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Deal puts Pembina in driver's seat for piping oil sands crude

Two mid-tier Canadian energy companies are combining forces in a bid to capitalize on immense new infrastructure spending unlocked by the rapid expansion of the oil sands.

On Monday, Pembina Pipeline Corp. announced an all-share deal valued at $3.2-billion to take over Provident Energy Ltd.

The resulting company, with assets that include pipelines, natural gas processing facilities and an energy marketing arm, will sit at the nexus of two of the most important energy trends dominating today's oil patch. Its pipelines will ferry away crude from the fast-growing oil sands. And its gas plants will extract the prized natural gas liquids that are the primary focus of today's gas drillers – and which also happen to be used to make that oil sands crude flow.

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"Our operations really are quite complementary," Pembina chief executive officer Bob Michaleski said. And by boosting its size – the new company, if shareholders approve, will have a market cap of nearly $8-billion – Pembina will gain "more opportunity to do larger-scale projects, and those would typically be oil sands projects."

Mr. Michaleski envisions investing in dual-pipeline projects, with one line sending natural gas liquids up to the oil sands, and a parallel line bringing back diluted heavy oil.

Natural gas liquids are products like propane, ethane and butane. They sell for far more than gas, in part because some are highly valued as "diluent."

Diluent gets little of the attention commanded by oil. But it's a critical product. The heavy bitumen that companies wrest from the oil sands is so "heavy" that much of it moves more slowly than molasses at room temperature. It won't flow through a pipeline unless it has been thinned down. Doing that takes diluent – and a lot of it.

In a research note assembled late last year, Calgary-based First Energy estimated the oil patch used roughly 350,000 barrels a day of diluent in 2010. By 2015, it expects demand to rise by another 300,000. Expected future increases in oil sands output will press that number even higher.

For now, much of the diluent is imported. Cenovus Energy Inc. brings some in by rail from Kitimat, on the British Columbia West Coast. Others pipe it in. In July, 2010, Enbridge began shipping diluent through Southern Lights, a new 2,556-kilometre pipeline between Chicago and Edmonton. But shipping on that pipe isn't cheap – it costs up to $11 per barrel just to get material to the Canadian border in Manitoba.

That high cost provides a major incentive for companies to buy locally, in Alberta. And it provides a substantial incentive for companies selling that diluent – which is what the new Pembina is positioned to do.

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"You imagine someone producing [diluent]in our backyard. They're stringing together gold bars," said Rafi Tahmazian, who manages energy investments for Canoe Financial.

"Companies like Provident are grabbing more control of that business, to make sure that it doesn't get into the hands of the heavy producer," he said.

The Provident deal will allow Pembina to link its gas-moving pipelines with Provident's processing facilities, allowing it to own more of the value chain.

"Pembina could have done fine on its own. But there were some things it could not do. And with Provident it can do them," said First Energy analyst Steven Paget.

At the same time, a longstanding decline in Alberta's natural gas liquids is reversing. According to figures gathered by Alberta's Energy Resources Conservation Board, gas liquids fell by nearly a third between 2002 and 2010, alongside a similarly precipitous decline in natural gas.

But virtually all of the spending on natural gas exploration today is devoted to finding "wet" or "liquids-rich" gas, which is far more profitable. That suggests change is afoot, and in November, Keyera Corp., a Pembina competitor, said its 2011 gas liquids numbers had begun to rise.

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"I'd say we just came out of the lull," Keyera CEO Jim Bertram told a Scotia Capital conference. "And we're starting to see an escalation in natural gas liquids in Western Canada, which I think will continue now for quite a few years, given the economics."

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About the Author
Asia Bureau Chief

Nathan VanderKlippe is the Asia correspondent for The Globe and Mail. He was previously a print and television correspondent in Western Canada based in Calgary, Vancouver and Yellowknife, where he covered the energy industry, aboriginal issues and Canada’s north.He is the recipient of a National Magazine Award and a Best in Business award from the Society of American Business Editors and Writers. More

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