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TransCanada Halts Energy East Natural Gas-to-Oil Mainline Conversion

After falling years behind the original project schedule, TransCanada Corp. called a halt Thursday to spending on the proposed Energy East partial conversion to oil of its natural gas Mainline.

The Calgary pipeline conglomerate announced formal cancellation, effective Aug. 23, of its internal allowance for funds used during construction for the planned oil conversion and associated replacement gas facilities in Ontario.

The action prevents taking a financial beating if Energy East is abandoned, said the company. “Should TransCanada decide not to proceed...the carrying value of its investment in the projects as well as its ability to recover development costs incurred to date would be negatively impacted.”

Planning and regulatory expenditures to date on Energy East were not disclosed but are understood to run into tens of millions of dollars. Including construction, costs of the proposed cross-country conduit for 1.1 million b/d are currently forecast at C$15.7 billion ($12.6 billion).

The retroactive effective date of the spending halt was the same day the National Energy Board (NEB) handed down unprecedented environmental additions to the issues that would be considered by resumed regulatory hearings on the proposal. TransCanada called the ruling “significant changes to the regulatory process.”

The expanded issues list includes greenhouse gas exhaust by both upstream production and downstream use of shipments on Energy East. Producer and pipeline trade associations and the Alberta government opposed the additions. The expanded agenda was demanded by industry critics and encouraged by a report from a federal cabinet-appointed review of NEB proceedings.

Previous Canadian regulatory reviews only covered emissions by construction and operation of projects, on grounds that production and consumption are indirect side effects far beyond control by pipelines and the NEB.

In the Energy East case, the shippers would be Alberta thermal oilsands plants under provincial jurisdiction. Consumption would be on overseas markets reached via a proposed Atlantic tanker terminal in New Brunswick at the Bay of Fundy port city of Saint John.

The Energy East proposal has called for converting, to 1.1 million b/d of oil service, 3,000 kilometers (1,800 miles) of surplus gas pipe in TransCanada's 58-year-old Mainline right-of-way spanning Alberta, Saskatchewan, Manitoba and Ontario, plus a 1,500-kilometer (900-mile) extension across Quebec and New Brunswick to an Atlantic tanker export terminal.

TransCanada kept a door open for a month to resumption of spending on Energy East. The company requested a 30-day suspension of NEB proceedings on the project, to enable a review of the project and the regulatory agenda.

“The suspension will allow time to conduct a careful review of recent changes announced by the NEB regarding the list of issues and environmental assessment factors of the projects while understanding how these changes impact the projects' costs, schedules and viability,” said TransCanada.

The original Energy East construction application to the NEB, filed in October 2014, set a project in-service target of March 2017. But the plan bogged down in prolonged disputes with Ontario and Quebec gas distributors, and environmental and aboriginal protesters across Canada. Hearings have been suspended since last September, when the first NEB review panel resigned over accusations of bias arising from private meetings with project supporters.

Market conditions that inspired Energy East changed during the prolonged regulatory ordeal. Gutted oil prices slowed Alberta production growth. Kinder Morgan Canada, Enbridge Inc. and TransCanada obtained approvals for expanded and new pipeline capacity to the Pacific coast of British Columbia, the middle-western United States, and potentially the Texas and Louisiana refinery rows on the Gulf of Mexico.

"Apart from Energy East, we will continue to advance our C$24 billion ($19 billion) near-term capital program in addition to our longer-term opportunities,” said TransCanada President Russ Girling. He assured stockholders that the expansion portfolio would support annual dividend raises of 8-10% through 2020.

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