Vector Pipeline President Juri Otsason said last week the 720MMcf/d pipeline project from Chicago to Dawn, ON, is running alittle behind schedule and probably will not be in service untilthe end of October. It originally was expected to be in serviceOct. 1. He also said the results of a recent Vector open seasonwere disappointing despite the company’s new contract to provide200 MMcf/d of short-haul firm service to NIPSCO.

“We are well under way with the construction and on schedule forthat [Oct. 31] target date. As you go through and build a projectthere are uncertainties not the least of which is weather,” henoted. “In parts of our right of way it has been quite wet, but sofar it hasn’t had a significant impact on our activity because inthe early stages some of the work such as clearing is not assensitive to rain. Obviously if we get much more rain than normalas we go forward it could slow us down.”

Vector deferred construction of one of its compressor stationsuntil 2001 so its initial capacity will be about 720 MMcf/d, all ofwhich is expected to be available as soon as pipe valves are openedin late October. The exact timing for the addition of the othercompressor, which would bring firm capacity to 1 Bcf/d, has yet tobe determined.

The company announced a new short-haul transportation contractand a pipeline interconnection with NIPSCO last week and a deal toprovide a connection to NIPSCO’s affiliate, Crossroads Pipeline.The NIPSCO agreement gives Vector access to a growing portion ofthe Indiana utility’s distribution territory, and the connectionwith Crossroads provides access to markets east of Indiana.

“Vector will provide NIPSCO with a very competitive source ofcapacity and further integrate NIPSCO’s system with the growingsources of natural gas supply at the Chicago Market Center to beprovided with the completion of the Alliance and Vector Pipelineprojects this fall,” said Dan Gavito, vice president corporate gassupply for NiSource.

Otsason said the pipeline company was not as lucky lining upmarkets in a recent open season for its remaining 300 MMcf/d ofunclaimed long-haul space. “We did not get a lot of positiveresponse. We has some response to it, but some of it was such thatwe did not accept the proposals.” He attributed the poor responseto a “broad change in the gas dynamics in this part of NorthAmerica.”

There is considerable market uncertainty right now, and basischanges have had a negative impact on demand for capacity on thepipeline. Although winter basis spreads between Chicago and Dawnhave been as high as 16-18 cents, summer spreads have dropped tothe negative side recently because of excess stored gas at Dawn anda number of other factors. That’s in contrast to a recent historicaverage of about 13 cents. Vector’s recourse rates are 28 cents soit’s not hard to see why capacity on the system has declined inattractiveness.

“There’s still some question about the timing of Vector despitethe fact that we feel quite confident on our timeline. There’s alsosome question about the timing of Alliance,” he said. “We feelthat, too, is pretty predictable. [Alliance] is expected to come onstream in October. Barring anything unexpected, I think that’s avery achievable target.” Enbridge, which holds a 45% stake inVector, also owns 21% of Alliance. “Parts of [Alliance] are aheadof schedule and parts are on schedule. The [Alliance] mainline onaverage is slightly ahead. The extraction plant in Illinois, AuxSable, is on schedule and is probably the critical path item.”

But there are a variety of other factors influencing marketdynamics right now. “I think this industry, as you’ve probablyrecognized, is rife with rumors and speculation and some of it maybe planted intentionally by some parties,” he said. But there’s notdoubt that there is a tight supply situation in western Canada.

Otsason is optimistic that dynamics will change in Vector’sfavor soon, however. Alliance most likely will open relativelyfull, while TransCanada will suffer the consequences, including theloss 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 suppliedfrom a number of points and you really have to look at what themarginal supply is at any given point in time and that will be theprice setter. Alliance will put downward pressure on the Chicagoprice 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 notgoing to be renewed come Nov. 1. A little bit over half of thatwill impact [Dawn] directly because it is basically capacity intothe east.” There also are a lot of proposals and concepts floatingaround about how TransCanada and regulators at the National EnergyBoard will deal with the effect of TransCanada having significantuncontracted capacity. “What will that do to TransCanada’s toll?It’s a given that it will go up, but to what extent? How willinterruptible transportation on the pipeline be tolled. In March,IT was moved up to 80% of the firm toll, but now some parties wantto push it up even higher to discourage further non-renewals on theTransCanada system. That will have a significant impact on whathappens to prices in Ontario and at Dawn,” he said.

“If you look right now at the spot basis spreads, they are wellbelow the full toll. But if one goes out and looks to get a firmone-year or multi-year swap between Chicago and Dawn, [forwardbasis is about 18-19 cents],” said Otsason, “and that still doesnot 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 capacitydoes a number of things for you. First of all, it provides you withfirm transport capability, but it also provides considerableoptionality to allow you to capture arbitrage opportunities alongthe way, and I think in the case of the Vector path between Chicagoand Dawn.”

In a FERC filing made last week, Vector officials also areseeking a zonal rate design that would create a Chicago hub ratezone. The function of the Vector project has changed somewhat sinceit was first filed with FERC in December 1997. “When the projectwas initially conceived, it was very much thought of as a bulletline from Chicago to Dawn,” he said. But with new power generationbeing built along the line and LDCs such as NIPSCO buildingconnections to the system, Vector has become more of a hub than along-haul project. “It has moved more and more to something that Icall a transactional pipeline where I expect there will be a lot ofactivity in which the gas doesn’t move from one end of the systemto the other. Gas will be dropped off along the way. There will bebackhauls taking place. There’s a lot of high quality,high-performance storage on the line that will be providing serviceway 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 pipelinesdownstream, particularly Millennium, which would extend from LakeErie to New York City.

“When you develop a pipeline project you have to step back andlook at the longer term trend, and when you look at the demandoutlook in the U.S. Northeast and in eastern Canada, it is veryhealthy,” said Otsason. “The traditional markets are growingstrongly and on top of that you have dramatic growth that is goingto take place in the power generation market, particularly in theU.S. Northeast.”

Rocco Canonica

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