The LNG ships are coming and oilpatch leaders – even those in the pipeline business – are jumping on board.

TransCanada Corp. caught the LNG (liquefied natural gas) wave last week, announcing a plan with Shell US Gas & Power to build a $700-million (US) offshore LNG terminal in the New York State waters of Long Island Sound.

The proposed floating terminal would be able to receive, store and regasify about one billion cubic feet per day of natural gas.

I’ve written a couple of times in this column that LNG is the three little letters that keep heads of companies wanting to build the Mackenzie Valley and Alaska Highway gas pipelines awake at night.

Not so, say industry leaders. They contend that forecast North American demand for natural gas is so great, the continent will need every molecule of gas it can get – including LNG tankers arriving from countries such as Algeria, Russia and Indonesia.

Hal Kvisle, president and CEO of TransCanada, says his company predicts that gas production from the Western Canadian Sedimentary Basin will remain flat, while the building of more gas-fired power plants in the U.S. will significantly boost demand for the clean-burning fuel.

That means North America will need gas from both the Arctic pipelines as well as from LNG from foreign shores, Kvisle said at last week’s Ziff Energy conference on natural gas. “We don’t think it’s a case of LNG or northern gas. Both are going to be needed.”

BP plc is among the Alaska producers lining up to bring so-called stranded gas, which companies have had to pump back underground for years, to market via the proposed Alaska Highway pipeline.

Yet BP, too, doesn’t fret about foreign LNG flooding the continent before 2014 – the most optimistic date for the pipeline to start operating.

“We think the LNG is required. We think all the gas is going to be needed in this North American market,” Ken MacDonald, vice-president, Alaska-Canada gas pipelines for BP Canada, told me at the Ziff Energy conference.

Stephen Letwin, vice-president of gas strategy and development for Enbridge Inc., said his company is also confident that Arctic gas will be economically competitive with LNG, especially if what he called the “DADA” movement takes hold.

Letwin, who noted that LNG terminals are difficult to site and often face local opposition, said the trend in trying to get the facilities built has been “design, advance, develop and abandon” – or DADA.

TransCanada and Houston-based ConocoPhillips had to abandon a proposed LNG project in Maine this year after getting a thumbs down from local residents in Harpswell.

And TransCanada and Shell will still need to convince local communities and regulators that their planned LNG terminal in New York’s Long Island Sound watershed – home to more than eight million people along with a wide variety of wildlife and plants – is a good idea.

Arctic pipeline builders now spreading the welcome mat for both Arctic gas and LNG to North America could also become less enamoured of LNG if the lucrative U.S. market decides to shift in a big way from gas to coal-fired or nuclear power plants.

That’s unlikely. Coal will continue to be viewed as the “dirty” fossil fuel until utilities can build a commercial-scale power plant that burns as cleanly and for the same price as a gas-fired generator.

And until most Americans shake their “Three Mile Island” fears of nuclear power – if they ever do – gas will continue to be the fuel of choice.

Gas Gamble

Canadian Natural Resources Ltd. (CNRL) better hope gas remains the preferred fuel, considering the $698-million gamble the company is taking.

CNRL last week purchased $698 million worth of Canadian assets – 84 fields whose production is 70 per cent natural gas – from U.S. competitor Anadarko Petroleum Corp.

CNRL says the properties in northeast B.C. and northwest Alberta, which produce 25,000 barrels of oil equivalent per day, will boost its cash flow to help pay for its planned Horizon oilsands plant north of Fort McMurray, even without a partner.

But that’s a bit of a stretch, considering that CNRL would like to start building Horizon next year and its pricetag has jumped to $9.7 billion to $10.4 billion from the previous estimate of $8.4 billion.

It will take CNRL several years to make back the cost of the Anadarko properties. And if gas prices tumble, which they could if predictions of El Nino and a warmer winter materialize this year, recouping the investment will take longer.

The deal seems to make more sense for Anadarko, which has unloaded more than $3.3 billion US worth of assets in the last five months.

Anadarko said it expects significant savings on operating costs by selling 76 per cent of the fields in its Canadian portfolio, but only 25 per cent of the reserves. In other words, the company is selling fields that it considers are costing it too much money to produce.

CNRL says the new assets fit its current holdings well and it should be able to reduce production costs at the properties by 10 per cent.

CNRL got the Anadarko assets for a good price, especially with record-high commodity prices. But some analysts are questioning whether CNRL would have been better off using the cash to reduce debt before tackling the Horizon project.

They make a good point. And since CNRL’s board hasn’t yet given the final go-ahead for Horizon, if a balmy winter sends gas prices south, the company might yet have to push back the construction timetable.

Talisman Trims Hedge

Hedging their bets cost some major industry players big time this third quarter.

But so far, only Talisman Energy Inc. has said publicly that it’s staying out of the hedging game next year because it believes oil prices could go even higher.

Companies have used hedging – locking oil and gas production into a price that the firms think won’t go much higher – for many years. But this quarter, as oil prices shot up to $50-plus a barrel, a lot of players got hoisted on their own hedging schemes.

According to various news reports, EnCana Corp.’s hedging left more than $320 million of potential earnings on the table in the third quarter; the company’s total oil and natural gas hedging losses could climb above $1 billion US this year.

Husky Energy Inc. might lose $550 million on hedging for the year, Talisman and Canadian Natural Resources Ltd. each $500 million.

Companies hedge to lock in production at a good price as protection against a possible slump in commodity prices, and to help build long-term asset value.

But another reason for hedging – which some might call greed and others good business practice – is to push share prices even higher. The bottom line is that hedging amounts to rolling the dice on the future.

And the future, especially in a cyclical business operating in a geopolitically uncertain world, is unpredictable.

Plug the Plug on Rossdale

Whatever possessed the Alberta Electric System Operator, which is in charge of Alberta’s electricity transmission system, to ask Epcor Inc. to continue power generation at the century-old Rossdale power plant for another five years?

Epcor says it had planned to discontinue electricity generation at the Rossdale plant, a well-known landmark in Edmonton’s river valley, at the end of this year. But the system operator requested that generation continue until 2009 “in order to ensure transmission reliability,” the city-owned utility says.

The 15-hectare Rossdale site is so old that several of its aging brick buildings have been designated as historical resources and the area is archeologically significant.

Neighbouring residents have been lobbying for almost five years to have the power plant permanently shut down, the historical buildings preserved and the more modern buildings used for non-industrial purposes – perhaps a museum and interpretive centre.

Surely Alberta doesn’t lack for power?

Since 1999, the provincial grid’s capacity jumped 3,300 megawatts, or about 40 per cent, to 11,800 MW, according to a recent report by the Independent Power Producers Society of Alberta.

Maximum generating capacity now tops the province’s estimated 2004 average consumption of 7,000 MW by nearly 70 per cent.

So why keep the aging Rossdale plant on life support for another five years?

It just doesn’t add up.

(Mark Lowey can be reached at mark@businessedge.ca)