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BP takes another big step out of Canada

BP is further reducing its Canadian presence with the $1.7bn sale of its natural gas liquids (NGLs) business

The supermajor is pressing ahead with a $45 billion asset sell-off to help it meet potential liabilities from last year’s Macondo oil spill in the Gulf of Mexico. The deal heralds a structural shift in the country’s gas processing market with the exit of its largest marketer.

Houston-based Plains All American Pipelines will assume control of 2,600 miles of pipelines, including 20 million barrels of liquefied petroleum gas storage capacity; seven fractionation plants, with around 232,000 barrels a day (b/d) of capacity; multiple straddle plants; and two field gas-processing plants with an aggregate capacity of about 8 billion cubic feet a day; as well as 10 million barrels of long-term and seasonal NGL inventory as of 1 October, the effective closing date of the transaction.

BP has long been Canada’s largest marketer of gas as well as oil, a legacy of its merger with Amoco in 1998. Amoco gained the assets through its take-over of Canada’s Dome Petroleum in 1988, which, in turn, acquired it from Hudson’s Bay Oil and Gas in 1981.

The NGL business also includes financial assets, such as supply contracts, shipping arrangements on third-party pipelines and long-term leases on 720 rail carriages used to move products. Collectively, the BP deal will provide Plains access to about 140,000 to 150,000 b/d of NGLs through a fully integrated network to fractionation facilities and markets in western and eastern Canada, as well as the Great Lakes region of the US.

Plains officials are delighted with the deal. “This is an asset-rich transaction,” claimed chief executive Greg Armstrong.

For BP, the sale marks a steady retreat from Canada, bringing total asset sales to $5.2 billion since last year’s Macondo disaster. In July 2010, BP sold most of its Canadian gas assets to Apache, but retains an oil-sands refining-production venture with Husky Energy, as well as offshore Arctic leases.

BP chief executive Robert Dudley said Canada remains an important part of the firm’s portfolio, but the move marks a significant scaling-back for BP, which – by virtue of the Amoco merger – was once Canada’s largest gas producer. The Canadian NGLs network was considered BP’s link between the proposed $30 billion Alaska gas pipeline and the Lower 48 to facilitate growth in petrochemicals production and its gas-marketing division. Indirectly, the deal casts further doubt on BP’s commitment to the Prudhoe Bay gas link.

As well as the Canadian assets, the deal includes a smaller number of US facilities that straddle the border. Plains said the assets integrate into its larger network, which includes the Bakken unconventional oilfield, as well as the Marcellus Shale in the northeastern US.

It is the growth in unconventional resource plays, and especially NGLs, that it driving a consolidation of the North American midstream in response to changing supply dynamics. In October, Kinder Morgan paid $21 billion for El Paso, in one of 2011’s largest mergers.

The emergence of new shale basins in Pennsylvania are threatening to alter traditional pipeline flows. Petrochemicals plants in Ontario that were once supplied from western Canada may start importing cheaper Marcellus feed stocks. Condensates from the Bakken will increasingly be used to dilute western Canadian heavy oil and bitumen. In that sense, the consolidation also represents a rationalisation and reallocation of existing capacity to transport and process the wave of NGLs that have resulted from the unconventional drilling boom.

It’s a fundamental realignment that must take place to allow for growth. Conservative estimates are suggesting Lower-48 production will rise by at least 20%, to more than 8 million b/d by 2020 – mainly NGLs from shale plays. The bigger question isn’t whether those rates can be achieved and whether infrastructure developmentcan keep pace.

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