New York (Platts)--1Aug2013/409 pm EDT/2009 GMT

TransCanada will proceed with its Energy East pipeline project to ship crude oil from Western Canada to refineries and export terminals in the east of the country, the company said Thursday.

TransCanada said its decision to go ahead with the project was based on "binding, long-term contracts" from producers and refiners after a recent open season concluded with firm commitments for about 900,000 b/d of capacity.

TransCanada said it intended to seek the necessary regulatory approvals early next year to build and operate the line.

The pipeline will have a capacity of 1.1 million b/d and is expected to cost about $12 billion to build.

The project consists of converting some of the company's natural gas pipeline capacity to handle crude and building about 1,400 km (924 miles) of new pipeline.

Once completed, the line will transport crude from parts of Alberta and Saskatchewan to Montreal and the Quebec City region before terminating at Canaport in Saint John, New Brunswick, where TransCanada and Irving Oil are planning to build a deepwater oil terminal.

The $300 million Canaport Energy East Marine Terminal "will connect TransCanada's Energy East Pipeline to an ice-free, deepwater port," Paul Browning, Irving president and CEO, said in a statement. "It will allow Canadian producers direct access to world markets for exporting Canadian oil via the world's largest crude-carrying vessels."

TransCanada expects the line will enter service in late 2017 for deliveries to Quebec and in 2018 for shipments to New Brunswick.

NEW EXPORT ROUTES

Patricia Mohr, the Bank of Nova Scotia's senior economist, said in a note Thursday that Energy East also could open an economic route to Europe, India and possibly China.

She estimated the transportation costs at US$7/b from Alberta to Saint John, compared with US$15/b to reach the Irving Oil refinery in Saint John by rail, and US$6-US$8/b from Alberta to the US Gulf Coast.

Mohr also projected the tolls on Enbridge's proposed Northern Gateway pipeline from the oil sands to a tanker port on the British Columbia coast at US$3.30/b and US$5/b on Kinder Morgan's planned tripling of capacity on its TransMountain system from Alberta to the Vancouver area.

"Had (Energy East) been available in the first half of 2013, the cost of Edmonton Par crude from Alberta delivered to Montreal/Quebec City would have been US$14.85/b cheaper than imported Brent," she said.

Mohr said refineries in India are interested in importing Alberta blended bitumen, estimating that tanker charges from Quebec City and Saint John to India's west coast would average US$4.20/b.

She said a tanker terminal in Saint John would be free of ice year-round and accommodate Very Large Crude Carriers of 350,000 deadweight metric tons, which could lower shipping costs to India to US$3/b.

Assuming a US$3/b quality discount, Western Canada Select "could have earned a much higher price in India than actually received" in the first half of 2013 based on the price of Saudi Arabian heavy crude delivered to India, Mohr said.

GOVERNMENT BACKING

Energy East has solid backing in Alberta, Saskatchewan, Manitoba and New Brunswick and positive indications from Ontario, but faces uncertainty in Quebec, where opposition to moving crude bitumen by pipeline from the oil sands to Quebec's refineries has been compounded by last month's crude train derailment at Lac-Megantic where explosions accounted for an estimated 47 deaths.

TransCanada officials said that although the major regulatory decisions will be made by Canada's National Energy Board, many federal and provincial departments will participate in the review, while discussions are already taking place with other stakeholders, including 150 First Nations and aboriginal communities to determine the pipeline routing.

Canada's Natural Resources Minister Joe Oliver said in a statement that the government welcomes the chance to move Western Canadian crude to Eastern Canada and "ultimately to new markets abroad. Initiatives like this could allow Canadian refineries to process more potentially lower-priced Canadian oil, enhancing Canada's energy security and making our country less reliant on foreign oil."

Alberta Premier Alison Redford welcomed the Energy East announcement "as part of our efforts to build new markets and get a fairer price for the oil resources Albertans own."

A month ago, her government committed to ship 100,000 b/d of its royalty crude for 20 years on Energy East, indicating it would pay about C$5 billion in tolls over the period.

The province is expecting to receive up to 400,000 b/d of royalty crude by the start Energy East starts deliveries in late 2017, the Alberta Petroleum Marketing Commission has said.

Al Monaco, CEO of Enbridge, which is competing with TransCanada to access eastern Canadian and US markets, told a second-quarter call Thursday that combined volumes now in place for shipment out of Western Canada raise the prospect of opening new export markets.

Energy East's proposed 1.1 million b/d pipeline and Enbridge's plan to reverse its Line 9 and deliver 300,000 b/d to Ontario and Quebec refineries starting in 2014 mean "we will require all of the pipelines that have been announced."

"Everybody's come to realize that we need a certain amount of excess capacity to manage through difficult periods," he said.

On the export possibility, Monaco said "it's not a bad assumption (that the pipeline projects) involve a lot of crude and it will have to find a home."

OIL MARKET IMPACT

TransCanada's Energy East pipeline would have an effect on more than the Canadian crude market, traders said Thursday, with completion of the pipeline ushering in light sweet Canadian crudes and displacing Bakken that is being railed in.

Refiners in East Canada "are buying Bakken and WTI," one trader said. The pipeline "will curtail demand that the refiners in East Coast Canada have for our crudes."

Another trader said completion of the pipeline would send heavy sour Canadian crudes to the East Coast instead of the US Gulf Coast, which should increase demand for heavy Gulf crudes such as Mars, Southern Green Canyon and Poseidon.

"It should help clear Canada of heavy crude, which would strengthen the Gulf Coast heavy crudes," he said.

--Richard Swann, richard.swann@platts.com; Gary Park, newsdesk@platts.com; Esa Ramasamy, esa.ramasamy@platts.com; David Arno, david.arno@platts.com; Beth Evans, beth.evans@platts.com
--Edited by Jason Lindquist, jason.lindquist@platts.com

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