Skip to main content

TransCanada CEO Russ Girling (second from left) announces the new Energy East pipeline.TODD KOROL/Reuters

Quebec's energy regulator is voicing support for TransCanada Corp.'s $12-billion Energy East pipeline project but warns that the company must ensure natural gas customers don't pay for its switch to an oil conduit.

Energy East is desirable in that it will convert 3,000 kilometres of its existing and underused Canadian Mainline natural gas pipeline to another purpose, namely to transport western crude, the Régie de l'Énergie said in a report on Quebec's natural gas situation made public Wednesday. "We believe such a conversion could help limit the increase in transport fees for natural gas."

Nevertheless, the regulator also cautioned that a challenge to the project from natural gas distributors remains outstanding and that they shouldn't be left paying the bill for the pipeline's vocational change.

"The Energy East project was designed to serve oil shippers above all," the Régie said in its report conclusions. "The gas element of this project introduces costs and risks that natural gas shippers don't currently bear. The Régie believes [these shippers] shouldn't be the only ones to assume them. As such, TransCanada should review the project so as to ensure that gas shippers won't cross-subsidize the oil portion of the project and won't have to assume a bigger risk than currently exists."

TransCanada welcomed the report, saying it affirmed its belief that converting underused gas pipeline capacity to oil makes sense.

Amid a changing energy landscape in North America, Quebec's Minister of Energy and Natural Resources in July called on the regulator to prepare a report on its natural gas situation. At the time, Pierre Arcand expressed concern that the province's gas users would have enough supply and noted that the Energy East project could alter Quebec's historic dependence on gas from Western Canada.

The report concludes that over the next 15 years, demand for natural gas in Quebec will climb 2 per cent annually as it reaches 300 petajoules by 2030. The regulator said the demand increase and related transport needs are not problematic in and of themselves.

Quebec has no viable source of home-grown natural gas supply, the regulator concludes, largely because the public continues to oppose the development of the province's shale gas deposits. That means that over the next 15 years at least, the province will continue to depend on gas sourced out of province and pumped in over TransCanada's pipeline system.

Without Energy East and assuming the status quo is maintained, natural gas supply to Quebec customers would continue but transport fees would eventually go up as volumes diminish over all on TransCanada's eastern network, the regulator said. A shift by U.S. shippers to other transport options plays into that scenario, it said.

"From the point of view of supply, Energy East is desirable. That's what the regulator says," Mr. Arcand said in an interview. "Now, the project has several other components that still have to be considered" including economic benefits and environmental questions.

One key fight that's erupted concerns pipeline capacity, specifically over a 420-kilometre section from North Bay to Cornwall, Ont.

TransCanada plans to convert the line to carry oil and build a new, smaller pipeline to serve natural gas clients. Natural gas distributors, including Ontario's Union Gas Ltd. and Quebec's Gaz Métro, say all of the capacity on that section is currently needed. They worry that the plan to switch capacity to oil service will leave them and their customers vulnerable to supply shortages and higher costs.

A unit of steel giant ArcelorMittal recently joined the local distributors in asking the National Energy Board to force TransCanada to reassess gas demand in Ontario and Quebec before it begins hearings on the pipeline. TransCanada said Wednesday that it has already started that process, adding that the market will have another opportunity to specify its needs for gas transmission capacity.

"It is important to note that, currently, even in the coldest winter months, much of the gas which is being transported eastward on the Canadian Mainline is for export, and not for use in Quebec or elsewhere in Canada," the company said in a statement.

But ArcelorMittal, which uses large quantities of gas to process iron ore pellets at a plant about 60 kilometres southeast of Montreal, remains worried about costs associated with the plan. "Our concern is about potential cost increases for natural gas users and the impact of this project if there are no alternative solutions available," spokesman Louis-Phlippe Péloquin said.