TransCanada Corp. (TRP) said Tuesday it expects its Keystone oil pipeline to come into service in 2012 as scheduled, quashing earlier signals it could slow the project on delays to oil sands projects.

In October, the Calgary-based company said Keystone's second stage linking Alberta's oil sands with the U.S. Gulf Coast could be delayed by up to 18 months. But the remark prompted a flurry of calls from the pipeline's future customers against a slowdown, Chief Executive Hal Kvisle said.

"The reaction from our major shippers was immediate ... these [oil sands] volumes have to get to the Gulf Coast," Kvisle said on a conference call. "It was a very clear message."

The high-cost oil sands industry has taken a major hit as oil prices plunged more than 70% off July's record highs near $150 a barrel and credit became scarce. Producers have delayed or shelved multibillion-dollar developments in Alberta, whose oil sands are the biggest crude reserve outside Saudi Arabia.

But most of the oil sands volumes committed to Keystone will come from projects already underway today, Kvisle said, and this new production will need a new market other than the saturated U.S. Midwest. Nearly half of total U.S. refining capacity is located on the Gulf Coast, and many facilities are already equipped to handle the thick oil sands bitumen.

Keystone's first phase, which will cost $5.2 billion and is currently under construction, will carry 590,000 barrels a day from Hardisty, Alberta, to southern Illinois and Oklahoma by late 2009 or early 2010. The second stage, which will cost $7 billion, will shift an additional 500,000 barrels a day to Houston and Port Arthur, Texas.

TransCanada owns just under 80% of the line while ConocoPhillips (COP) - until recently an equal partner - holds the remainder. Major shippers such as Valero Energy Inc. (VLO) have the option to take a combined 15% stake in Keystone, which will come out of TransCanada's interest. These customers will decide whether to exercise this option by the end of the first quarter, said Russ Girling, who heads TransCanada's pipelines unit.

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