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Even in the midst of a potentially life-threatening challenge, TransCanada Corp.'s Mainline carries more natural gas than any other pipeline system in North America. Quiet and unseen, it is Canada's underground energy superhighway, a network of pipes crossing from Prairies to Canadian Shield to urban centres that for more than half a century has carried Alberta's gas to the eastern stretches of the continent.

The Mainline fuels assembly lines, power plants and home furnaces from the Alberta-Saskatchewan boundary to Montreal and beyond. It has long been so important to Canada that it is routinely compared to the Canadian Pacific railway, both ribbons of steel that have sewn this country together.

Trouble on the Mainline, then, means trouble for the country – and there is indeed trouble on the Mainline. It isn't moving enough gas. In the past five years, contracted volumes for its cross-Canada service have fallen 70 per cent. Its once-full pipes now run, on average, half empty, and as a result, it is nearly 2½ times more expensive to ship a molecule of gas from one end to the other as it was five years ago.

Eager to slash those costs, some who ship gas through the Mainline are seeking ways to force TransCanada to mothball parts of the system, urging a move that would force the company to erase billions in asset value.

The unrest comes amid a series of profound changes in how energy moves across North America. The Mainline is a 14,101-kilometre system built to connect the gas-rich west with the gas-poor east. Now, however, companies are discovering huge new quantities of shale gas in places like Pennsylvania, New York and even Quebec. And it's no longer a given that those in the west want their gas to flow east, as companies explore numerous ways to export product to Asia.

In regulatory documents, TransCanada acknowledges that it is "acutely aware of the competitive situation of the Mainline," although its chief executive officer argues that there's little reason for worry. "Our system has been in place for almost 60 years," Russ Girling said in an interview. "It will be in place for another 60 years."

But increasingly, those looking at shifts in the continent's energy geography see a threat to the very foundation of his biggest asset. If the east has its own gas, and the west wants to send its gas across the Pacific, what's left for the Mainline?

"I don't know how they keep it alive," said Ian Mondrow, a Gowling Lafleur Henderson LLP lawyer who has represented Ontario electrical generators against TransCanada in an ongoing battle over pipe tolls.

"If there's a lot of gas in the east which is cheap and easy to move around, then no one's going to ship gas from Western Canada," he added. "That would basically end the relevance, to a large extent, of that Mainline pipe."

The Mainline is a major pillar for TransCanada, providing a fifth of the company's pretax earnings. But the viability of the Mainline is not merely a corporate concern. It poses a set of vexing but critical questions for Canada's energy policy. Significant parts of the country have no other source of natural gas. And the health of the Mainline plays an important role in Canada's economic well-being. Problems with the pipe have already raised the cost of gas in the east, and those costs stand to threaten Canada's industrial competitiveness.

Further, any move to have Eastern Canada rely more heavily on U.S. gas also threatens to erode Canada's energy independence. For these reasons, even critics of the Mainline are rooting for it.

"I don't see any advantage to be gained in the market by TransCanada failing," said Murray Newton, president of the Industrial Gas Users Association, whose members represent about one-third of Ontario and Quebec's industrial gas consumption.

"Matter of fact, I think that would be catastrophic for everyone. It would be catastrophic for Western Canadian producers, for gas marketers, for the Canadian market and the U.S. northeastern market. All of TransCanada's stakeholders have an interest in TransCanada's Mainline becoming more competitive and more healthy."

Yet he believes the Mainline is faced with "long-term issues, fundamental issues that need to be fixed as soon as possible."

Even those who played a major role in shaping the Mainline admit the path forward looks rough. Gerry Maier led TransCanada, first as president, then as CEO, then as chairman, from 1985 to 1999. He is not optimistic about the pipeline staging a strong recovery. The Mainline will, he says, remain – without it, eastern homes from Saskatoon to Boston would go cold and new natural gas power plants might not have enough fuel. But he warns that the coming years for the Mainline will be tough ones.

"I don't think it's going to be a picnic," he said.

The 'great pipeline debate'

On the afternoon of June 6, 1956, Dr. John Lorne MacDougall, a Liberal MP from Vancouver, dropped dead in a fifth-floor washroom in the House of Commons. His death came as a shock, not least for the fact that the heart attack appeared to be prompted, at least in part, by a pipeline. Mr. MacDougall had been up past 3 a.m. that day, as debate raged over whether Ottawa should build the $118-million Northern Ontario leg of a country-spanning natural gas connection, and provide financial assistance to Trans-Canada Pipe Lines Ltd. for the remainder.

It had been a vicious political fight. Three other MPs were hospitalized as it proceeded, their ailments also blamed on the stressful intensity of the debate. The day after Mr. MacDougall died, the Louis St. Laurent government succeeded in passing the legislation that would enable the pipeline's construction.

