EnCana Sells Two Pipelines: Brings Change to Canadian Sector

Abstract:The changing face of the Canadian oilpatch, in terms of players and strategy, was clearly demonstrated earlier this week when EnCana Corp. sold two pipelines for about C$1.6 billion.

Analysis:The changing face of the Canadian oilpatch, in terms of players and strategy, was clearly demonstrated earlier this week when EnCana Corp. sold two pipelines for about C$1.6 billion.

The company sold its Express pipeline system, which runs from Hardisty, Alberta to Chicago, for C$1.18 billion. It also disposed of its 70 percent interest in the Cold Lake line, which runs from Cold Lake in northeastern Alberta to Hardisty, for C$425 million.

BC Gas Inc., a Vancouver-based pipeline and utility firm, and two pension funds, the Ontario Municipal Employee Retirement System and the Ontario Teachers' Pension Plan purchased Express. They forked out C$593 million in cash and assumed C$582 million in debt.

Regulated by the National Energy Board, Express is an important artery carrying Canadian oil exports to Rocky Mountain states. It was built in 1997 by Alberta Energy Co. (which was rolled into EnCana earlier this year) and TransCanada PipeLines Ltd. TransCanada sold its half interest in 2000 to its partner for C$90 million and the assumption of debt totaling almost C$300 million.

The system contains two legs. Express, capable of moving 172,000 barrels per day, runs from the oil pipeline hub of Hardisty to Casper, Wyoming. A second section, called Platte, can take 150,000 bpd of oil from Casper to the Wood River refining center near Chicago. Express covers about 750 miles (1,250 kilometers), while Platte sprawls over nearly 895 miles (1,500 kilometers).

The other pipeline sold by EnCana, Cold Lake, was picked up Inter Pipeline Fund. The income trust already owned a 15 percent stake in the heavy oil gathering system. It delivers about 220,000 bpd from Cold Lake, located in northeastern Alberta, to Hardisty and Edmonton, a distance of 540 miles (900 kilometers). Inter also has an agreement to pick up the remaining 15 percent stake owned by Canadian Natural Resources Ltd.

The transactions, expected to close in January, demonstrate the growing strategic divide between producers and income funds in Canada. They also illustrate how heavy oil and oilsands are going to drive the pipeline sector over the next decade.

Besides a financial gain of C$250 million, EnCana moved ahead in several ways. It kept a commitment to shareholders and analysts to pare debt by selling assets. Its disposition program raised C$2.1 billion, well beyond its original goal of C$1 billion.

EnCana was formed earlier this year through the merger of PanCanadian Petroleum and Alberta Energy, creating North America's largest independent producer. The sales increased the firm's focus on petroleum production, which should make it more appealing to investors looking to make a bet on commodity prices.

The moves by Inter, created from assets spun off by Koch Industries, and the two pension funds indicate the increased maturity of the Canadian energy industry. With equity markets extremely volatile, midstream assets are attractive to pension funds looking for some steady returns. The same motive explains the interest of Inter and other income funds, which have raised billions of dollars in the past two years from investors burned by the stock market and turned off by low returns offered by bonds, T-bills, and investment certificates.

The tidy profit notched by EnCana may encourage other producers to monetize their midstream assets. With income trusts still in favor with investors, the footprint of income trusts in the Canadian energy industry is only going to get larger over the next couple of years.

Some analysts say the premiums forked out by income trusts put conventional pipeline operators at a disadvantage when assets like the Cold Lake line are put on the block. BC Gas officials, for example, won't comment on whether they bid on Cold Lake. It would have been a logical move since company executives have said on several occasions that the future of oil pipelines in Alberta lies with heavy crude and oilsands.

BC Gas, which has owned for decades the 250,000 bpd Trans Mountain pipeline, which carries Alberta oil to the West Coast, has already established a toehold in moving non-conventional oil to market.

Trans Mountain built and will operate the C$700 million Corridor pipeline. This system will carry 155,000 bpd of bitumen, a type of extra heavy oil, 300 miles (500 kilometers) from the Athabasca oilsands project near Fort McMurray, Alberta to Shell Canada Ltd.'s Edmonton refinery. Deliveries are expected to begin this month.

Trans Mountain is considering another foray into the oilsands with its Bison project, a 310-mile (516-kilometer) line. The C$800 million project, still only a proposal, would initially carry 100,000 barrels per day from northern Alberta to Edmonton. However, a major potential customer for the project, True North, has delayed its C$3.5 billion oilsands project. The development will miss its scheduled 2005 startup date because of rising costs, a continuing search for another partner, and uncertainty surrounding Canada's plans to implement the Kyoto Protocol.

The focus by BC Gas on oilsands fits the long-term trend in the province, where bitumen output is forecast to more than double over the next decade from the 733,000 bpd averaged in 2001.

This does not mean BC Gas was not happy to buy Express, which diversifies its asset base and expands its presence in Alberta and the U.S. Midwest. The firm is talking about expanding Express' capacity to 280,000 bpd, a sign that Express is more than just a consolation prize. The extra capacity would mostly be filled by heavy oil and bitumen flowing from the bevy of oilsands projects expected to be built over the next 10 years.

Win-win may be the most hackneyed phrase in the oilpatch, but, at first blush, it looks as though all firms involved have reasons to smile about this week's major shakeup in the Canadian pipeline sector.