Feb. 9 (Bloomberg) -- TransCanada Corp., Canada's largest pipeline operator, announced a $1.7 billion project to carry oil to Illinois, positioning the company to capitalize as heavy-crude output in Alberta rises and U.S. energy demand grows.

The pipeline, called Keystone, would be about 3,000 kilometers (1,865 miles) long and would carry 400,000 barrels of oil a day, the Calgary-based company said in a statement today.

TransCanada, a natural-gas transporter, joins Enbridge Inc. and Terasen Inc. in planning oil pipelines as Shell Canada Ltd. and other producers spend billions of dollars on expansions. Output from Alberta's oil sands is expected to rise to 2.6 million barrels a day by 2015 from 1 million currently, according to the Canadian Association of Petroleum Producers.

For TransCanada  I think it is a good diversification and helps them to be not just dependent upon gas,'' said Zaheer Khan, who helps manage the equivalent of about $3.6 billion in debt securities, including an undisclosed amount of TransCanada bonds, at Baker Gilmore & Associates Inc. in Montreal.

Shares of TransCanada rose 3 cents to C$30.03 ($24.02) at 2:56 p.m. in Toronto Stock Exchange trading. The stock has five buy ratings, seven hold ratings and one sell from analysts.

The Keystone pipeline would run from Hardisty, Alberta, to refineries in Wood River and Patoka, Illinois, TransCanada said. The project includes conversion of a 1,240-kilometer (770-mile) gas pipeline in three Canadian provinces to carry oil.

Cost-Competitive Conversion

The conversion ``is an innovative, cost-competitive way to meet the need for pipeline expansions to accommodate anticipated growth in Canadian crude-oil production during the next decade,'' Chief Executive Hal Kvisle, 52, said in the statement.

TransCanada currently transports about 5 billion cubic feet of gas a day on its flagship pipeline system and can handle up to 7.5 billion cubic feet, spokeswoman Hejdi Feick said. Lines used for the Keystone project will remove about 500 million cubic feet of excess gas capacity, she said.

``We've got an existing system that just needs a few modifications to make it into an oil pipeline,'' she said. ``It will also have less of an environmental impact because that line already exists today.''

Preliminary discussions with regulators, landowners and oil companies have begun, TransCanada said. The project will need approval from Canadian and U.S. regulators before construction can begin.

Shipments as Soon as 2008

The pipeline could begin operating by 2008 or 2009, the company said. TransCanada hasn't decided how it will finance the project, Feick said.

By 2010, the Keystone line could boost TransCanada's per- share earnings by 10 to 15 cents annually, Dominique Barker, an analyst at Credit Suisse First Boston, said in a note to clients. She rates the company's shares at sector perform and doesn't own any.

Keystone ``confirms industry comments that the most important market for heavy oil from Alberta is the U.S. and puts into question'' exports to China, Barker said.

TransCanada could eventually ship Canadian oil to refineries along the U.S. Gulf Coast, said Khan of Baker Gilmore. That region has the biggest share of U.S. refining capacity at 48 percent, according to the Energy Department.

ConocoPhillips, the biggest U.S. refiner, has its largest refinery at Wood River. The plant can process about 300,000 barrels of crude oil a day.

Largest ConocoPhillips Plant

ConocoPhillips, Marathon Oil Corp. and Premcor Inc. are upgrading plants in the U.S. Midwest to handle more high-sulfur Canadian oil, which is cheaper than lighter grades of crude from Texas, the Gulf of Mexico and West Africa.

Such investments and the heavy-crude demand they would spur are needed to make it worthwhile for TransCanada and Enbridge to build new pipelines to the U.S., said Rich Ballantyne, president of Vancouver-based Terasen's pipeline unit.

``Pipeline capacity doesn't a market make,'' Ballantyne said in a telephone interview. ``Bringing in another pipeline with 400,000 barrels a day into an existing market that may or may not be able to absorb it is pure head-to-head competition, and when those things happen, pipelines tend not to be the winners. Producers are the winners.''

Terasen's project is on the North American West Coast and targets refineries that are already equipped to process high- sulfur oil.

TransCanada owned a 50 percent stake in a pipeline that delivers Alberta oil to refineries in Montana and Wyoming. The company in October 2000 sold its interest in the pipeline, called Express, to cut debt and focus on gas pipelines and power plants.