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Major Pipe Expansions Too Costly in Short Term

Major Pipe Expansions Too Costly in Short Term

Current and projected economics will not support any of the major pipeline expansions to the Northeast from the Midwest at least until 2004, a new study by Energy ERA, a Calgary, AB-based energy consulting firm, concludes. The Portland Natural Gas Transmission and Maritimes &amp Northeast pipelines as well as the pipeline expansions currently planned in the Gulf of Mexico will be sufficient to meet growing gas demand in the Northeast over the next few years.

Energy ERA said despite the flood of new supply expected to arrive in the Midwest via Alliance Pipeline, the Northeast will not be ready to absorb the surplus supply in the next five years.

Other secondary conclusions of the study, which is titled "Northeast Natural Gas: Pipeline Infrastructure &amp Market Dynamics," include the likelihood there will be a major capacity turnback problem for Midwest-bound U.S. pipelines and that there will be no need for additional seasonal storage in the Northeast and Midwest over the forecast period of the next 16 years if several of the proposed Midwest-to-Northeast pipelines are built.

The study also took a close look at the gas price impact of each planned pipeline and all of the 2.8 Bcf/d of capacity proposed in aggregate. It estimated that a scenario involving nine proposed pipeline expansion projects that eliminated major overlapping projects - one involving only Vector and Millennium rather that Independence and MarketLink for example - would cause an average $0.30/MMBtu price decline at New York City, a 22-cent drop at the Dawn Hub in Ontario, a 10-cent drop at the Henry Hub and Chicago, and a 21-cent increase at the AECO C hub in western Canada.

The scenario includes the additions of Alliance, Vector, Millennium, PNGTS 2nd Expansion, Iroquois Expansion, TransCanada 1999 Expansion, Trunkline abandonment, Columbia Gulf Expansion and Northern Border 2000. The price impact would be only slightly different if Independence replaced Vector-Millennium. The price impacts of other projects, including TriState, Great Lakes 300, and a second Iroquois project, also are examined. The conclusion is that the gas market in the entire Northeast quadrant of the continent is in for some major changes over the next few years.

"It's very substantial, but I wasn't surprised," said Ken VanderSchee, an analyst with Energy ERA, "Our study was based on historical usage, price differentials, and pipeline capacity, and we found that the Northeast prices are very reactive to the expansions." The study predicted for the winter of 2001, New York Citygate prices without any expansion would be (U.S.) $2.95/MMBtu. Taking into account the first scenario of planned expansions, the study estimated the price will be $2.61.

Economics are not favorable now and clearly won't be favorable for some time. "That's not to say the moment some of these projects open, there will be no gas flowing through them," VanderSchee said. "All we're saying is that the study indicates it will be a while before the transportation costs become more than the toll charges."

The 150-page study is available on a confidential multi-client basis. For more information, see the notice at www.energyera.com. John Norris

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