4/15/05

Pipeline passes a mayor hurdle

PetroChina's decision to get on board gives new impetus to plan for Alberta to B.C. 'Gateway' line

BY SCOTT SIMPSON
VANCOUVER SUN

Enbridge Inc.'s race to build a $2.5 billion crude oil pipeline through B.C. passed a major milestone Thursday with Asian energy giant PetroChina signing onto the project.

Calgary based Enbridge announced that PetroChina inked a memorandum of understanding to buy up half the daily 400,000 barrel capacity of the 1,160 kilometre "Gateway" line that will carry oil from Alberta to a new deep sea terminal situated either at Prince Rupert or Kitimat.

Enbridge officials cautioned that a decision to go ahead with the project is still several months away, and the company will now assist PetroChina in finding producers who can fulfill the state owned Chinese corporation's desire to purchase 200,000 barrels a day. That's a marked departure from Enbridge's traditional role as a utility service provider, and the biggest indication to date of China's interest in Canada's richest source of oil.

The deal's main drivers:

- PetroChina is China's largest oil company.
- PetroChina has signed a memorandum of understanding to purchase about half of the so called Gateway Pipeline's shipping capacity, or 200,000 barrels of day.
- Northern Alberta's oilsands are expected to soon produce most of Canada's crude oil
- Canada holds the second largest supply of remaining energy reserves in the world behind Saudi Arabia.

Long term contracts with China vital for new pipeline

The Alberta oilsands represent the world's second largest proven reserve of crude oil, after Saudi Arabia.

Enbridge president and CEO Patrick Daniel travelled to Beijing to sign the memorandum.

"This is a positive step forward on a project which will have major benefits for Enbridge, for oilsands producers and for Canada, as well as for consumers in China and other offshore markets," Daniel said in a news release from the company.

"However, there remains a great deal to be accomplished before the Gateway Pipeline can become a reality. Definitive long term agreements for the sale of crude oil to the Chinese will need to be negotiated, as will longer term capacity commitments with other shippers."

Enbridge is actively seeking commitments from other potential shippers to fill the remaining capacity, but company spokesman Jim Rennie said in an interview that PetroChina was the linchpin.

"We've said all along that we need an anchor, that an Asia Pacific customer is needed to make this a go. Assuming that everything goes well with PetroChina, the 200,000 barrels a day are brought together.

"We think we can reach definitive contractual agreements this year. If we can do that, that's half the 400,000 barrel a day capacity of the pipeline."

He added that the company still has a lot of preparatory work to carry out.

"We are looking for additional commitments, as well as community consultation and aboriginal consultation in B.C., getting our engineering work and our environmental work done."

The company believes it can submit next year an application to build the pipeline, and have it in service by 2010 when production from the oilsands is expected to reach 900,000 barrels of crude oil per day.

Brian Purdy, an infrastructure analyst with FirstEnergy Capital Corp., said the announcement gives Enbridge the lead over Terasen Pipelines, which is proposing to build an oil pipeline along its existing TransMountain Pipeline right of way from Alberta to Burnaby.

"I think at this point it looks like Enbridge is a little bit ahead. It gives them the scale and the key mass to get a project of this size moving forward. It sounds as if they have a commitment for basically half the pipeline capacity, which is fairly key," Purdy said.

"From this point they can go and talk to other producers and just incrementally add them on, to attempt to bring up the utilization of the asset once it's built. At the same time, it's a key milestone for them to get the critical mass they need to move this forward."