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Is TransCanada wasting its time with Keystone XL?

While the company is distracted with its contentious oil pipeline, rival Kinder Morgan is making moves on the faster-growing natural gas business.

While TransCanada Corp. stands mired knee-deep in the Keystone XL oil pipeline debate, its biggest rival in its core gas business is getting a whole lot bigger. On Oct. 17 Kinder Morgan Inc., America’s biggest natural gas shipper, announced a US$21-billion bid to take over El Paso Corp., the No. 2. Together the companies own 125,000 kilometres of pipe.

“Now that KMP is by far the biggest pipeline distributor of natural gas, that will also give them pricing power over the market,” Chris Jarvis, president of Caprock Risk Management told Reuters.

Like ExxonMobil’s US$41-billion acquisition of shale gas producer XTO Energy in 2009, this is a massive bet on the upside of suddenly cheap and abundant natural gas. Instead of hedging away from gas, as TransCanada and many other companies appear to be doing, it’s a bet that gas will play a much bigger role in our energy future, probably at the expense of oil.

A decade ago TransCanada Pipelines, as it was then known, was a pure-play natural gas shipper from producing areas in Western Canada to markets in Eastern Canada and the U.S. Midwest. Past CEO Hal Kvisle and his successor, Russ Girling, have since diversified into oil transportation and power generation.

Diversification is the conventional wisdom in Canada’s energy business right now. Enbridge Inc., which used to control Canadian oil exports to the U.S., has become the largest gas distributor in Ontario and invested in wind farms. Enbridge boss Pat Daniel was just named Canada’s 2011 CEO of the Year by Caldwell Partners in a nod to this strategy. By contrast, gas giant Encana Corp. was punished by investors following its spinoff of Cenovus Energy. Now TransCanada is staking a good deal of its future in an oil pipeline that could end up being rejected because of political considerations.

Kinder Morgan’s move is a rebuke to that thinking. Its investment in gas dwarfs the investment Kinder is contemplating in oil lines such as its Trans-Mountain system in Alberta and B.C. Only time will tell which strategy is the right one.