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TransCanada's (NYSE: TRP) Oil Sands Pipeline

Brian Hicks

Written By Brian Hicks

Posted May 6, 2013

Canada’s oil sands are moving forward, with or without Keystone XL.

TransCanada (NYSE: TRP) announced plans for the construction of the Heartland Pipeline, connecting Edmonton facilities to the oil sands region in Hardisty, Alberta. An additional proposal includes a terminal situated in northern Edmonton to hold excess reserves of oil.

Alaska oil pipelineThe pipeline itself will cover 125 miles, transporting 900,000 barrels a day of crude. The new terminal is expected hold a capacity of 1.9 million barrels of crude.

Shareholders and aborigine groups have been acting as consultants. With ongoing controversy surrounding Enbridge’s (NYSE: ENB) Northern Gateway and the Keystone XL, TransCanada is doing everything it can to ensure indigenous groups are satisfied with the future project and to minimize environmental impacts.

TransCanada will submit an application to Alberta regulators in the next few months and a separate application in the fall of this year.

This has less to do with the United States and more to do with Canada’s booming oil industry. As Alex Pourbaix, president of TransCanada’s pipeline division, told the Calgary Herald, Canada’s drilling success is expected to reach three million barrels per day over the course of 15 years.

Because there has not been enough pipeline infrastructure in place to ship surface crude to market, Canadian oil drillers have been forced to cut excess crude well below market value.

The new pipeline will provide relief to drillers suffering from backlogs, but not anytime soon; Heartland will not go online until later in 2015.

The new pipeline will ship plenty of the crude to eastern Canada, and some in the United States.

Heartland, combined with the proposed Northern Gateway, is an indicator that Canadians are in high pursuit of infrastructure relief to support their growing energy industry.

Canada was betting big on the Keystone XL project in hopes of getting the flow of tar sands to the Gulf Coast for processing, but the long delays is causing our neighbor to the north to seek other options.

TransCanada is postponing planned construction of XL from later 2014 to early 2015.

Could it be a sign that TransCanada is moving beyond Keystone XL in favor of Heartland?

Not likely, since the company has already spent $1.8 billion in laying the groundwork for the pipeline. But the postponement of XL could actually hurt the United States as opposed to Canada.

Never Ending Saga of Keystone XL

Don’t hold your breath for any new developments on Keystone XL. The debate is more contentious than ever, as the Canadian government and Congress expect President Obama to make a final decision this summer.

State Department approval is also necessary, since the pipeline is a cross-national endeavor.

With Heartland and Northern Gateway, Canada stands a better chance than the U.S. of setting up a robust energy system. Besides the reversal of the Seaway pipeline to the Gulf Coast, XL is the only major effort on the part of the U.S. to meet its energy transport needs.

More oil companies are relying on railway transport, but the costs in shipping by train is higher, and there is the greater likelihood of accidental spills. Pipeline transport is cheaper and faster.

Politics and regulations are the main factors behind the stall of XL, and it seems that TransCanada is beginning to look beyond the U.S. in hopes of providing direct relief to Canadian drillers.

Some Canadian leaders desire a connection within the borders of Canada as opposed to a cross-natoinal pursuit in the form of XL. Canadian Prime Minister Stephen Harper, however, still supports XL.

Congress, the energy industry, the Canadian government, and governors in Bakken states are also in favor of the pipeline, but there is still heavy opposition from environmental groups and members of Congress.

There is some indication that the president may be willing to go along with the project, but the incessant delays are killing the momentum of XL, forcing TransCanada to delve further into other projects.

What often gets lost in the debate is how beneficial XL would be to U.S. drillers as well. Many frame the debate as a Canadian matter, but some of that crude will be coming from the Bakken and moving to Cushing, Oklahoma.

American oil companies are going through backlogs of their own, unable to ship enough crude to Cushing, Oklahoma to trade on the New York Mercantile Exchange.

And with the U.S. Geological Survey revising its reserve estimates upwards for the Bakken and Three Forks formation, XL seems all the more imperative.

It will be interesting to see how Heartland stacks up to XL—since the two are expected to become fully functional around the same year—and whether or not approval of the new terminal and pipeline will affect how TransCanada perceives XL in the future.

Heartland Benefits

Heartland has a strong chance of being approved and constructed, so which companies stand a chance of benefiting?

The heart of Alberta crude production begins with the Athabasca oil sands, and Marathon Oil (NYSE: MRO) has been in Athabasca since 2007, developing new technologies for the sake of higher extraction rates.

ExxonMobil (NYSE: XOM) could also benefit from Heartland, since the company has had prior dealings with TransCanada through an Alaska pipeline project, and Exxon recently launched a new project in Kearl oil sands.

Watch out for TransCanada’s opposition as well.

Enbridge’s Northern Gateway may not be fully functional until 2019, but the company has other pipeline projects in the works.

But TransCanada also has plenty in the way of options. XL is a mere hiccup as Canada continues to build on its oil operations.


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