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
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
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