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Western Prices Expected to Soar in Upcoming Supply Shift

Western Prices Expected to Soar in Upcoming Supply Shift

San Juan Basin prices could average close to $3.20/year by 2005, and other western points could see similar increases because of the major supply shift that is expected to occur once the Alliance project comes on line next year, Larry Larsen, a vice president at Williams Gas Pipeline-West, said in a panel discussion this week at Ziff Energy Group's North American Gas Strategies conference in Calgary.

Citing data from PIRA Energy Group, Larsen projected that Alliance will help boost prices at such western points as Kingsgate, Sumas and major spot locations in the Rockies from recent levels in the $2.10s, $2.20s and $2.30s to solid base positions in the $2.70s and $2.80s by 2005.

Alliance is North America's biggest pipeline project of the past decade, exceeding even Kern River in 1992, he noted. And though still in construction phase, it is already having an impact on the future western gas supply picture.

Prior to the Alliance project and Northern Border's Chicago extension, which went into service last December, Rockies gas tended to supplement other supplies in California and the Pacific Northwest but also often moved into the Midcontinent and Midwest markets when prices there were attractive, Larsen said.

In recent years, Permian Basin supplies have been sold mostly into intrastate Texas and to the Midcontinent/Midwest region and secondarily to California and east-of-California markets, he said.

However, the new Chicago-bound pipes are pushing Rockies' gas out of the Midcontinent/Midwest but also are allowing Rockies' production to grab more market share along the West Coast, said Larsen. In addition, he sees the Permian Basin as returning largely to its former westward-flow pattern as Canadian supplies to the western U.S. decline. These trends will be hastened by the fact that Northwest Pipeline is already "maxed out" moving Rockies gas northward and Kern River is flowing maximum volumes to California, Larsen said.

There is a consensus that not enough Canadian gas will be available to fill Alliance at its in-service date unless supplies on other pipelines, such as TransCanada, are displaced, Larsen concluded. However, in the long run he expects enough new discoveries in the Rockies and western Canada to ensure ample supplies for the region.

Both Larsen and John Watts, director of energy marketing for Avista Energy, expressed concern over the impact on Pacific Northwest supplies after Alliance begins operations. Alliance will take away about 300 MMcf/d of British Columbia gas that normally moves south into Northwest Pipeline, Larsen said. "And when it gets really cold in western Canada, a lot more [export-targeted] gas gets kept at home," virtually insuring supply shortfalls in the Northwest at those times, he added. Watts offered this precaution for gas users in the Pacific Northwest to prepare for Alliance's startup: "Make sure your supply and your transportation are firm."

Watts and Larsen found another issue on which to agree: the need for a really cold winter to test changes made in North America's gas deliverability infrastructure in the past few years. However, as a subsequent speaker observed, be careful what you ask for. "Yes, we need a 'moderate' winter to test the national grid," said Jerry Strange, director of transportation marketing for El Paso Natural Gas. "But we don't need extreme cold that would cause the system to fail. We'd never be able to live that down.

Roger Tanner, Houston

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