Rainbow Lake oil pipeline put on sale by Imperial Oil and partners
Published: Thursday, September 6, 2007 | 8:44 PM ET
Canadian Press: JUDY MONCHUK
CALGARY (CP) - The energy champions behind the proposed $16-billion Mackenzie pipeline are selling a small oil pipeline in northern Alberta, bewildering observers who say the Rainbow line has strategic importance.
Rainbow is owned by Imperial Oil (TSX:IMO), ExxonMobil and Royal Dutch Shell, all partners in plans to bring Canada's large Arctic reserves of natural gas to southern markets.
"If and when we do Mackenzie, there was the view that we would have an (natural gas liquids) condensate stripping plant up there," an industry insider said Thursday.
"The economic cost of doing that was more efficient than building new pipe to run NGL-rich stuff."
Imperial Oil spokesman Gordon Wong said Rainbow was up for sale but gave no pricetag.
The 40-year-old pipeline transports up to 200,000 barrels a day of crude oil from Zama, Alta., in the far northwestern corner of the province, to Edmonton where Imperial and Petro-Canada (TSX:PCA) have refineries.
The 1,200-kilometre Mackenzie pipeline is designed to move 1.2 billion cubic feet of natural gas a day, but many believe the project will never go ahead. Earlier this year, there were reports oil companies had told the federal government the pipeline was effectively dead - killed by years of regulatory hurdles, environmental roadblocks, escalating construction costs and stubbornly low commodity prices.
Still, if it was to go forward, a restructured Rainbow line could be utilized as a cheaper option for some byproducts.
The notion of switching fuels transported in pipelines is not new.
Calgary-based pipeline giant TransCanada Pipelines (TSX:TRP) has been granted regulatory approval to transform one of its main gas lines in Canada to handle oilsands crude.
But whether Rainbow could be converted from oil to natural gas was a hot topic in the oilpatch Thursday.
"I don't know if it's as easy to do that," said Greg Stringham, vice-president of markets for the Canadian Association of Petroleum Producers.
"Natural gas requires much higher pressure than convention crude oil, so going from gas to oil seems to be easier."
Rainbow can also connect to Enbridge Inc.'s (TSX:ENB) pipeline system to the U.S. Midwest and the Trans Mountain pipeline to the Pacific Coast.
Some were surprised that Exxon Mobile didn't go directly to Enbridge for a private deal over the Rainbow line.
"It seemed to have the blessing of the Exxon Mobil group up there to negotiate an NGL line which was supposed to be worth about $300 million that would connect with the Rainbow Zama system," said an industry analyst.
It's unclear what pricetag can be put on the pipeline. Essentially, the oil companies believe selling their stake and leasing back whatever capacity they need is the best way to get value from that asset.
Any buyer will have to be comfortable that the amount of oil behind the pipe will be sufficient to make the returns worth purchasing an energy infrastructure asset which may have an option value down the road.
"The start point is what will the sellers, who are also the shippers and the owners of the oil, willing to pay for moving their oil," said one advisor to the industry.
"Ultimately, there has to be an agreement as to what the sellers are willing to pay per unit of shipments," he said.
"They have to be willing to commit to a certain throughput and if they don't make that throughput they have to pay top-up payments."
That's how the Alliance pipeline was built. Alliance is a 3,000 kilometre mainline natural gas pipeline which extends from northeastern British Columbia to delivery points near Chicago in the U.S. Midwest.
Interested players in Rainbow are expected to be Enbridge, Kinder Morgan Energy Partners LP, Pembina Pipeline Income Fund (TSX:PIF.UN) and Inter Pipeline Fund (TSX: IPL.UN).
© The Canadian Press, 2007
