Alliance, Vector Pose Unforeseen Challenges
The impact of the 1.325 Bcf/d Alliance Pipeline and the 1 Bcf/d
Vector Pipeline on Chicago basis prices will be a lot less
significant than some may be expecting, according to several market
observers speaking at the LDC Forum in Chicago last week.
"If we have both [pipelines], we'll see a material balance shift
very slightly in reducing our receipts out of the [Chicago] hub.
We'll still have receipts exceed deliveries. The variance is
actually very negligible," said Jim Goetz, director of trading and
asset optimization at PG&E's National Energy Group.
Currently there is about 15.2 Bcf/d of mainline gas delivered to
the Chicago Hub and about 16.2 Bcf/d of mainline receipts at
Chicago, leaving receipts 1 Bcf/d greater than deliveries. However,
adding both Alliance and Vector reduces the net variance by only
325 MMcf/d to 625 MMcf/d more mainline receipts than deliveries,
Alliance is due to start bringing its load of Canadian gas
production from British Columbia and Alberta to Chicago on Oct. 30.
Vector is scheduled to provide receipt capacity at Chicago and
transportation to the Dawn Hub in Ontario starting Nov. 1. Vector
is expected to open at about 725 MMcf/d until it gets its Highland
compressor station operational. It also will be expandable to 1.5
The Chicago-Henry Hub basis differential is roughly about 10
cents "going out until 2003," Goetz said. "When you add Alliance
[and Vector], the basis differentials do not change materially."
Goetz estimates a basis increase of only two cents to a total of 12
cents based on the cost of transporting gas from Chicago to eastern
market points. Historically Chicago was based more on the variable
cost of transporting gas from the Rockies.
People Energy's Timothy Hermann, supervisor of hub services,
noted that there is enough new gas-fired power generation in and
around Chicago this year to easily absorb on an hourly basis any
incremental increase in deliveries over receipts. "On a daily
basis, I think in 2001 that gas will be spoken for, too. But on
those mild summer days I think we could still see Chicago in a long
Chicago has the most liquidity of all the other major market
hubs. "It out-does any other market hub for its deliverability in
and out [of the hub]," noted Goetz. "And for price discovery
purposes we can see liquidity going out five, 10, 12 and even 15
years with very close [bid-ask] spreads. That's important for any
other pricing mechanisms we need."
However, there will be some major hurdles to cross locally for
Chicago's spot at the top to be maintained. Hermann expects an
initial negative impact on local price liquidity until the market
irons out the wrinkles in gas flow and pricing among the multiple
delivery points within the Chicago area.
The current infrastructure will be taxed considerably with the
introduction of the Alliance, Vector, and the other new and
proposed pipelines, including the Guardian, Horizon and Whitecap
Energy projects to northern Illinois and Wisconsin.
Although in the broad scheme of things Chicago looks very
healthy and robust, there are some "logistical limitations that are
working against a fluid and efficient marketplace," said Hermann.
"The Chicago market is not as well connected as it was two years
ago. Most of the new capacity is being added south of Joilet, IL,
whereas most of the new demand growth is occurring north of Joliet.
The Chicago infrastructure is becoming subject to limitations that
will soon eat into the trading liquidity people enjoy here. One
example is supply into Nicor where Northern Border, NGPL and ANR
compete not only with each other but also with Nicor's own storage
and transmission capacity. Another example is that Alliance volumes
into Peoples will at times be limited to the connection location.
And finally, there are numerous systems connected at Chicago but
not connected in a very robust manner. As more supply is introduced
by new sources, the system integration efforts really have not kept
pace, and soon there is going to be a limitation here and it's
going to have a negative effect on liquidity. We need some assets,
like compression and pipe."
With the addition of so many new pipelines in Chicago, but
particularly the larger ones, problems may begin to show up because
of the numerous points on the LDC systems, Hermann added. On the
Nicor and Nipsco systems alone there are about 16 potential trading
points. "This has not been a barrier to market liquidity in the
past because most gas traded at one point on the system because of
a lack of supply adversity. But the introduction of large volumes
of competitively priced gas at new supply points is going to erode
market liquidity in Chicago," he said. Last October, Peoples
created a pool on its system that decreased the number of potential
trading points from six to one. "The results were very successful,
and the same pooling concepts, I believe, can be used elsewhere."
Meeting the needs of new power generation, however, could end up
being the biggest challenge. "On the one hand we are going to see
increased volatility as the market needs more balancing assets, but
I think there is going to be a new source of balancing assets with
the introduction of Vector because it attaches to
high-deliverability storage in Michigan. But Chicago is still
pretty hungry for more transparent options for extremely volatile
loads," said Hermann.
Another major weakness in the market is the inability of the
LDCs to provide no-notice services or allow other players to step
in and provide those services. If the LDCs don't get on the ball
soon, they may not be the ones serving these new generation loads
at all, said Goetz.