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By Nia Williams
CALGARY, Alberta, July 29 (Reuters) - Canadian pipeline operator TC Energy Corp could spend billions of dollars on its plans to lower emissions by switching to renewable energy to run its huge network of U.S. and Canadian oil and gas pipelines.
Calgary-based TC Energy, which ships oil and gas through nearly 100,000 kilometres (62,140 miles) of pipelines, one of the biggest networks in North America, has been encouraged by a better-than-expected response to a request in April for information on wind power for projects in the United States.
"We started just with our liquids pipeline and it gives us really a lot of confidence that we'll be able to pivot quickly to our natural gas pipeline business both in the U.S. and in Canada," Corey Hessen, TC Energy's president of power and storage, told Reuters.
TC's decision to power pipelines with wind and solar, instead of natural gas, is similar to smaller-scale plans by rival Enbridge Inc and would go some way toward meeting investor demands to improve its environmental performance.
"It's a big prize and it's a really big opportunity," Hessen said.
The project is the best near-term opportunity for TC to play a part in the energy transition, he said.
Energy firms worldwide are trying to reduce the planet-warming emissions they pump out in the process of producing and transporting oil and gas. Canada's oil and gas industry is the country's largest emitting sector.
Canada's rising carbon price could add a significant expense to TC Energy's costs if it fails to reduce its emissions. Canada has pledged to cut emissions 40-45% from 2005 levels by 2030 and will hike the price of carbon from C$40 a ton currently to C$170 a ton by 2030. It also charges industrial carbon emitters like TC under an output-based pricing system.
TC's scope 1 and 2 emissions - that is, emissions it produces or that are produced to supply it with power - from its oil and gas pipelines were nearly 14 million tonnes in 2019, according to the company website.
TC said it is still in the process of quantifying how many tons of carbon emissions would be saved by switching to renewables to power pipelines.
The company incurred C$69 million ($54.9 million) in expenses under existing carbon pricing programs in 2019, up from C$62 million in 2018, according to its latest sustainability report. TC expects most of its assets across Canada, the United States and Mexico to eventually come under regulations aimed at managing carbon emissions.
"It's in their interest to green their portfolio and start this strategy now," IHS Markit analyst Kevin Birn said.
"The world is going to get more aggressive on climate policies and that means carbon is going to be a cost."
Francois Poirier, who became chief executive in January https://www.reuters.com/article/us-tc-energy-moves/canadas-tc-energy-says-insider-poirier-to-take-over-as-ceo-idUSKCN26C1MU, has said he wants to use TC's power and storage division, which includes renewable energy and which he used to oversee, to grow and diversify the company while also lowering emissions.
Hessen said the priority for his growing power and storage team is to secure renewable energy to power TC's network of U.S. and Canadian pipelines.
The company received more interest than it expected when it asked renewable energy developers for information on 620 megawatts of wind-powered electricity to operate part of its Keystone pipeline, Hessen said. Developers submitted responses for 14 gigawatts (GW) of wind, more than 20 times TC's need, he added.
It would take 5 to 7 GW to power the entire U.S. and Canadian pipeline network, he estimated. That compares with total installed wind power capacity in the United States of 118 GW, according to the U.S. Energy Information Administration.
BMO Capital Markets estimated in a note to clients that securing 620 megawatts of wind power would cost around $1 billion in capital investment, which implies the cost of converting TC's whole U.S. and Canadian network would run to several billion dollars.
Hessen declined to discuss the potential cost for the renewable energy investment, but said "TC Energy has a history of really going after and being successful with large-scale capital deployments for its infrastructure."
Some shareholders say they would prefer TC to invest in new pipelines or return cash to investors, rather than spend money on powering pipelines with renewables.
"Is it as good (a use of capital) as investing in pipelines, acquiring assets, or buying back shares? I suspect probably not," said Martin Cobb, senior vice president at Lorne Steinberg Wealth Management, which owns shares in TC.
Building new pipelines is challenging due to growing environmental opposition and government policies aimed at reducing reliance on fossil fuels. TC is seeking $15 billion in compensation from the U.S. government after Washington revoked a key permit for its $9 billion Keystone XL (KXL) project earlier this year. The project had been delayed by over a decade before TC cancelled it in June.
Tudor Pickering Holt analyst Matt Taylor said it would be difficult to replace the anticipated revenue from KXL. TC at one point estimated KXL would bring in annual pre-tax earnings of around US$1.3 billion.
Some investors are welcoming TC's increasing focus on other parts of its business after the KXL saga.
Natural gas pipelines make up 75% of TC's revenues and will remain its primary revenue-generator. The company will spend the bulk of its secured capital program through 2024 on that division.
The power and storage unit, where CEO Poirier sees potential for growth, comprises 5% of the company's asset value and includes a 48.4% stake in Canada's largest nuclear power station. TC will put C$2.6 billion, or 13%, of its secured capital spending towards extending the life of the Bruce Power nuclear plant.
TC is also looking at developing two hydro-pumped storage projects in Ontario and Alberta to generate new revenue. The projects involve pumping water between reservoirs at different elevations to produce electricity. If they go ahead, the projects would be the first of their kind built in Canada since the 1950s.
Kipp Horton, CEO of WindRiver Power Corp, TC's partner in the 75-MW Canyon Creek project in Alberta, told Reuters the companies expect to make a final investment decision this summer.
"This is an opportunity, with a new chief executive, to say this is the new TC Energy. They're still going to be transporting fossil fuels but are trying to transition to a greener business," said Brett Girard, portfolio manager at Liberty International Investment Management, a TC shareholder. ($1 = 1.2563 Canadian dollars) (Reporting by Nia Williams Editing by Denny Thomas, Simon Webb and Marguerita Choy)