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Vector Official Sees Short-Term Struggle Ahead

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 be determined.

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 America."

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 attractiveness.

"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 and Dawn."

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 U.S. Northeast."

Rocco Canonica

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