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15-Year NE Contracts Expiring; Trading Switching from Iroquois to Dawn, ON

Procurement of natural gas imports for the northeastern United States is changing methods and migrating from Alberta to Ontario, where TransCanada PipeLines will overhaul its eastern end to accommodate the switch.

TransCanada filed with the National Energy Board for C$99.3 million (US$80 million) in new facilities primarily to accommodate a new buying strategy adopted by Alberta Northeast Gas Ltd. (ANE), a consortium of 17 distributors in New England, New Jersey and New York.

The facilities, including short stretches of new pipe, are designed to enable ANE to arrange its own supply portfolio and move the buying activity to the Dawn trading hub near Sarnia in southern Ontario, starting next year. ANE intends to hold its own pipeline transportation contracts and do its own shopping around for gas.

In documents supporting the facilities application, ANE said time and market conditions overtook its 15-year-old practice of relying on long contracts with four Alberta "aggregators" or brokers for its imports via the Iroquois branch line off TransCanada into the northeastern U.S.

Not the least of the causes of the change was a painful lesson against relying on the "illiquid" or small-volume trading point at the Iroquois pipeline entry point into New York from eastern Ontario to top up supplies during demand peaks.

"For example," ANE says, "gas priced at the illiquid Iroquois point during a severe cold spell in January 2003 sold for as high as US$76/Dth, while Dawn gas sold at $5.845 and Henry Hub gas sold for $5.73 on the same day." There was "a constraint in pipeline capacity downstream of Dawn" at the same time as "the forces of supply and demand were in great tension. The ANE customers seek to ensure they are not exposed to this kind of pricing by contracting for pipeline capacity back to a liquid point - that is, Dawn."

The Dawn hub, a trading center on part of the Union Gas Ontario distribution grid that has long doubled as part of TransCanada's route to eastern Canadian and U.S. markets, includes 800 Bcf of storage capacity. Dawn has connections with other U.S. and Canadian pipeline systems: ANR, MichCon, Great Lakes, CMS, Trunkline, Panhandle, Alliance and Northern Border. The storage and transportation web around Dawn includes a direct link to the Chicago trading hub, Vector Pipeline.

Dawn trading volumes are growing rapidly. Spot sales jumped 56% to a daily average 12.2 Bcf per month in 2004 from 7.8 Bcf the year before.

ANE's current Canadian supply portfolio of 15-year contracts for about 360 MMcf/d expires in October of 2006. The northeastern U.S.distributor consortium's current supply procurement practices were born in 1980, when it got its start as Boundary Gas. Since deliveries started in 1984, ANE calculates it has bought more than 2.2 Tcf of Canadian gas for US$7 billion.

ANE wants to increase its Canadian-sourced gas to about 450 MMcf/d, but doubts even its old, smaller levels of supply procurement can be sustained without changing purchasing practices.

"The North American market has undergone several transformations since the start of ANE," the consortium points out. "For example, gas supply arrangements have become increasingly shorter term in nature and it is very unlikely that ANE could find a competitively priced 15-year gas supply arrangement with one supplier to replace its existing contracts." As ANE contracts expire as a last legacy of the old era, big producers are opting out of the old supply pools of the aggregators, chiefly Cargill Canada (formerly TransCanada) and ProGas, but also Canadian Forest Oil and EnCana.

Canadian market conditions also are changing, ANE said. Not only do virtually all industry and government forecasters agree Alberta supplies have either peaked or soon will. Canadian consumption is on the rise.

"Much of this demand increase is in Alberta, specifically natural gas used for oil sands extraction," ANE observes. "Flat productivity and increasing domestic demand will result in less gas available for U.S. export markets.

These dynamics are a major concern to northeast U.S. local distribution companies which must plan to serve existing and future customers, as well as being designated the supplier of last resort."

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