Pipeline rivals race to U.S. Gulf Coast

TransCanada, upstart Altex aim for Texas

Shaun Polczer
Calgary Herald
Saturday, January 19, 2008

The race is on to the U.S. Gulf Coast to ship Alberta oilsands to Texas, but it could be a case of pride coming up the backstretch for two old rivals.

A decade ago, Jack Crawford was rattling the cages of TransCanada Corp. with a bold proposal to build the Alliance natural gas bullet line to Chicago.

Alliance, a direct challenge to TransCanada's entrenched gas shipping monopoly, shook up the industry and set the stage for a decade-long restructuring of Canada's largest pipeline company.

Ten years later, Crawford is doing the same thing as the CEO of Altex Energy Ltd., which is aiming to build a $5.3-billion bullet bitumen line to the largest refining market in the world.

The stakes are high and Crawford once again finds himself brushing up against TransCanada -- this time with its Keystone heavy oil pipeline to the Texas Gulf.

"It's somewhat reminiscent of Alliance," Bob Hastings, a pipeline analyst with Canaccord Adams in Vancouver, says of Altex. "You know, done on the back of a napkin at the P-Club."

But the rules of the game are not the same as they were a decade ago and the outcome is even less certain.

TransCanada is no longer a monopoly, having diversified into power generation, nuclear facilities, oil pipelines and liquefied natural gas.

CEO Hal Kvisle acknowledged Alliance forced the company to restructure, transforming it into the much larger entity it has become today.

In addition, the field has grown much wider as other competitors seek to diversify their own businesses.

"It's a little different. This time you've got Kinder (Morgan), Enbridge, TransCanada and a bunch of other guys down there," Hastings adds.

As a rule, Altex, a privately owned company backed by one large mystery investor and a couple of U.S. private equity firms [Kern Partners], is tight-lipped about its activities.

But by using a combination of proprietary technologies, the company hopes to shave the cost of shipping bitumen by one-third to half compared with a similar conventional system like Keystone.

Altex hopes to achieve the ambitious target by reducing the amount of natural gas liquids, or "diluent," needed to thin the bitumen to make it flow.

The cost of diluting the heavy oil can often exceed the price of shipping it, Crawford said in a presentation to the summit.

"They're a direct competitor, you know, a head-to-head competitor," Crawford told reporters following the conference. "Having said that, we think our technology from an economic perspective blows away the competition."

Even Kvisle concedes the biggest competitive advantage goes to the pipeline that can deliver the most direct route. On that mark, Altex has the clear lead. "There's no patent on route selection," he quipped. "People can build wherever they want."

By contrast, TransCanada has to ship oil from Hardisty to Winnipeg on reconfigured gas pipe -- the original No. 1 mainline -- before it can start feeding it to Oklahoma, Illinois and eventually to Texas.

"This is the same pipeline C.D. Howe caused to be built and brought down the Canadian government," he said.

But TransCanada's advantage lies in its ability to reconvert depreciated natural gas pipe to carry oil at a substantially lower cost than building a greenfield project.

"They've got free pipe," adds Hastings. "If you've already got pipe in the ground, why would you build another one? I think it's pretty innovative."

In addition, Keystone has substantially more flexibility over the kinds of products it can carry, which include synthetic crude oil that can also be mixed with bitumen to form a product called "syn-bit."

If the Alberta government eventually decides to mandate more upgrading in the province, it could negate Altex's diluent advantage, Kvisle said.

"If the world moves in that direction and there is significantly more upgrading in Alberta that does not create a problem for us," he said. "That's an upside."

If approved, Altex could begin shipping 250,000 barrels a day starting in 2012, while Keystone would move about 600,000 barrels a day starting in 2010.

Keystone in September received National Energy Board approval to convert and construct the Canadian facilities, and in January of this year got the preliminary green light from U.S. authorities to begin construction later in 2008.

TransCanada says it already has firm contracts for 495,000 barrels a day, while Altex, in typically low-key fashion, will only say it is talking to "major" shippers.

Both Kvisle and Crawford deny there is a race to the Gulf, claiming both pipelines will be needed.

The Canadian Association of Petroleum Producers forecasts some 1.8 million barrels per day of incremental heavy oil and bitumen production in Alberta will be added over the next 10 years.

Greg Stringham, the association's vice-president of markets and fiscal policy, noted that figure is greater than the combined capacity of all the pipelines planned to date.

"There are a lot of proposals," he said. "It's still only about half of the growth that we see."

However, it's unlikely all that oil will make it to Texas; some will wind up in Oklahoma, Illinois and eventually California, provided the environmental issues are sorted out.

"We're probably going to need more capacity. We just don't know where."

spolczer@theherald.canwest.com

© The Calgary Herald 2008