Winning the "great pipeline debate," as it would come to be called, came with a price: The next year, voters booted his government from office. But for years, the Mainline worked, its energy nourishing a flourishing western petroleum industry and fuelling an eastern industrial establishment.

"We'd have two or three years where we were going flat out and expanding as quickly as we could. Then suddenly you'd hit two or three years where there would be no expansion," recalls Bob Reid, TransCanada's former president of energy transmission, a role that had him overseeing the Mainline. The last period of major growth was in the 1990s, a decade that saw a 65 per cent increase in the Mainline's capacity. Mr. Reid remembers a three-year rush when the pipe was expanded so quickly that TransCanada "used every contractor that was available and all the pipe capacity that was available."

But even then, there was worry. While the Mainline was growing, a competing natural gas pipeline, called Alliance, was also moving forward. It offered a direct connection to the Chicago area, and it was embraced by gas producers, who committed to fill it. Every molecule of gas flowing into Alliance was a molecule lost from the Mainline. The frenzied construction period had resulted in too much pipe, a possibility Mr. Reid had warned about.

"I testified before the NEB, saying that I was concerned about building all this capacity," he recalls. He was told his concern was overstated. "I said something like, 'Don't be too sure about that. The sky will fall some day here. Because there's just too much capacity now.' "

He was right. In 2000, the year Alliance entered service, Alberta's gas output peaked. It has since fallen more than 20 per cent, leaving even more empty pipe.

In other words, vacant space on the Mainline is not new. But the advances in natural gas production sometimes referred to as "the shale gas revolution" have the potential to exacerbate it.

Today's Mainline can carry 6.5 billion cubic feet (bcf) a day across the country. (That is enough to heat more than 26 million average homes.) Yet in northeastern B.C., at least four groups are working to bring gas to the coast to liquefy it and export it to Asia . Their plans are largely preliminary, but as much as four bcf in exports is being contemplated. Another partnership is looking into converting natural gas to diesel fuel in Alberta or B.C.; that could take a further 0.5 to one bcf. Growth in the oil sands will also suck up increasing amounts in future years.

At the same time, the sudden rise of shale gas from plays like Pennsylvania's Marcellus is driving major changes in the east. For decades, Alberta gas has been transported through Ontario to the U.S., where it is a major energy source for places like Boston and New York. But in May, U.S. regulators approved a project that will allow gas from the Marcellus to flow into Ontario for the first time. Two other proposals are working toward a similar goal.

They aren't distant prospects: By 2012, their backers hope they have opened a billion cubic feet of capacity from the U.S. into Ontario.

What, then, will be left for the Mainline?

The Mainline advantage

Being the owner of a federally-regulated piece of infrastructure comes with some downsides. One of them is the need to devote a lot of energy to doing constant battle over how best to run your business. Mr. Girling, the TransCanada CEO, is intimately familiar with the system. For more than a decade, he has been one of the company's prime figures in negotiating and defending pipeline tolls, or rates. That has meant a lot of time spent testifying before the National Energy Board. Once, he went 11 days straight.

"If you look at any regulated utility, it has these issues associated with it," he says. "They come in and say, I don't like this about your rates."

But, Mr. Girling says, "at the end of the day, the cheapest way of getting their gas day-to-day is on this system."

This is the central tenet of TransCanada's argument for the future of the Mainline. It's one borne out of simple economics. A substantial portion of pipeline transportation costs come from the need to recoup the cost of building it. The undepreciated value of the entire Mainline system is about $6-billion, roughly half of its total construction cost. That works out to just under $700,000 a mile. A new pipeline costs roughly $4-million a mile to build; "we've been up to $10-million a mile in congested residential areas – if you can even get it permitted," Mr. Girling says.

In other words, TransCanada believes new contenders will have trouble competing with its legacy assets. An example: This past winter, some gas from the U.S. Midwest flowed to Southern Ontario by way of Manitoba, taking a several-thousand-kilometre detour around the Great Lakes. Why? "Because new capacity [for a more direct connection] doesn't exist yet, and trying to build new capacity is tough," Mr. Girling said. On some parts of TransCanada's pipe, even if the company were to double its tolls, "it's still cheaper than a new-build pipeline. Way cheaper," Mr. Girling said.

Mr. Girling also believes shale gas will actually help the Mainline. North-eastern B.C., he says, has the potential to produce triple the gas volumes being contemplated for LNG export. "That's where we come in," he says.

The company has already secured 2.3 billion cubic feet in new contracts between now and 2015 from B.C.'s two major plays. It has a further 2.3 billion cubic feet in requests for service – a less firm commitment – between now and 2020. As a result, TransCanada believes the Mainline will begin to stage a turnaround in 2013 or 2014. It's possible it's already happening. Volumes so far in 2011 have exceeded those in 2010, although analysts say much of that is related to the cold winter.

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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