Vector Official Sees Short-Term Struggle Ahead
Vector Pipeline President Juri Otsason said last week the 720
MMcf/d pipeline project from Chicago to Dawn, ON, is running a
little behind schedule and probably will not be in service until
the end of October. It originally was expected to be in service
Oct. 1. He also said the results of a recent Vector open season
were disappointing despite the company's new contract to provide
200 MMcf/d of short-haul firm service to NIPSCO.
"We are well under way with the construction and on schedule for
that [Oct. 31] target date. As you go through and build a project
there are uncertainties not the least of which is weather," he
noted. "In parts of our right of way it has been quite wet, but so
far it hasn't had a significant impact on our activity because in
the early stages some of the work such as clearing is not as
sensitive to rain. Obviously if we get much more rain than normal
as we go forward it could slow us down."
Vector deferred construction of one of its compressor stations
until 2001 so its initial capacity will be about 720 MMcf/d, all of
which is expected to be available as soon as pipe valves are opened
in late October. The exact timing for the addition of the other
compressor, which would bring firm capacity to 1 Bcf/d, has yet to
The company announced a new short-haul transportation contract
and a pipeline interconnection with NIPSCO last week and a deal to
provide a connection to NIPSCO's affiliate, Crossroads Pipeline.
The NIPSCO agreement gives Vector access to a growing portion of
the Indiana utility's distribution territory, and the connection
with Crossroads provides access to markets east of Indiana.
"Vector will provide NIPSCO with a very competitive source of
capacity and further integrate NIPSCO's system with the growing
sources of natural gas supply at the Chicago Market Center to be
provided with the completion of the Alliance and Vector Pipeline
projects this fall," said Dan Gavito, vice president corporate gas
supply for NiSource.
Otsason said the pipeline company was not as lucky lining up
markets in a recent open season for its remaining 300 MMcf/d of
unclaimed long-haul space. "We did not get a lot of positive
response. We has some response to it, but some of it was such that
we did not accept the proposals." He attributed the poor response
to a "broad change in the gas dynamics in this part of North
There is considerable market uncertainty right now, and basis
changes have had a negative impact on demand for capacity on the
pipeline. Although winter basis spreads between Chicago and Dawn
have been as high as 16-18 cents, summer spreads have dropped to
the negative side recently because of excess stored gas at Dawn and
a number of other factors. That's in contrast to a recent historic
average of about 13 cents. Vector's recourse rates are 28 cents so
it's not hard to see why capacity on the system has declined in
"There's still some question about the timing of Vector despite
the fact that we feel quite confident on our timeline. There's also
some question about the timing of Alliance," he said. "We feel
that, too, is pretty predictable. [Alliance] is expected to come on
stream in October. Barring anything unexpected, I think that's a
very achievable target." Enbridge, which holds a 45% stake in
Vector, also owns 21% of Alliance. "Parts of [Alliance] are ahead
of schedule and parts are on schedule. The [Alliance] mainline on
average is slightly ahead. The extraction plant in Illinois, Aux
Sable, is on schedule and is probably the critical path item."
But there are a variety of other factors influencing market
dynamics right now. "I think this industry, as you've probably
recognized, is rife with rumors and speculation and some of it may
be planted intentionally by some parties," he said. But there's not
doubt that there is a tight supply situation in western Canada.
Otsason is optimistic that dynamics will change in Vector's
favor soon, however. Alliance most likely will open relatively
full, while TransCanada will suffer the consequences, including the
loss of about 1.1 Bcf/d in contracts.
The 1.3 Bcf/d Alliance Pipeline will only knock "a few pennies"
off of Chicago prices, he predicted. "The Chicago area is supplied
from a number of points and you really have to look at what the
marginal supply is at any given point in time and that will be the
price setter. Alliance will put downward pressure on the Chicago
price but I would expect only 2-5 cents."
Dawn Basis Even Wider?
The bigger market impact could come on the other end of Vector,
he said, with Dawn prices rising by a more significant amount.
"There's about 1.1 Bcf/d of contracts [on TransCanada] that are not
going to be renewed come Nov. 1. A little bit over half of that
will impact [Dawn] directly because it is basically capacity into
the east." There also are a lot of proposals and concepts floating
around about how TransCanada and regulators at the National Energy
Board will deal with the effect of TransCanada having significant
uncontracted capacity. "What will that do to TransCanada's toll?
It's a given that it will go up, but to what extent? How will
interruptible transportation on the pipeline be tolled. In March,
IT was moved up to 80% of the firm toll, but now some parties want
to push it up even higher to discourage further non-renewals on the
TransCanada system. That will have a significant impact on what
happens to prices in Ontario and at Dawn," he said.
"If you look right now at the spot basis spreads, they are well
below the full toll. But if one goes out and looks to get a firm
one-year or multi-year swap between Chicago and Dawn, [forward
basis is about 18-19 cents]," said Otsason, "and that still does
not give you the full optionality value.
"If you look at the spot gas pricing between the two points,
that typically will not support firm pipeline transportation costs.
I think that's the case in most instances," he said. "Firm capacity
does a number of things for you. First of all, it provides you with
firm transport capability, but it also provides considerable
optionality to allow you to capture arbitrage opportunities along
the way, and I think in the case of the Vector path between Chicago
In a FERC filing made last week, Vector officials also are
seeking a zonal rate design that would create a Chicago hub rate
zone. The function of the Vector project has changed somewhat since
it was first filed with FERC in December 1997. "When the project
was initially conceived, it was very much thought of as a bullet
line from Chicago to Dawn," he said. But with new power generation
being built along the line and LDCs such as NIPSCO building
connections to the system, Vector has become more of a hub than a
long-haul project. "It has moved more and more to something that I
call a transactional pipeline where I expect there will be a lot of
activity in which the gas doesn't move from one end of the system
to the other. Gas will be dropped off along the way. There will be
backhauls taking place. There's a lot of high quality,
high-performance storage on the line that will be providing service
way back up the Vector line to Michigan, Indiana and Illinois,
particularly to power projects that are developing along the way."
There's also the uncertainty about proposed pipelines
downstream, particularly Millennium, which would extend from Lake
Erie to New York City.
"When you develop a pipeline project you have to step back and
look at the longer term trend, and when you look at the demand
outlook in the U.S. Northeast and in eastern Canada, it is very
healthy," said Otsason. "The traditional markets are growing
strongly and on top of that you have dramatic growth that is going
to take place in the power generation market, particularly in the