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Alliance, Vector Pose Unforeseen Challenges

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, Goetz calculated.

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 Bcf/d.

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 hand position."

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.

Rocco Canonica

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