Canada says LNG ruling has no bearing on Kinder pipeline decision

(Recasts lead, adds analysis, quotes, background)

By David Ljunggren and Nia Williams

OTTAWA/CALGARY, Sept 28 (Reuters) - Canada's approval of a natural gas plant is not a sign it will automatically let Kinder Morgan Inc expand a crude pipeline, a top official said on Wednesday, amid what sources say is uncertainty inside the government over the project.

In its first major energy decision since taking power last November, the Liberal government on Tuesday granted a permit to Malaysia's Petronas to construct the liquefied natural gas plant in the province of British Columbia.

The federal cabinet has promised that by Dec. 19, it will announce whether Kinder Morgan can more than double the capacity of its Trans Mountain pipeline from the oil sands of Alberta to the British Columbia coast.

The case is complex, pitting the energy industry's interests against a series of differing opponents, and if mishandled, could hurt the Liberals in a part of the country where they gained more support than expected in last year's election win.

Environmentalists and aboriginal activists strongly oppose the expansion while the British Columbia government - wary of possible spills - has imposed a series of conditions on any pipeline crossing its territory.

"Kinder Morgan will be decided on its own merits. There is no linkage between these projects," Natural Resources Minister Jim Carr told reporters when asked what message markets should take from the Petronas decision.

Analysts are skeptical about the Petronas project's prospects given low gas prices and cost-cutting at the Malaysian oil giant.

Several sources familiar with the file dismissed the idea Ottawa had approved the Petronas plant to give it cover to reject the Trans Mountain expansion, insisting that ministers were not close to making a decision and had ruled nothing out.

The existing Trans Mountain pipeline is the only one linking the oil sands in Alberta and the Pacific Coast.

Greens, who were courted by Prime Minister Justin Trudeau last year with promises he would do more to protect the environment, are outraged he would contemplate a move that they say would increase greenhouse gas emissions from the oil sands.

The Liberals are also under pressure from the energy industry, which wants help to relieve a shortage of pipelines that pushes down the price of Canadian crude.

Tim Pickering, chief investment officer of Calgary-based fund Auspice Capital Advisers, said the Petronas approval was positive but stressed the need for more capacity.

"That's a little frustrating but this is a step in the right direction," he said in an interview.

Other industry sources expressed cautious optimism the Trans Mountain expansion would be approved as it follows the pipeline's existing right of way.

Carr, referring to the Petronas approval, said Canada understood the needs of energy markets.

"There is a thirst for Canadian natural resources internationally. And what this decision shows is that we are being responsive to that need," he said. (Reporting by David Ljunggren; Editing by Bernard Orr, Diane Craft and Frances Kerry)