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TransCanada/Sears Retail Deal Part of Market Turn-Around

TransCanada/Sears Retail Deal Part of Market Turn-Around

After holding back for 14 years, TransCanada PipeLines Ltd. is jumping into door-to-door retail sales competition - and on a scale to match its stature as the nation's biggest natural gas transporter and trader. TransCanada announced last week it is teaming up with department store retailer Sears Canada to make a start on a national campaign by initially selling gas to residential consumers in Ottawa. The move by wholly-owned subsidiary TransCanada Energy out-classed on-going retail operations such as Suncor Inc.'s Sunoco service station chain in Ontario or pioneering efforts in central Canada by Direct Energy Marketing of Calgary.

The new alliance represents a double first north of the border - the first entry into gas sales by a national general retailer as well as TransCanada's first entry into retailing. It was a big step for TransCanada, and a signal that a formerly controversial field, which used to be disdained as a hotbed of "discounters" or hustlers, has become respectable. The new arrangement calls for TransCanada to manage supply, transportation capacity, storage and risk management for Sears. The department store chain will drum up consumer contracts as an addition to its Sears HomeCentral line of heating and cooling services which currently include sales of furnaces, air conditioning units, hot water tanks and maintenance agreements. The companies said "the new agreement will first be piloted in the Ottawa market with future plans to roll out the service nationally."

Larry Moore, Sears Canada vice president for service, said the agreement precludes either company partnering with another to sell gas to the residential market. Enbridge Consumers Gas is the Ottawa LDC on which gas will be sold to residential users. If the pilot is successful in the initial months, the companies expect to roll it out to all of Ontario by the end of 2000, said TransCanada spokesman Glenn Herchak. Eventually, in about five years, a national program could have about 550,000 customers out of a roughly 5.5 million potential users nationwide, giving it a 10% market share, Moore said. Total volume moved in a national program is expected to be about 200 MMcf/d. With electric deregulation, Sears could become involved in selling power, too, Moore said.

The pipeline sales subsidiary's role in the partnership follows a script laid out for the next stage in the evolution of Canadian marketing at a well-attended conference held in the gas capital of Calgary by Ziff Energy Group. It is a stage supported by higher prices which make once-negligible activities profitable.

Brant Sangster, marketing vice president of Petro-Canada, said the new times call for master jugglers of two moving targets - the costs of transporting Canadian gas and the price it fetches with all North America for a stage.

With new pipelines being completed on top of expansions by old ones, Sangster said the Canadian gas community is fulfilling a dream that he called "connectivity." But this process, of establishing links to every significant energy sales outlet on the continent, "changes the marketplace fundamentally and irrevocably. It raises the importance of price and transportation management. It will change how a company is perceived and measured by the financial community. It is worth the effort to a natural gas producer."

In the connected Canadian gas community, making the right decisions about sales destinations and the route traveled make far more difference to the price fetched by production than the industry's traditional crafts. Petro-Canada calculates that for every MMBtu of Canadian production, transportation decisions can spell gains or losses of C25 cents (US17 cents) while choices of what markets to pursue and when make C50 cent differences. By contrast, the traditional Canadian focus on gas finding and development costs deals with modest effects. For each MMBtu, concentrating on resource land costs makes a difference in the C3 cent range, development drilling C4 cents, producton facilities C5 cents and exploration C5 cents (US3.3 cents). Cutting costs of operations can make a bigger difference, but as a C10 cent factor remains a far smaller variable than gas prices and transportation.

Managing risks of movements in exchange rates between the U.S. and Canadian dollars can make as much difference in the value received for gas as operating, finding and development costs combined, Petro-Canada's calculations show. But multibillion-dollar expansions of the pipeline grid and the strain of mastering the resulting complications of a continental trading game are worth the effort, Sangster suggested. Canadian benchmark gas prices have gained about C$1.06 (US71 cents) per MMBtu since 1996 at Alberta Energy Co.'s AECO trading and storage hub. At the Sumas export point for British Columbia gas travelling via Westcoast Energy's provincial pipeline web, a gain of C97 cents (US65 cents) has nearly matched the improvement in Alberta.

The dynamics described by Petro-Canada also go a long way towards explaining TransCanada's new action, as a symptom of changing times as much as a change of heart in the gas establishment. The "connectivity" described by Petro-Canada has turned the tables on Canadian markets, tightening up supplies to the point where the industry now operates in a "high price environment" that is raising home heating costs across the country and creating opportunities to make retail market competition pay.

Gordon Jaremko, Calgary

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