Costs are rising but the leading entry in the race to place new liquefied natural gas (LNG) terminals just inside Canada along the St. Lawrence Seaway is poised to enter construction, thanks to favorable regulatory and supply developments.

"Right now it's a green light," Cacouna Energy spokesman Andrew Pelletier said. "We're working toward a project announcement," he added in an interview from the Montreal headquarters of the joint venture by TransCanada Corp. and Petro-Canada.

Forecast costs of the Gros Cacouna terminal, proposed to import an initial 500 MMcf/d of gas in the form of LNG, have climbed about two-thirds into the C$1 billion (US$940 million) range from early predictions of C$660 million (US$620 million), Pelletier said. But an engineering and economics review currently under way by the sponsors is "a normal process" for big projects and does not telegraph intentions to defer construction, he said.

"We're finding that every element of the project is starting to get positive at the same time," he said. The announcement, planned before the end of this year, will lay out a final cost estimate and a schedule likely to call for a start on construction in 2008 for deliveries commencing in 2011 or early 2012.

Petro-Canada is becoming increasingly optimistic that it will be able to fulfill its designated role in Cacouna as responsible for procuring LNG supplies overseas. The company has qualified as the lone Canadian entry on a final short list of four contenders being considered for a development partnership by Russian gas giant Gazprom, Pelletier pointed out. Negotiations are continuing with potential LNG sources in the Mediterranean region, the Middle East, Africa and Australia.

Petro-Canada is also participating in new drilling offshore of Trinidad & Tobago, where the Canadian company is a supplier to the Atlantic LNG project and has also been marketing tanker cargoes to the U.S. as a part-owner of Port Fortin LNG Export Ltd.

TransCanada contributed a major regulatory victory this summer before the National Energy Board (NEB). The scale of the win was underlined by a hard-fought duel with the Alberta Department of Energy. The NEB described its decision as "a signal to the global market" that Canada is open to LNG. The ruling determined who will pay for a cornerstone of the Cacouna project -- "and potentially more like it" -- over the next 20 years.

The contested item is a C$738 million (US$694 million) set of additions to the Trans Quebec & Maritimes (TQM) branch of TransCanada's pipeline network. A 240-kilometer (150-mile) extension, a compressor and technical changes to TQM are needed for markets to use the new tanker terminal at Gros Cacouna, on the south shore of the St. Lawrence River east of Quebec City.

Over vigorous resistance by Alberta government lawyer Brent Prenovost, the NEB sided with the Cacouna partners and their supporters including the Quebec government, Canadian Industrial Gas Users Association and Montreal distributor Gaz Metropolitain Inc. The board ruled that the remote terminal is a "receipt point" for gas to enter TransCanada's pipeline, akin to conventional Alberta and Saskatchewan inlets along the main shipping route for their gas to central Canada and the United States.

That status qualifies the Cacouna pipeline extension for a utility cost-sharing system known in Canada as the "rolled-in toll methodology." The bill for the LNG import addition will become, in effect, an added mortgage to be paid off with tolls charged to all shippers, including Alberta gas producers and merchants. TransCanada estimated the extra bill will be as little as two-tenths of a penny and no more than three cents per gigajoule by the time it is spread over years and all the traffic on the national pipeline system.

But Alberta Energy calculated the scheme creates a considerable subsidy for LNG imports by saving the terminal the expense of paying for its own pipeline link to Quebec, Ontario and U.S. markets as a separate line with "incremental" tolls. In a strongly worded final argument before the NEB, Prenevost predicted the rolled-in system will give LNG imports a competitive advantage of C$1.10 per gigajoule (US$1.08 per MMBtu) against Alberta gas in Quebec.

He acknowledged the Alberta government stood alone in resisting the scheme but suggested it was no accident the Canadian gas production industry stayed conspicuously silent during the regulatory duel.

"Alberta receives a major portion of its revenues from natural gas royalties and a major portion of those revenues are realized from sales in eastern Canadian and northeastern U.S. markets," Prenevost said. "LNG will be competing in those markets. Unlike many producers, who have diversified world interests or perhaps aspire to achieve those interests, Alberta relies primarily on the Western Canada Sedimentary Basin," he told the NEB.

Petro-Canada said LNG import projects are spawned by projected declines in aging western gas supplies. The trend opens up new business vistas with "great potential," the NEB heard from the company's London, England-based business development vice-president, Graham Lyon.

"Longer term, the Cacouna facility will allow Petro-Canada to market LNG produced from Petro-Canada's international and domestic operations...and potentially from demonstrated reserves off Canada's East Coast and in the Canadian Arctic Islands," Lyon told the NEB.

The NEB described the ruling as no subsidy for LNG importers or consumers but a case of adapting to changes that affect all elements of the gas industry and markets.

The biggest change is a projected decline of 3.2 Bcf/d or nearly 20% in western Canadian production to about 14 Bcf/d by 2020 even after potential supply additions from the Arctic and Alberta coalbed methane. This erosion will affect all concerned in the gas market and requires adjustments to the entire supply chain including the transmission utility at the heart of the system, the NEB indicated.

"It is the growing aggregate demand of all shippers combined with the expected decline of supplies from the Western Canada Sedimentary Basin that give rise to the need for new supply requiring additional facilities such as the Cacouna extension," the board said.

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