Energy giants' battle is key to B.C.'s economic future

This is not business as usual in northeast B.C.

The feud between B.C.'s energy giants is heating up in the north amid a slew of liquefied natural gas (LNG) projects and pipelines.

The National Energy Board's (NEB) decision to reject TransCanada's (TSX:TRP) bid to build 100 kilometres of gas pipeline north of Fort Nelson went largely unnoticed when it was announced January 30, despite it being the best example yet of how cutthroat the pipeline business has become in this province.

The fact that the decision went largely ignored shouldn't come as a surprise – the mainstream news media in B.C. have done an excellent job of regurgitating LNG announcements without taking the time to come up north and ask actual questions.

So what's the big deal about a tract of proposed pipeline north of Fort Nelson?

To hear Spectra Energy (NYSE: SE) tell it, that 100-kilometre extension of the Horn River Mainline, which was part of a $333 million project, would have completely destroyed the competitive environment among companies that transport gas out of the Horn River Basin. To put it in perspective, the Horn River, with more than a hundred trillion cubic feet of marketable gas in the ground, has been called the "crown jewel" of Canada's unconventional natural gas industry.

TransCanada's proposal would have seen a new pipeline ferry gas from the basin and compete with the likes of Spectra and others.

The problem that Spectra had, and the NEB ultimately agreed with, was that TransCanada proposed a pricing model for the pipeline that would have rolled the tolls it charges to use the pipeline into its overall system. It's a long-standing TransCanada practice, whereby shippers on the system share the costs and benefits of extensions and expansions.

In other words, gas producers in the Horn River would've been able to ship gas out of the basin without paying an incremental toll.

Spectra, in its final argument before the NEB, vehemently opposed the pipeline extension, pointing out that the only way it could compete with TransCanada if the extension were built would be to offer "raw gas transmission service for free."

"This is not business as usual in northeast B.C.," argued Don Davies, legal counsel for Spectra, at the NEB hearing. "There exists a competitive environment for building new pipelines up to the production fields in the Horn River Basin … [TransCanada] seeks to entirely ignore the existing pipeline competitive environment."

Shawn Denstedt, acting on behalf of TransCanada, argued that the extension would give producers access to new markets and spur further development of reserves.

"These parties seek to keep supply in northeast B.C. captive to their markets, thereby reducing competition and dampening the price for producers and the benefits to the province and country," Denstedt argued.

He pointed out that the Canadian Association of Petroleum Producers supported TransCanada's rolled-in toll treatment and that the opposition to the project was an attempt by Spectra to protect its field services business.

On January 30, the NEB rejected the Fort Nelson extension, noting that the "toll treatment" for the project was "inappropriate."

The NEB went as far as to say it wasn't convinced the project was even economically feasible. It labelled the project "premature" and added that it would have negative commercial impacts for competitors.

But the exercise wasn't a total loss for TransCanada. The company received approval for a 33-kilometre pipeline loop in northwest Alberta.

More importantly, the NEB hearing documents reveal the intensified level of competition heating up between B.C.'s energy giants as they clamour for control of the province's lucrative natural gas industry.

TransCanada has spent approximately $700 million expanding its Nova grid in B.C. since early last year.

The grid, which has been operating since 1957, includes 24,000 kilometres of pipeline spread across B.C. and Alberta.

The company has also partnered with Progress Energy on a $5 billion pipeline project to ship gas to a proposed LNG terminal in Port Edward and has partnered with Royal Dutch Shell on a second $4 billion pipeline that would carry gas to a proposed terminal in Kitimat.

Meantime, Spectra has partnered with BG Group to build another natural gas pipeline to the north coast, this one estimated to cost up to $8 billion.

Last week, Business in Vancouver reported that AltaGas and a Japanese partner have teamed up for yet another proposed LNG terminal – now the seventh such terminal being publicly discussed for the north coast.

Although the energy giants behind these projects aren't based in northern B.C., most are opening regional offices in Prince George, Prince Rupert and elsewhere to improve their level of engagement with communities and First Nations.

The recent NEB spat is just one part of a much larger tapestry unfolding in the north that could forever change B.C.'s economy.

Both TransCanada and Spectra have a long history of investment and job creation in central and northern B.C.

Although many other questions about this burgeoning industry remain unanswered, the multibillion-dollar investments these companies have proposed promise long-term job creation and community growth.

The development of B.C.'s natural gas industry is quite possibly the most important business story in B.C. right now, and those with even a remote interest in this province's economic future best stay tuned.

(Full disclosure: Northern Development's chairman, Evan Saugstad, is a Spectra Energy employee.) •

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