Kinder Morgan Inc., which this year will become the largest U.S. pipeline company after its $20.7 billion purchase of El Paso Corp., aims to extend its lead over competitors in transporting oil across Canada for export to higher-paying markets in Asia.
Kinder is pressing forward with plans to expand its Trans Mountain pipeline, the only conduit connecting Canada’s oil-sands region to the Pacific Coast, to take advantage of regulatory setbacks that stalled competing projects at TransCanada Corp. and Enbridge Inc., both of Calgary.
Kinder, whose Houston-based pipeline partnership, Kinder Morgan Energy Partners LP, has jumped 13 percent since the end of October, is seeking commitments from Canadian oil drillers so it can double the line’s capacity to 600,000 barrels a day.
“We’re seeing a real sense of outrage” in Canada, Chief Executive Officer Richard Kinder said at a conference in Houston this month about TransCanada and Enbridge’s delays.
The Trans Mountain line is expected to produce $169.4 million in distributable cash flow, or the money it has available for payments to its unitholders, in 2012, up 15 percent from 2009, Kinder Morgan said in a presentation to analysts last month.
“We believe longer-term growth potential exists through the proposed expansion,” Elvira Scotto, an analyst with RBC Capital Markets LLC in New York, wrote in a Jan. 29 note to clients. Kinder is seeking 15- to 20-year commitments from shippers, which would provide a predictable source of cash flow.
Kinder Morgan Energy Partners fell 6 cents to $85.64 at the close in New York. The shares have climbed 19 percent in the last 12 months.
El Paso Acquisition
Kinder is awaiting regulatory approvals in the U.S. to buy El Paso and plans to close the transaction in the second quarter this year. The partnership’s units rose 20 percent in the past 12 months, compared to the Cushing 30 pipeline index, which rose 3.0 percent in the same period.
With the world’s third-largest oil reserves after Saudi Arabia and Venezuela, the Canadian government is eager to better connect foreign buyers to its oil-sands region, located in the landlocked province of Alberta, Prime Minister Stephen Harper has said. Oil production is projected to grow to 3.5 million barrels a day in 2015, from 2.9 million in 2011, according to the Canadian Association of Petroleum Producers.
Kinder plans to decide by midyear whether to seek the Canadian government approvals it will need to enlarge its Trans Mountain line.
TransCanada, meanwhile, is readying a new plan to ship Canadian oil south across the U.S. after its Keystone XL line was rejected by President Barack Obama’s administration over environmental concerns. A third proposal by Enbridge called Northern Gateway that would extend west from the oil sands to Kitimat, British Columbia, is facing opposition from aboriginal groups and a regulatory decision has been delayed until 2013.
Canada’s oil exports rose 8.7 percent last year to 2.1 million barrels a day, according to the National Energy Board.
About 99 percent of those exports went to the U.S. via pipelines, trucks and rail cars. Only about 10,000 barrels of crude a day went to Asia on the Kinder line, according to Wenran Jiang, a researcher at the University of Alberta.
Shipping more oil to Asia is “a fundamental strategic objective of this government,” Canadian Natural Resources Minister Joe Oliver said Jan. 27 in Toronto. “It is encouraging, I think, to see that there are a lot of other plans in the works.”
The “green furor” over proposals from Enbridge and TransCanada may benefit Kinder Morgan because its proposal follows an existing route, Bradley Olsen, an analyst with Tudor Pickering & Holt Inc. in Houston, wrote in a note to clients.
Previous 2008 Expansion
The Trans Mountain line opened in 1953 and was expanded in 2008. It carries gasoline and other refined products, as well as conventional and so-called heavy crude from the oil-sands region, according to Kinder Morgan. About 26 percent of its volume in 2010 was heavy crude.
The company will wait until it gets commitments from shippers before applying for permission to build the line in 2013. It will spend more than a year working with native and environmental groups about the route, Kinder Morgan Canada President Ian Anderson said at the conference. The route may be altered in some places, such as urban areas where there’s no right of way to expand the existing line, he said.
Among Canadian environmental groups, Kinder’s possible Trans Mountain expansion isn’t viewed as an acceptable green option. Kinder has had a good safety record and has plans in place to handle any problems, said Lexa Hobenshield, a spokeswoman for Kinder in Canada.
Chance of Spills
An enlargement of the Trans Mountain line would increase the chance of a spill in Vancouver harbor and possibly lead to dredging the harbor to accommodate larger tankers, said Ben West, a campaigner for the Wilderness Committee, an environmental group.
“Kinder Morgan has done as little as possible to let people know what they’re planning,” West said. “There’s probably no one happier right now than Richard Kinder, as all the attention has gone to Keystone and Enbridge and he quietly gets all the contracts going to him.”