By Brian Swint and Mike Lee - Dec 2, 2011 6:01 AM GMT+0700

Plains All American Pipeline LP (PAA) agreed to buy BP Plc’s natural gas liquids business in Canada for $1.67 billion in cash, expanding its footprint in the nation and gaining the capacity to increase U.S. operations.

The acquisition includes about 4,000 kilometers (2,500 miles) of pipelines, 21 million barrels of liquefied petroleum gas storage capacity and seven gas-processing plants, London- based BP said in a statement today. The deal is expected to close in the first half of 2012.

The purchase adds to Houston-based Plains’ 16,000 miles of pipelines and makes it one of the largest U.S. liquefied petroleum gas service providers, Chief Executive Officer Greg Armstrong said in a separate statement. Liquefied petroleum gases are a type of gas liquids.

The location of the pipelines and plants allows for processing of gas from U.S. formations including the Bakken in North Dakota and the Marcellus in Pennsylvania, Plains Chief Operating Officer Harry Pefanis said on a conference call today.

Liquids such as propane, butane and pentane, which can be used for fuel and heat, have become important byproducts for gas producers. Propane spot prices at Mont Belvieu, Texas, were $15.8775 per million British thermal units today, compared with natural-gas futures prices of $3.645 in New York.

The gas fractionation plants Plains bought distill the hydrocarbons into products that can be sold separately. BP previously used the system to transport and process liquids from its own fields, Armstrong said on the call. In the future, Plains may “simply use the fractionators to process third-party volumes for a fee,” he said.

Natural Gas Liquids

Plains’ bid topped an offer from Provident Energy Ltd., a Calgary-based company that co-owns some of BP’s assets, said three people with knowledge of the sale talks. Provident rose 2.8 percent to close at C$9.98 in Toronto.

Provident “may have done a bid,” said Raina Vitanov, the company’s investor relations manager. The purchase price is “a pretty big number,” she said in an interview. “It basically shows how valuable this business is.”

Plains moved into the gas liquids and liquefied petroleum gas business on a smaller scale a few years ago, Daniel Spears, a fund manager with Swank Capital LLC in Dallas, said in an e- mail today.

‘Dramatically Increase’

“This transaction allows Plains to dramatically increase its presence in the NGL and LPG segments,” said Spears, who helps manage $1.5 billion, including shares of Plains.

The sale brings BP closer to its goal of raising almost $40 billion through asset sales to help compensate for last year’s Gulf of Mexico disaster, the biggest offshore oil spill in U.S. history. Chief Executive Officer Robert Dudley has overseen divestitures in Venezuela, Vietnam and the U.S. since taking over from Tony Hayward more than a year ago.

“The divestment program is positive for BP because it generates cash quickly,” said Jason Kenney, an oil and gas analyst at Banco Santander SA in Edinburgh. “This also lets BP focus on their higher-value upstream assets.”

BP fell 1.4 percent to close at 454.35 pence in London. Plains rose 1.7 percent to $65.98 in New York.

In a separate statement, Plains also announced it’s buying pipelines and terminals from Western Refining Inc. (WNR) for $220 million. The acquisition gives Plains an 82-mile, 100,000-barrel a day pipeline that connects fields in southeast New Mexico with Plains’s existing Basin pipeline system.

SemGroup Rebuff

The purchase also included a 6.6 million barrel storage terminal for crude oil, refined products and liquefied petroleum gas at an idle refinery in Yorktown, Virginia.

Plains will spend $200 million upgrading those and other recent acquisitions, Armstrong said.

Today’s acquisitions follow a rebuff from rival pipeline owner SemGroup Corp. (SEMG), which rejected an unsolicited $1 billion cash bid from Plains in October. SemGroup’s board rejected the proposal again last month. SemGroup fell 7 percent, its biggest decline in almost four months, to close at $26.19 in New York.

BP’s assets in the U.S. and Canada produce 48 percent of all gas liquids in the world, according to the company’s website.

“Canada remains an important part of our portfolio of growth opportunities to meet North America’s energy needs,” Dudley said in the statement. About 450 BP employees will transfer to Plains in the deal.

BP sold other Canadian gas assets as part of a $7 billion deal with Apache Corp. (APA) last year. The company is also getting rid of half its U.S. refining capacity, including plants in Texas City, Texas, and Carson, California. It plans to complete the refinery sales by the end 2012.

Credit Suisse Group AG is advising BP on the transaction. Barclays Plc and Bennett Jones LLP are working with Plains.

To contact the reporters on this story: Brian Swint in London at bswint@bloomberg.net; Mike Lee in Dallas at mlee326@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net