TransCanada PipeLines Ltd. has made a start on curing a growing spare capacity headache by successfully marketing a partial conversion of its mainline to oil from natural gas.

An open-season sale of binding transportation contracts drew bidders for 340,000 bbl/d of service, or enough to proceed with a conversion plan titled Keystone Oil Pipeline, TransCanada said.

Regulatory applications for the US$2.1-billion project will begin soon with a filing at the National Energy Board. TransCanada’s schedule calls for construction to start by late 2007 and for deliveries to commence in the last quarter of 2009.

The centerpiece of Keystone will be conversion to oil of 530 miles of one of seven gas pipelines in TransCanada’s Canadian mainline right-of-way across the western provinces to export points in central Canada.

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.

Alberta oilsands production is forecast to rise by 150% over the next 10 years to 2.5 million bbl/d. At the same time, TransCanada vice-president Steve Becker told a recent Calgary oilsands conference that spare space on the gas mainline could double to three billion cubic feet per day or about 40% of the system’s total capacity exceeding 7 Bcf. The partial oil conversion will only reduce the spare gas capacity outlook by about 200 MMcf/d, Becker indicated.

As the fastest growing Canadian industrial gas consumer, the oilsands sector is a prime contributor to increasing spare capacity on the gas export system. Although bitumen extraction and upgrading efficiency is improving, gas use by the industry’s heat processes still averages about 0.6 MMBtu per barrel of production and tops one MMBtu in some cases.

Rising Canadian industrial gas use is widely forecast to gradually cut into U.S. exports, currently about 10 Bcf/d. Oilsands gas consumption is projected to at least triple to 1.8 Bcf/d over the next decade, although there is some uncertainty in the outlook because the newest projects are adopting “gasification” technology to make their own fuel from heavy residue of bitumen output.

The stretch of converted gas pipeline across western Canada will be the cornerstone of a 1,830-mile new export route from Alberta’s Hardisty oil shipping hub near the provincial capital of Edmonton to the Illinois trading and refining center at Patoka. The project includes 1,237 of new oil pipeline, 230 miles in Canada and 1,070 miles in the United States. Initial capacity will be 435,000 bbl/d. The plan calls for the pipeline to be laid capable of taking up to 590,000 bbl/d by adding pump stations. ConocoPhillips Pipe Line Co. has an option to buy up to a 50% interest in the new system. Parent ConocoPhillips Co. is among subscribers to the delivery capacity. A Canadian subsidiary participates in two steadily growing oilsands developments.

The Keystone plan contemplates eventually adding an extension to the Oklahoma oil trading hub at Cushing, where oilsands production could be sold as far south as refineries along the coast of the Gulf of Mexico, Becker said.

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