By Scott Haggett

CALGARY, Alberta (Reuters) - TransCanada Corp on Thursday said it would move ahead with Canada's largest-ever pipeline, expanding the scale of its $12 billion plan to ship oil sands crude in the West to refiners on its east coast and beyond as its U.S.-bound Keystone XL line stalls in Washington.

Canada's No. 2 pipeline company said "strong market support" convinced it to build the 1.1-million-barrel-per-day Energy East Pipeline, which will stretch 2,700 miles from Alberta to a new deepwater oil terminal on the Atlantic. The line will be nearly a third larger than the 850,000 bpd capacity it had originally proposed in April.

The conduit, which will utilize a converted natural gas line for much of its route, should be in service by late 2017 for deliveries to Quebec and 2018 for New Brunswick, promising a new slug of both sweet and sour crude that could reshape the Atlantic Basin oil market and open up new markets.

Customers including Suncor Energy have already pledged to use at least 900,000 bpd of the line's capacity, suggesting that oil producers and refiners are prepared to pay up for access to an export route that may offer better odds of success than those to the west and south, hung up by regulatory hurdles in both Canada and the United States.

Environmental groups have resisted similar projects to pump crude across the Rocky Mountains to Canada's Pacific Coast. Such groups are attacking the Energy East plan. The government of Quebec, where memories of the Lac Megantic disaster that killed 47 are fresh, has yet to say if it will support the federally regulated project.

"It looks like they got far more interest than they were initially expecting," said analyst Sandy Fielden of consulting firm RBN Energy in Austin, Texas. "It also solves two problems for the company as they have this large natural gas pipeline that has been made largely redundant."

Similar projects to Canada's West Coast have faced delays due to objections by First Nations groups and environmentalists, while the 800,000 bpd Keystone XL pipeline to Texas has been awaiting U.S. State Department approval for years.

President Barack Obama is expected to make a final decision on the line by later this year, but the lengthy delays have forced shippers to seek other outlets.

TransCanada said both lines would be necessary.

"The demand for Energy East is completely independent from our other long-haul pipeline project, Keystone XL, which is underpinned by ... 20-year contracts," TransCanada Chief Executive Officer Russ Girling said at a press conference. "Shippers remain committed to that project ... Both of these projects have their own rationale in the marketplace and both are needed."


Energy East would be the largest project yet to deliver oil sands crude to Canada's coasts for export or refining, as energy companies fret about the regulatory hurdles and market limitations of pumping more oil to the United States, currently Canada's only major customer.

Oil sent on the planned line could supplant much of those imports and give oil sands producers access to high-priced Atlantic markets for the first time.

The pipeline should more than replace the over 700,000 bpd that Canadian refiners imported from abroad last year, according to the National Energy Board, most of that to supply six refineries east of the Ontario-Quebec border.

Girling said oil producers were looking to reach markets as far as India.

"There's a lot of crude that will have to find a home," Al Monaco, chief executive of rival Enbridge Inc, said on a conference call. Enbridge is seeking approval to build a 525,000 bpd pipeline to British Columbia for export, and is also looking to reverse its Line 9 to deliver crude to Montreal, which would compete directly with TransCanada's line.

Canadian Natural Resources Minister Joe Oliver welcomed the announcement as a way to lower prices for refineries and reduce their reliance on foreign suppliers.

The pipeline project would be subject to an environmental and regulatory review, Oliver said.

Shares of TransCanada were up 2.3 percent at C$48.00 in midafternoon trading.


The company said it would seek regulatory approvals early next year. The pipeline will convert 3,000 kilometers (1,900 miles) of TransCanada's under-utilized natural-gas mainline system to carry crude oil through Saskatchewan to Cornwall, Ontario, near the Quebec border.

The plan includes about 1,400 kilometers (870 miles) of new pipeline, primarily in Quebec and New Brunswick, and new marine export terminals in both provinces, including one at Canaport in Saint John, New Brunswick, where TransCanada has formed a joint venture with privately owned Irving Oil to build, own and operate a new deep water marine terminal.

TransCanada is also building an oil storage terminal in southeastern Saskatchewan that could collect crude from North Dakota's Bakken field that is now shipped east by rail.

"Obviously, we've had some interest from U.S. parties," Girling said. "We'll continue to pursue that."

The line would probably diminish the need to ship oil by rail to East Coast refiners, a trend under scrutiny since the derailment at Lac Megantic.

"The same people-power movements that have stalled other ill-conceived tar sands pipeline projects will rise up to tell our governments we need to invest in clean energy, not tar sands expansion," Mike Hudema, a climate and energy campaigner for Greenpeace Canada, said in a statement

The proposal is the latest in a series of planned pipelines and expansion projects as a flood of crude from the oil sands and the Bakken shale oil field stretches existing networks.

(Additional reporting by Nia Williams and David Sheppard; Editing by Lisa Von Ahn, Janet Guttsman and Andrew Hay)