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Alberta Premier Rachel Notley makes an announcement in Edmonton, Alta., on Sunday, Dec. 2, 2018.JASON FRANSON/The Canadian Press

Alberta Premier Rachel Notley is expected to announce a $2-billion private investment in a partial upgrading facility designed to allow the province’s oil sector to squeeze more crude into overcrowded pipelines.

The project, which Ms. Notley is expected to announce on Tuesday, involves a Calgary company and would be located in the Edmonton region, according to a government source familiar with the project who was not authorized to speak publicly about it.

Increased upgrading capacity is one of several policies from Ms. Notley’s government designed to address persistently low Canadian oil prices and a lack of new pipelines to get Alberta crude to new markets. She has been promoting a plan that also calls for increased oil by rail and production cuts as her NDP government prepares for a spring election.

The province has previously announced $1-billion in loan guarantees and grants for partial upgrading projects with a goal to add between two and five facilities. The government has been reviewing applications. It’s not clear what incentives the province offered to the project being announced Tuesday.

The company behind the project has signed a letter of intent and has yet to make a final investment decision, the source said. If it proceeds, it would involve 2,000 construction jobs.

Major oil sands producers in recent years have balked at investing in new upgrading capacity, owing to multibillion-dollar price tags and shaky economics. However, several small firms bill themselves as specialists in niche processing. They include Value Creation, which has previously proposed a partial upgrading project, and Enlighten Innovations Inc.

Last May, the Alberta Energy Regulator approved Value Creation’s revised application for a 188,000-barrel-a-day bitumen upgrader and refinery near Edmonton. At the hearing, it pegged the capital cost at $3-billion. The company’s efforts to build such a project at the site date back to 2004, when BA Energy, which Value Creation acquired, first proposed one. It is called the Heartland Processing Plant.

The last major processing plant, the $9.7-billion Sturgeon refinery, also located near Edmonton, was due to start processing bitumen by the end of 2018. The project, owned by North West Refining and Canadian Natural Resources Ltd., suffered a series of cost overruns that were backstopped by the Alberta government. Its bitumen supply comes from Canadian Natural and Alberta, through the oil that it receives in lieu of cash royalties.

Richard Masson, a fellow at the University of Calgary School of Public Policy and the former head of the Alberta Petroleum Marketing Commission, said partial upgrading facilities help the province’s oil sector in two ways. Upgraded crude requires far less diluent than unprocessed bitumen to transport through pipelines, which means partially upgraded oil takes up less space. And medium-grade oil from such a facility can be processed at more American refineries, which expands the market for that oil.

“To the extent that you can get some of the product into these medium-conversion refineries, it broadens your market, so you end up with better price and more competition,” Mr. Masson said in an interview,

“And to the extent that you have less pipeline congestion, then you don’t end up with all these backups of inventory.”

The provincial government ordered production cuts that took effect at the beginning of the year, which has narrowed the price gap – known as the differential – between Alberta oil and West Texas Intermediate. Last fall, the differential topped US$50 a barrel, but it has narrowed in the past few weeks to less than US$10.

Ms. Notley has promoted a plan to purchase rail cars to increase oil shipments by rail and is asking the federal government for financial help.

And last fall she invited the industry to come forward with proposals to build a new refinery in the province. The government has not said what incentives it would be prepared to offer. The deadline for proposals is Feb. 8.

With reports from Jeff Lewis and Jeffrey Jones