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NEB Approval of Alliance Sets Stage for Toll Discounts

NEB Approval of Alliance Sets Stage for Toll Discounts

Canada's National Energy Board gave natural-gas exporters a license to grow by approving the Alliance Pipeline Project, but the board included a warning of the risks of excess capacity: price cuts and strained supplies.

With a prediction the entire Canadian gas community will gain eventually, the NEB bluntly broke up the old-boy network that dominated transportation north of the international border since the 1950s. The landmark ruling said "the board agrees with those parties who argued (in 77 days of hotly-contested hearings) that Alliance will provide benefits by offering producers an alternative transportation service and by increasing competition among pipelines."

Officially, Alliance president Dennis Cornelson was cautious, describing the ruling announced Nov. 26 as "another key milestone" but not the last it has to pass. The final hurdle will be endorsement by the federal cabinet in Ottawa. After poring over the NEB's approval for a week, Alliance declared none of the engineering or environmental conditions hurt the project and formally received the Certificate of Public Convenience and Necessity for its Canadian half. President Dennis Cornelson said the project will move ahead on schedule, which calls for a start on construction early in the new year and completion in the last quarter of 2000.

Cornelson acknowledged "there are significant challenges before us." Not the least of them will be filling up the pipeline from a Canadian gas production sector already straining to keep up with 1.1 Bcf/d in capacity being added this year by the TransCanada PipeLines and Foothills-Northern Border systems. Compounding the demands on productive capacity are constraints on drilling budgets due to poor oil prices for all but a handful of Canadian producers which are pure gas specialists.

The NEB noted that Alliance had its eyes open to production and drilling issues and declared itself to be an "at-risk" project, with its owners taking responsibility for any problems arising for it from excess capacity in the overall pipeline grid. Canadian marketers and industry analysts, however, predict that Nova and TransCanada are as likely to feel any pinch as Alliance.

The new project is fully subscribed, with 15-year commitments to pay demand charges for its 1.3 Bcf in daily capacity whether the service is used or not. TransCanada is widely forecast, among Canadians, to face the toughest capacity marketing problem because many of its current transportation agreements have one-year terms. While no one is predicting competitive toll cuts yet, senior marketers privately describe them as at least a theoretical possibility if Canadian producers fall behind in topping off "deliverability" by the time Alliance goes into service.

The NEB ruling set aside time-honored Canadian doctrine that pipelines are public utilities that should be restricted to a handful of franchises or natural monopolies, with the grid's total capacity managed by government authority to protect their tolls and revenues. The board said it accepts that "the potential for some duplication of facilities is inherent in the nature of competition."

The NEB noted Alliance and the Alberta pipeline grid, TransCanada's Nova Gas Transmission, have 35 receipt points in common. Talks are under way on interconnections. But it will not be a loss if the overlap leads to rivalry with the transporters discounting tolls or making other special offers to court shippers, the NEB suggested.

The board said, "If commercial negotiations do not completely eliminate potential duplication, it will likely be due to the parties' judgment that they are willing to compete in certain areas . . . duplication which results in beneficial competition may be considered to be in the public interest."

Attention to Risk

The decision made it plain that the new era has some risks. The NEB observed that completion of Alliance's gas producer-inspired, C$3.7 billion (US$2.6 billion), 1,875-mile, 1.3 Bcf/d route to Chicago by late 2000 is bound to create excess transportation capacity and escalate competition to sell gas, especially in the early years of the new pipeline.

The decision marks a landmark departure from traditional Canadian requirements for proof that all the gas to fill a new pipeline is on hand. The NEB accepted $8.2 billion in 15-year commitments to Alliance shipping contracts as proof that producers are confident they will have the supplies.

The decision also brought to an abrupt end attempts to halt or change Alliance by the Canadian petrochemical industry, with Nova Chemicals leading the attack. Setting aside a mass of consulting studies as invalid, the NEB found there is no reason to believe that Alliance's plan to carry a gas stream rich in liquid byproducts will dry up supplies of ethane raw materials for Canadian plants. "By providing enhanced market access, the Alliance project would encourage additional gas production.thereby yielding increased supplies of ethane."

In what may be the last in a long string of annual capacity additions for some time, the NEB approved a 1999 program by TransCanada. The plan calls for C$402.9 million (US$280 million) in facilities by Nov. 1, 1999. The package was sharply cut down earlier this year. TransCanada lopped off C$575.9 million (US$400 million) or 59% the 1999 expansion budget by cutting the planned capacity additions down to 108 MMcf/d, as a result of a resolution of a dispute between Kamine Development and Niagara Mohawk Power that will close three cogeneration plants as well as an agreement by Union Gas Ltd. to use other delivery routes. TransCanada, hoping to hold down costs and tolls as it enters a new era of competition among Canadian pipelines, had asked shippers that could make other arrangements to step forward.

Gordon Jaremko, Calgary

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