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TransCanada President and CEO Russ Girling, right, discusses Energy East Pipeline in Calgary last year.TODD KOROL/Reuters

TransCanada Corp. faces a rough ride in Central Canada over its proposed $11-billion Energy East pipeline as industrial users and natural-gas distribution companies warn they'll be short-changed by the company's plan to switch the pipeline to oil from gas.

Both Quebec and Ontario governments plan to intervene in the National Energy Board review, which will kick off when TransCanada files for regulatory approval later this month. Both provincial governments are being urged to defend their natural gas customers who say their interests are being sacrificed to western oil producers.

Quebec's regulatory body, Régie de l'énergie, held hearings last week on the Energy East plan, and will provide advice to the Liberal government on whether the project benefits the province.

In the hearing, India-based IFFCO Canada Enterprises Ltd. warned it will cancel plans to build a $1.6-billion fertilizer plant in the province if it can't secure a reasonably priced source of gas in light of TransCanada's plan to transform its west-to-east mainline to carry crude.

The province's biggest gas distributor, Gaz Métro, plans to condemn the project as it is currently structured when it comes before the federal regulator for hearings. A representative of industrial gas users said the loss of pipeline capacity could undermine the competitiveness of central Canada's energy-intensive industries.

Calgary-based TransCanada proposes to convert a portion of its underutilized west-to-east mainline from gas to oil service to the Ontario-Quebec border and build new pipeline to Saint John, N.B. The Energy East project would deliver 1.1-million barrels per day of western crude to refineries and export terminals in Quebec and New Brunswick.

Alberta crude producers have enthusiastically supported the project, as they seek access to new markets but face major hurdles in British Columbia and the United States.

TransCanada told the Quebec regulator that it is guaranteeing gas service to all customers who sign up for long-term contracts, that it will build new links between southwestern Ontario and Quebec, and that the cost of service will be lower because the company's mainline will be more fully utilized.

The National Energy Board – and ultimately federal cabinet – has the authority to approve Energy East. But as witnessed in British Columbia, strong opposition from provincial and local governments can erect significant hurdles for crude pipeline projects.

"We are seeing from the utilities a major stepping up of visible, political opposition against the pipeline project," Shahrzad Rahbar, president of the Industrial Gas Users Association, said in an interview.

"Frankly, I shake my head: I would have thought TransCanada and the oil shippers would have wanted to avoid having large industry and utilities say anything but 'hooray, hooray, hooray for the project."

Ontario's Union Gas Ltd. and Enbridge Gas Distribution confirmed last week they continue to oppose the Energy East plan, as did Quebec's Gaz Métro.

At the centre of the dispute is a portion of the pipeline known as the Ontario triangle, which carries gas from North Bay to Ottawa and is a critical link for customers in eastern Ontario and Quebec. While the mainline is underutilized west of North Bay, the Ontario triangle also carries gas from the United States and frequently runs at capacity.

The consultancy Wood Mackenzie told the Regie last week that TransCanada's plan would create a 20-per-cent shortfall in gas pipeline capacity in eastern Ontario and Quebec markets.

The industry has to revamp its pipeline network as booming U.S. production has created underutilized facilities in some regions and bottlenecks in others. "The manner in which we're dealing with it is threatening to kill markets," Ms. Rahbar said.

For its part, IFFCO Canada was forced to scramble after it became clear that TransCanada would reduce capacity on the Ontario triangle. The company has signed up for service on the proposed eastern Ontario line, but TransCanada has yet to win approval from the National Energy Board for that project..

IFFCO – part of a sprawling farmers' co-operative from India – plans to build a nitrogen fertilizer plant in Becancour, a year-round-water port on the St. Lawrence. IFFCO vice-president David Tournier said the company has spent two years trying to sort out its gas supply, while competitors in the U.S. are proceeding with projects.

"As long as you don't have your gas supply confirmed, then investors aren't going to lend you any money," he said. "So that's the danger to our project."

Editor's note: An earlier version of this story said TransCanada plans to switch the Energy East pipeline to gas from oil. In fact, it will switch to oil from gas.

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