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A pipeline in peril Add to ...

Either way, TransCanada believes that even with the advent of shale gas, North America needs so much gas in coming years that Alberta will continue to be an important supply source.

The company has other ideas, too, for drawing more gas onto its system. The company believes it may be cheaper to ship gas from B.C. to Quebec than to the Pacific Coast – meaning the Mainline could potentially feed Atlantic-bound LNG export terminals on the St. Lawrence River. It may even be possible to carry B.C. gas on TransCanada pipes to the Columbia River Gorge, in Oregon, where several LNG terminals have already been permitted.

A ‘death spiral’

The problem with the future is that it takes time to get there. Even if TransCanada is right and gas comes flooding back into its pipes, it likely won’t be for several years. Between now and then, it must find a way to figure out how to keep the pipe economic.

The short-term future for the line is a drama now playing out before the National Energy Board, where TransCanada and some 400 users are battling to set tolls for coming years. It’s a high-stakes battle.

Already, lower gas volumes are causing major toll spikes. The Mainline is entitled to certain revenues every year. If less gas goes through, the cost of each gigajoule rises – the reverse of economies of scale. And as tolls go up, volume tends to decline even more, as some shippers are priced out. That has prompted warnings about a “death spiral.” The end-to-end Mainline toll has soared from 94 cents a gigajoule in 2006 to $2.24 this year.

TransCanada has devised a potential solution: It wants to shift the pain. The Mainline is just one part of the company’s 57,000-kilometre gas system. In the west, it is fed by a pipe network that moves gas across Alberta. In the east, delivery pipes bring product to users.

The feeder and delivery pipes have been more robust than the Mainline. So TransCanada has sought to raise tolls on those segments, while lowering them on the Mainline. Using this strategy, the company believes it can lower Mainline tolls 25 per cent below 2009 levels.

The idea is controversial. Some power producers in Ontario say the delivery toll hike threatens to put them out of business.

Some of the Mainline’s clients, gas shippers, believe there’s a simpler solution, but it’s not an easy one. They doubt the Mainline will ever run full again, – gas flow forecasts are extremely difficult, but consulting firm ICF International forecasts just a 4 per cent recovery between now and 2035, for example – and they think drastic action is called for. Sources told The Globe and Mail that some major gas buyers in Ontario are sketching plans to ask the National Energy Board to force TransCanada to write down part of the value of the Mainline. They suggest $1-billion to $2-billion in unneeded infrastructure could be shut down – things like compressor stations and perhaps even some of the lines that make up the Mainline network – to allow for a reduction in tolls.

TransCanada, for its part, categorically rejects any suggestion that it write down the Mainline, and analysts say a forced writedown would be a dramatically unusual step. What’s more, they say, the TransCanada cost-shifting could actually attract new gas onto the Mainline.

But unless TransCanada and its shippers can somehow come to agreement – a prospect that appears increasingly dim – it will fall to the NEB to decide how to set Mainline tolls. The decision is not just about money, or how to reconcile the interests of Alberta’s gas companies with Ontario’s electrical utilities. It’s about attempting to find a way to preserve that underground energy superhighway.

“It’s a very thorny issue,” said Carl Kirst, an analyst with BMO Nesbitt Burns who covers TransCanada.

“We continue to firmly believe that there’s very much life in this asset. It’s still a critical asset. But all of that will hinge on the NEB’s decision.”

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