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Inter Pipeline to acquire Williams' Canadian NGL midstream business

Inter Pipeline to acquire Williams' Canadian NGL midstream business

Inter Pipeline Ltd. has entered into an agreement to acquire the shares of The Williams Companies Inc.’s and Williams Partners L.P.'s Canadian natural gas liquids (NGL) midstream businesses for cash consideration of $1.35 billion, subject to closing adjustments. The transaction is expected to close in the third quarter of 2016 and is subject to approval under the Competition Act and other customary closing conditions.

Williams Canada pioneered the process of extracting NGL and olefins from offgas, a byproduct of bitumen upgrading operations. Williams Canada’s assets include two liquids extraction plants located near Fort McMurray, Alberta, a fractionator near Redwater, Alberta and a pipeline system that connects these facilities. The two extraction plants have the capacity to recover approximately 40,000 barrels per day of NGL and olefins from the upgrader offgas. The liquids mix is then separated into marketable products at the Redwater fractionator and sold across North America.

As a result of this acquisition, Inter Pipeline also assumes responsibility for the potential construction of a $1.85 billion Propane Dehydrogenation (PDH) facility located near the Redwater fractionator. This facility would convert low-cost, locally sourced propane into high value polymer grade propylene, an important petrochemical product largely used in plastics manufacturing.

“This accretive acquisition is a highly complementary addition to our existing NGL extraction business,” said Christian Bayle, Inter Pipeline’s President and Chief Executive Officer. “Consistent with our disciplined acquisition strategy, we are purchasing this unique and attractive business at a low period in the commodity cycle, and well below original cost. This positions Inter Pipeline to significantly benefit as energy prices strengthen.”

Transaction Highlights

  • Inter Pipeline is acquiring the only processor of oil sands offgas and the only fractionator capable of handling this type of offgas liquid
  • Williams Canada invested approximately $2.5 billion in the development of this large-scale NGL midstream business during its 16-year history
  • Acquisition provides a platform for material future NGL and olefin related growth opportunities including capacity expansion investments, securing additional offgas supply sources and development of integrated petrochemical manufacturing facilities
  • Transaction is expected to be immediately accretive to funds from operations per share

Business Overview

The Williams Canada business is anchored by the two liquids extraction plants located near Fort McMurray, Alberta. These facilities process a gas stream known in the energy industry as “offgas”. Offgas is created when oil sands bitumen is heated to high temperatures though an upgrading process. This offgas byproduct is rich in high value NGL, and olefins, which are synthetic petrochemicals that do not naturally exist in large quantities. After the liquids are removed from the gas stream by the extraction plants, the residual offgas is returned to the upgraders where it is consumed as fuel.

The first extraction plant, which began operations in 2002, processes offgas from the Suncor Energy Inc. oil sands upgraders. The second extraction facility, completed in early 2016, is integrated with the Canadian Natural Resources Limited Horizon upgrader. Suncor and CNRL are contractually obligated to deliver offgas feedstock to the extraction plants under multi-decade supply arrangements. On a combined basis, these facilities are capable of extracting approximately 17,000 b/d of ethane-ethylene mix and 23,000 b/d of other NGL and olefinic liquids.

A 12-inch diameter, 420 kilometre pipeline, known as the Boreal pipeline, links the liquid extraction plants to the Redwater Olefinic Fractionator located in the industrial heartland of central Alberta. The Boreal pipeline has a current throughput capacity of 43,000 b/d and can be expanded up to approximately 125,000 b/d with the addition of low cost pumping stations.

The Redwater Olefinic Fractionator separates the NGL and olefin mixture into higher value products including propane, polymer grade propylene, normal butane, alky feed, olefinic condensate and an ethane-ethylene mixture. Caverns capable of storing over one million barrels of NGL support the fractionator operations.

The ethane-ethylene mix is sold to NOVA Chemicals Corporation under a long-term fee based contract which commenced in late 2013. The remaining NGL and olefinic products are distributed by third-party pipeline, truck and rail and sold to various North American counterparties.

PDH Opportunity

Since 2013, Williams Canada has been developing an attractive opportunity to construct Canada’s first Propane Dehydrogenation facility. Using propane as its feedstock, this proposed $1.85 billion petrochemical facility is designed to produce polymer grade propylene, a valuable intermediate product largely used to create a variety of plastics, fibers and chemicals.

“Alberta is a particularly attractive location for a world-scale PDH facility given the ample supply of low-cost propane feedstock,” commented Mr. Bayle. “Construction of this PDH plant is an innovative way to provide an important new market for Alberta propane, help diversify our energy based economy, and deliver significant long term economic benefits to Inter Pipeline’s shareholders and the Province.”

Approximately $250 million has been invested to-date in the PDH facility by Williams Canada. Substantial design work and equipment procurement has been initiated. Site preparation and early civil construction has also commenced on lands neighbouring the Redwater Olefinic Fractionator. The PDH facility is intended to be integrated with the fractionator and use a combination of proprietary propane as well as other locally sourced product as its feedstock. In total, the PDH facility is designed to consume 22,000 b/d of propane and produce 525,000 tonnes per year of polymer grade propylene.

Inter Pipeline expects to make a final investment decision on this project by the end of 2016. Subject to full sanctioning, the project is expected to be operational in 2020.

As part of the development plans for the PDH facility, Williams Canada has made an application under the Alberta Government’s Petrochemical Diversification Program which offers up to $500 million in royalty credits to projects that increase the consumption of petrochemical feedstocks like propane. The credits, once awarded, can be traded to oil and gas producers to offset royalty payments made when they extract hydrocarbons. The Alberta Government has stated its intention to finalize the list of recipients within the next several months. Inter Pipeline believes this project is well positioned to be awarded credits under this program.

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