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Energy East saga casts doubt on Canada's ability to build new pipelines

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Energy East saga casts doubt on Canada's ability to build new pipelines

TransCanada Corp.'s decision to walk away from the approximately C$1.3 billion carrying value of the Energy East pipeline and its companion system, the Eastern Mainline project, has cast a pall over the nation's energy regulation, industry groups said.

TransCanada on Oct. 5 ended the regulatory battle to build the estimated C$15.7 billion conduit linking Alberta's oil sands region with a marine terminal in New Brunswick. In the three years since TransCanada made its application to the National Energy Board, the company has had to refile a simplified application, has started hearings that were interrupted by protests, and was then told the entire process would have to be started again.

Ultimately, it was the NEB's broadening of its regulatory scope to consider emissions by upstream producers and end users of the pipeline's shipments that prompted the company to walk away from the project.

"This is evidence of how a lack of clarity and an unclear decision-making process regarding pipeline projects in Canada are challenging the energy sector's ability to be competitive in the world market," the Canadian Energy Pipeline Association, which represents the nation's biggest pipeline companies, said in a statement.

Uncertainty over Canada's regulatory processes has grown since the election of Prime Minister Justin Trudeau's Liberal government in 2015, which has introduced additional environmental and aboriginal scrutiny to already-approved projects and proposed major changes to the NEB. The federal government's focus on emissions and planned imposition of a nationwide carbon tax were part of the reason the NEB changed its scope on Energy East.

The continual changes to the regulatory landscape are sending the wrong signals to energy investors, including those pursuing LNG projects, the group representing Canada's biggest oil companies said.

"Canada has in the past had the reputation where the rule of law was clear and well-practiced, where the regulatory system was clear and transparent and well-understood," Tim McMillan, CEO of the Canadian Association of Petroleum Producers, or CAPP, said in an Oct. 5 interview. "With this announcement this morning, as well as the announcement of Pacific NorthWest LNG a couple of months ago, of Aurora LNG more recently, there is getting to be a reputation where Canada is a place where the regulatory system is not as clearly defined or understood as maybe people had hoped."

Energy East would have carried 1.1 million barrels per day of oil sands and light crude from a hub at Hardisty, Alberta, to refineries in Quebec and a marine terminal in New Brunswick. The network would have converted an existing tube of TransCanada's mainline natural gas system to crude use, with the Eastern Mainline project providing gas to displaced consumers in Ontario and Quebec from a hub at Dawn, Ontario. Refineries in central Canada and on its East Coast now run a slate of mostly imported crudes.

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Canada's landlocked oil resources have few export options beyond pipelines to the U.S., and improving access to other markets is a priority for CAPP.

"This project had pipe in the ground for most of the way, it was connecting Canadians who today are reliant on Saudi Arabia, Nigeria and Venezuela for getting their crude oil — 70% of Quebec and Eastern Canada — we could connect them with products, as well as a deepwater port to the fastest growing crude market in the world, being India," McMillan said. "All around, this project checked all those boxes."

With its nearly C$16 billion in planned spending and thousands of proposed jobs, the Canadian Energy Pipeline Association called the cancellation an "extreme disappointment."

"The loss of this major project means the loss of thousands of jobs and billions of dollars for Canada, and will significantly impact our country's ability to access markets for our oil and gas," the pipeline group said.

Canadian companies look outside country for growth

TransCanada and Enbridge Inc., Canada's largest pipeline companies, have invested outside the country, as attempts to build new lines have been stymied by regulators.

In 2016, TransCanada acquired Columbia Pipeline Group Inc., and Enbridge bought Spectra Energy Corp earlier this year to expand their footprint in the U.S. The outflow of capital from Canada to more investment-friendly regions is not surprising, said Kenneth Green, senior director of the Center for Natural Resources Studies at the Fraser Institute.

"There have been lots of investment capital outflows to the United States and elsewhere," Green said in an interview. "They're building pipelines in the United States all the time and elsewhere in the world, they're building pipelines to reach the market. While oil prices are undoubtedly a problem, had the project been approved in a timely manner when it was first proposed, it would probably already be halfway built."

The drama surrounding Energy East is unlikely to bolster investor confidence in Canada, he said.

"It's a huge blow to the belief that Canada can get any kind of national infrastructure done," Green said. "Moving oil from oversupplied Western Canada to central Canada and eastern Canada strikes me as being a no-brainer."

Alberta frustrated by federal decisions

The oil sands are an important source of revenue for Alberta's government, which has been hit hard by a prolonged downturn in commodities prices. The deposits of tar-like bitumen locked in sand in northeastern Alberta are one of the biggest oil deposits in the world and the province, which owns the oil, receives royalties for each barrel produced.

"This is an unfortunate outcome for Canadians," Alberta Premier Rachel Notley said in an emailed statement. "The National Energy Board needs to send a clear message on what the future of project reviews look like in Canada. Our government understands that deliberation on upstream emissions and land-use integrity is important and must continue. Investors need confidence and we look forward to seeing that certainty in place soon."

With the removal of Energy East's 1.1 million barrels per day of capacity from Canada's pipeline slate and the denial of a permit for Enbridge's Northern Gateway project from Alberta to British Columbia's north coast, three large projects remain of five that were planned to increase the takeaway capacity of increasing oil sands output. Keystone XL would move oil from the Hardisty hub in northeastern Alberta to Steele City, Neb., for distribution to the U.S. Gulf Coast. Enbridge's Line 3 expansion, which is already under construction in Canada, would replace aging pipe with larger-diameter conduit to increase oil flows from Hardisty to the company's hub in Superior, Wis. Kinder Morgan Inc.'s Trans Mountain expansion would add 590,000 bbl/d between Edmonton, Alberta and a terminal on Canada's West Coast.

While the Trans Mountain project has been approved by the NEB and construction has started at the marine terminal, construction of the line is the subject of a court challenge and opposition from aboriginal groups, environmentalists and local governments. "Expect the opponents of the Trans Mountain Expansion to triple down" on efforts to stop the line in the wake of Energy East's cancellation, the Fraser Institute's Green said.

CAPP's McMillan agreed that Canada's regulatory woes could spill over into future energy investment.

"There is a moving-goalpost effect once people enter into the process, and that is very problematic for attracting investments into a country," McMillan said. "What we lost out on today and in those last few projects are decadeslong opportunities for our citizens."