger Pembina, with a market capitalization of almost C$8 billion, would gain “more opportunity to do larger-scale projects,” Michaleski said.

The CEO envisions dual pipeline projects, with one pipe sending NGLs to dilute oilsands production and a parallel line that would ferry the oil to market. The heavy bitumen produced from oilsands needs to be thinned to flow through pipelines at room temperatures; NGLs would accomplish that task, he said.

According to federal figures, in 2010 Canada’s oilpatch used an estimated 350,000 b/d of diluent and by 2015 the amount of diluent needed to thin heavy bitumen could rise by another 300,000 b/d. Most of the diluent now used in oilsands processing is imported by rail or pipe, which increases the transport costs by as much as C$11/bbl. The deal with Provident would eliminate those diluent shipping costs, Michaleski said. The transaction also would allow Pembina to link its gas pipelines with Provident’s NGL processing facilities.

According to a recent study by Bentek Energy LLC and Turner, Mason & Co., NGLs are today’s story, but tomorrow the infrastructure obsession will be crude oil. Bentek is projecting a nearly 3 million b/d increase in crude oil production from the United States and Canada in five years (see Shale Daily, Sept. 29, 2011). Because of the increase in Canadian crude oil output, more natural gasoline is expected to flow to the diluent market.

“Provident’s assets, employees, customers and growth projects are an outstanding fit for Pembina,” said Michaleski. “The proposed transaction integrates our energy transportation and gas processing businesses with Provident’s suite of services including NGL extraction, fractionation, storage, transportation and logistics, and will significantly accelerate our growth capital plans for these business segments. Our expanded footprint will provide greater access to natural gas liquids markets across North America and will allow us to offer customers a significantly expanded spectrum of energy services.”

Provident CEO Doug Haughey called the tie-up “a logical transaction that leverages off Provident’s strong growth as a pure-play midstream business. It generates substantial value for Provident shareholders and brings together two organizations with complementary strategies and assets. The result will be one of the strongest energy infrastructure players in Canada.”

Provident’s shareholders, said Haughey, would “participate in a larger entity that has the capability to pursue larger and more complex growth projects, has exposure to more elements of the energy infrastructure value chain, and offers greater liquidity and presence in the capital markets.”

Under the agreement each Provident share would fetch 0.425 of a Pembina share, which would yield almost 25% more than Provident’s closing price Friday on the Toronto Stock Exchange, which was C$9.51. Provident’s shares surged Monday and at midday Tuesday were trading at around C$11.55.

The boards of both companies support the transaction and are expected to recommend voting in favor of the agreement. Once the transaction closes Pembina would nearly double its market capitalization to nearly C$8 billion and it would have a total enterprise value of C$10 billion, said Michaleski.