This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 CALGARY 000631 
 
SIPDIS 
 
STATE FOR WHA/CAN, EB/ESC/ISC, EB/PPD 
 
USDOE FOR IA (DEVITO, PUMPHREY, DEUTSCH) 
 
E.O. 12958: N/A 
TAGS: ENRG EPET ETRD PGOV CA
SUBJECT: WHILE WILMA RAGES, PLANS DRAWN UP FOR NEW ALBERTA GULF COAST 
OIL PIPELINE 
 
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SUMMARY 
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¶1. Some may question Altex President Jack Crawford's timing. 
His October 14th press release that his newly-formed Calgary 
company is proposing a heavy crude oil pipeline line from 
northern Alberta to the refineries of southeast Texas may have 
raised a few eyebrows, as meteorologists warned that the largest 
Atlantic hurricane in history would soon be hitting the Gulf 
Coast.   However, few can doubt Crawford's good business sense: 
the proposed pipeline would undercut competitors' costs by a 
third, and come on-stream just as oil producers in Alberta are 
seeking to diversify their markets.  While Altex faces many 
challenges, both regulatory and financial, in completing the 
project, current energy market realities could make its 
construction a question of when, not if.  The pipeline, which is 
expected to carry 250,000 bpd initially from Alberta's tarsands, 
could under an "optimistic" scenario, be operational by 2010. 
Calgary CG, Econ Assistant and fall intern visited Altex Energy 
October 19th to discuss the new pipeline proposal.   End summary. 
 
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THE NEW LOGIC 
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¶2. Altex Energy was founded earlier this year by former 
employees of the Alliance Pipeline, which delivers natural gas 
from Fort St. John, British Columbia to Chicago and markets 
beyond.  This C$5.8 billion pipeline, which was an idea 
scribbled on a table napkin in 1995, began delivering natural 
gas to the U.S. Midwest in 2000.  By utilizing the experience 
and success of the Alliance pipeline, members of the Altex 
management team hope to convince the oil industry and government 
regulators that their proposal will be the most cost-effective, 
environmentally friendly partner for Alberta's booming oilsands. 
 While still only in its first stages, the pipeline project has 
financial backing from several investors, including 
Calgary-based Kern Energy Partners 1 Fund (KEP), a private 
equity fund with a focus on Canadian energy sector resource 
development.  KEP has C$230 million of committed capital from a 
group of partners that includes North American pension funds. 
 
¶3.  Jack Crawford told us that the unique design of the 
estimated $3 billion Altex pipeline will enable it to transport 
heavy crude at only two-thirds the cost of its competitors. 
Central to the Altex strategy is to develop a "straight shot" 
pipeline from Alberta to Texas, approximately 2000 kilometers, 
similar in scope to the Alliance pipeline.  Current pipeline 
systems generally travel a circuitous route through central 
Canada to Chicago and Minneapolis before making their way to the 
southeast.  While these designs were once the most economical 
means available for delivering crude oil to refineries on the 
Great Lakes, Crawford told us that logic has changed.  US oil 
exports from Canada have increased so much in recent decades 
that the percentage of refineries devoted to Canadian crude has 
risen from half to nearly 100%.  Crawford estimates Gulf Coast 
refining capacity at some seven million bpd, with the capacity 
to refine two million bpd of heavy crude.  Also working in 
Altex's favor is their pipeline's low profit threshold. Crawford 
told us that the Altex pipeline will only need to ship 250,000 
barrels per day (bpd) to stay economical, compared to the 
average 400,000 bpd needed by other systems to break even.  Of 
course, with most energy experts predicting sustained high 
energy prices, Altex plans leave room for expansion; the 
proposed pipeline would have a maximum volume of some 750,000 
bpd, just under current total daily Alberta oilsands production 
of one million bpd. 
 
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COMPETITION ALIVE AND WELL 
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¶4. Altex is not without competition, as several players in the 
pipeline industry, with an eye to future oil development, have 
formulated proposals of their own.  Calgary-based Enbridge Inc., 
Canada's dominant oil pipeline company, has advanced several 
designs, most notably their proposed C$4 billion "Gateway" 
project aimed at transporting 400,000 bpd of crude from northern 
Alberta to Kitimat, British Columbia and on to markets in Asia. 
Extensions of its U.S. Midwest system are also planned.  In 
addition to Terasen Pipelines' proposed C$210 million expansion 
of its Trans Mountain oil pipeline from Alberta to British 
Columbia, Calgary-based TransCanada Corp., Canada's largest 
transporter of natural gas, hopes to grab a share of the market 
by moving early, converting one of its primary natural gas 
pipelines from west to east into an oil pipeline (known as 
"Keystone") directed towards U.S. markets south of Manitoba. 
None of the proposals, however, are expected to come to fruition 
for at least several years. 
 
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DRIVING A HARD BARGAIN (10,000 TIMES OVER) 
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¶5. Although economic circumstances ensure increasing demand for 
pipelines such as Crawford's, regulatory challenges could 
forestall Altex for years to come.  Federal governments, 
environmental boards, First Nations, and local landowners must 
all be placated before construction begins.  While it will take 
time and energy to acquire regulatory approval from Canada's 
National Energy Board (NEB), permits in the United States are 
typically even more difficult to obtain.  Crawford noted to us 
that natural gas pipelines can be approved by the Federal Energy 
Regulatory Commission (FERC), but oil pipelines operate under a 
separate regulatory regime, and are subject to purview by every 
state government through which a pipeline passes.  The Altex 
pipeline would pass through seven: Montana, South Dakota, 
Nebraska, Kansas, Oklahoma, Texas, and possibly Louisiana. 
Altex must negotiate terms with each individual property owner 
its pipeline will run through, meaning multiple tens of 
thousands of agreements.  While Crawford says it is likely that 
Altex will be given the same expropriation and property 
condemnation powers that Alliance was awarded in 1998, he 
expects they will rarely be used noting, "99.5% of the time with 
Alliance we were able to obtain permission without employing 
such extreme measures". 
 
¶7. A final challenge for Altex, assuming the infant company 
acquires the necessary regulatory and land use approvals, will 
be competing for scarce labor resources.  With Alberta building 
permits increasing by 30% this year and busy cranes a common 
sight in Edmonton and Calgary, few construction contractors are 
eager to take on more work. However, this problem also 
emphasizes the logic of new pipelines; while some Albertans 
would prefer value-adding refinery capacity in-province, the 
labor necessary for such a massive upgrade simply isn't 
available.  Additionally, Crawford told us that Altex would not 
face these acute labor shortages south of the border, where the 
unemployment rate is several points higher.  All of that said, 
Crawford told us that, "optimistically", the pipeline could be 
in operation by 2010 when oilsands production is projected to 
rise to nearly two million barrels per day. 
 
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COMMENT 
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¶8. The timing of Altex's pipeline could hardly be more 
fortuitous.  The price spikes brought on by the damage done to 
Gulf oil production demonstrate the need to diversify U.S. crude 
oil supplies. Refineries in the southeast continue to upgrade 
their heavy oil capacity, while the world market for light crude 
continues to tighten.  Republic Senator Orrin Hatch's recent 
comments underscore the increasing importance of Canada's role 
in the ongoing diversification process, as Alberta's oilsands 
producers strive to fill demand to a nation seeking independence 
from unstable oil exporters. 
 
 
 
AHMED