A DARK HORSE, A STALKING HORSE: ENBRIDGE INC. AND

UNCLAS SECTION 01 OF 02 OTTAWA 000429 SIPDIS SENSITIVE STATE FOR WHA/CAN AND EB/ESC/IEC DOE FOR IA: PUMPHREY, DEVITO, DEUTSCH DOE ALSO FOR OFFICE OF OIL AND GAS GLOBAL SECURITY: KORNFELD STATE PASS USTR: CHANDLER STATE PASS FERC: LONGENECKER E.O. 12958: N/A TAGS: ENRG ETRD EPET CA SUBJECT: A DARK HORSE, A STALKING HORSE: ENBRIDGE INC. AND THE ALASKA GAS PROJECT REF: A. OTTAWA 0134 ¶B. 04 OTTAWA 3414 ¶1. (U) Sensitive but unclassified. Not for distribution outside USG channels. ¶2. (SBU) Summary: As wrangling continues over who has rights to build the Canada portion of the Alaska Gas Pipeline, Calgary-based Enbridge Pipelines Inc. has persistently signaled its capabilities and interest in the project. Enbridge does not have an ownership stake in the gas, nor does it possess "certificates of public convenience" to build the pipeline, as does archrival TransCanada Pipelines Ltd. However, Enbridge appears to be the only Canadian company other than TransCanada that is capable of building and operating a 1,300 mile natural gas pipeline from the Alaska/Yukon border to southern Alberta. With the Alaska gas producers (notably BP and Conoco-Phillips) reluctant to be locked into doing business solely with TransCanada on the basis of its 25-year old "exclusive" certificates under the Northern Pipeline Act (NPA),Enbridge is both a stalking horse, providing the producers with a plausible alternative to TransCanada, and a dark horse, in that wresting control of the project away from TransCanada would be a formidable task. Nevertheless, as a signal of its intent to pursue a role in the Alaska project, Enbridge filed a proposal in April 2004 under Alaska's Stranded Gas Act to build the entire 2,100 mile pipeline. End Summary. Alaska's Gas, Canada's Laws -------------- ¶3. (SBU) In a meeting February 8 with DCM and ESTOFFs, Enbridge Vice President for Public and Government Affairs D'arcy Levesque emphasized Enbridge's position that an alternative regulatory framework for construction of the Alaska pipeline already exists in Canada, obviating reliance on the NPA. The issue of whether authorities other than the NPA may be used for permitting construction of the Canadian portion of the Alaska pipeline is crucial: TransCanada insists that the NPA is the only valid legislation pertaining to the project, giving it exclusive construction rights. To bolster its claims, TransCanada has repeatedly cited a 2003 letter from then-Prime Minister Chretien to CEO Hal Kvisle expressing a preference to work within the framework of the NPA. ¶4. (SBU) According to Levesque, the NPA is irrelevant because Canada's National Energy Board (roughly equivalent to the U.S. Federal Energy Regulatory Commission) already has the power to approve any gas pipeline project in Canada which crosses Canada's national or inter-provincial boundaries. Further, he said, existing environmental legislation under the Canadian Environmental Assessment Act (CEAA),as administered by the Canadian Environmental Assessment Agency, will allow for an Environmental Impact Statement that will cover the pipeline's environmental implications better than the "antiquated" NPA. The NEB and CEAA, Levesque said, furnish the regulatory neutrality and transparency for the project to proceed, and also provide better recognition of aboriginal rights along the pipeline's proposed route. ¶5. (SBU) Levesque said that although the 1977 Northern Pipeline Act was originally intended to create certainty, its effect in today's changed situation is the exact opposite. Levesque said that TransCanada's claim that its NPA certificates are still valid has hampered GOC efforts to take a neutral position on the pipeline's regulatory authority, but acknowledged that the GOC is sensitive to the fact that TransCanada has spent millions of dollars to maintain the validity of its NPA certificates (ref B). Levesque noted, however, that most of TransCanada's expenses went into constructing the "pre-build" pipeline from southern Alberta to the United States, a pipeline which is currently in use and has since recovered its construction costs. Enbridge vs. TransCanada -------------- ¶6. (SBU) Enbridge, Levesque said, is particularly well suited to construct the Canadian portion of the pipeline because of its extensive experience with oil lines in Canada's north. For example, he noted that the company has considerable expertise in building and operating a pipeline in permafrost. Unlike TransCanada, Enbridge has not taken a stance on whether a 48-inch or 52-inch diameter pipeline would be best (ref A),but Levesque said that ultimately the market will determine the best configuration for the line. ¶7. (SBU) Enbridge owns and operates 8,500 miles of pipeline in North America, with a combined throughput of more than two million barrels per day of crude oil and petroleum liquids. Enbridge also owns and operates Canada's largest natural gas distribution company, with customers in Ontario, Quebec, and New York State. The company reported earnings of C$645 million (about 495 million USD) in 2004. Although Enbridge primarily focuses on petroleum liquids and TransCanada on natural gas, the two companies increasingly compete in both areas: TransCanada recently announced a 1.7 billion USD proposal to build a crude oil pipeline from the Alberta oilsands to southern Illinois, a distance of 3,000 kilometers. ¶8. (SBU) Comment: Although Enbridge claims not to be in direct negotiation with producers BP and Conoco-Phillips regarding the Alaska Gas Pipeline, there is clearly a convergence of interests among the companies. They are all opposed to the notion that only the NPA provides Canadian regulatory authority for the pipeline's construction, and are therefore dismissive of TransCanada's claim to exclusive construction rights. All the companies nevertheless appear concerned that the GOC will support TransCanada simply in order to avoid a lengthy legal challenge to the NPA. Ironically, the sheer magnitude of the proposed project -- 2,100 miles of steel pipeline from Alaska to Alberta -- means that when and if the line is built, there will likely be ample work not only for TransCanada and Enbridge, but a host of other contractors as well. End comment. Visit Canada's Classified Web Site at http://www.state.sgov.gov/p/wha/ottawa CELLUCCI