Two years after shippers sent a message that they wanted a change, Alliance Pipeline Ltd. on Wednesday proposed a new deal to deliver natural gas on its 1,855-mile route between northeastern British Columbia (BC) and Chicago.

The Calgary-based partnership of Enbridge Inc. and Veresen Inc. unveiled a “framework” for renegotiating tariffs and tolls by the time the system’s founding 15-year transportation service contracts expire Dec. 1, 2015. The message that a new deal was needed was sent by contract negotiations in the fall of 2010 as surging shale gas production in the United States flooded markets and cut prices across North America (see Daily GPI, Dec. 6, 2010).

As of a Dec. 3 deadline for contract renewals, only 8% of Alliance’s 1.6 Bcf/d capacity was booked for extensions of the status quo. The pipeline called the renewal problem an opportunity to use its competitive advantage, which is that the system was built in 1999 using a then-new technology that enabled it to carry gas steeped in liquids such as ethane, propane and butane.

Current traffic on Alliance at times exceeds 100,000 b/d of liquids, as vapors that fetch prices linked to oil, which makes them far more valuable than the gas that contains them. They have to date been chiefly extracted at the affiliated Aux Sable Liquids Products plant near Chicago. Ownership of the operation includes Williams Partners LP (14.6%), as well as Enbridge and Veresen (42.7% each).

The new deal framework replaces the original Alliance concept of a Canadian gas-export bullet line from northern Alberta and BC to Chicago with a flexible commercial regime.

The proposed scheme, presented at a Calgary meeting with industry representatives, features an array of potential new services that would enable Alliance to receive and deliver liquids-rich gas at multiple entry and exit points, depending on arrangements between shippers and processors. The framework was crafted over the past two years in private discussions within a group of Canadian and U.S. industry representatives.

The scheme includes zones, variable service rates that depend on where production enters and exits the system, variable contract lengths, a trading pool and multiple pipeline receipt and delivery points all along the route.

Alliance’s declared intentions are to transform itself from a single long-distance delivery service into a post office for liquids-rich gas. Exactly how the system comes together is to be worked out by an open season auction of service contracts, scheduled for early 2013, and put together as a new business package well before the pipeline’s current arrangements expire as of Dec. 1, 2015.

As an assurance that service would be a bargain by current standards, Alliance predicts estimated “indicative tolls” for “full path” deliveries to Chicago from northern BC and Alberta would work out to C$1.12-1.28/Mcf. The figures suggest that thanks to prospects of keeping Alliance full due to its ability to carry liquids-rich production, its rates would be well below costs of using TransCanada Corp.’s system, which carries only dry gas.

Potential for growth is built into current industry conditions, Alliance maintains. Thanks to discoveries of liquids-rich gas since 2001 — and especially to imports of U.S. shale drilling technology since 2006 — the pipeline estimates that Canadian production along its route has grown by 14% to nearly 6 Bcf/d. Output in the northern BC and Alberta region within a 25-mile radius of the line is projected to grow by another 35% to 9-10 Bcf/d by 2020.

While offering opportunities to drop off liquids-rich gas at processing plants along its entire route, Alliance has also been taking steps to keep the business within its corporate family. In January the Aux Sable liquids extraction team announced a package of long processing contracts, titled “rich gas premium agreements,” with Alberta exploration and production companies.

Aux Sable also landed a US$185-million agreement to buy a North Dakota extraction plant from EOG Resources Inc. The deal gave the Alliance family a foothold in the Bakken Shale play. The acquisition removes unwanted impurities from production and sends the cleaned-up brew of gas and useful liquids into the Alliance line.

The Bakken connection also would be expanded by a new 79-mile connection, called the Tioga Lateral Pipeline, from North Dakota production fields to the Alliance long-distance conduit to Aux Sable (see Daily GPI, Sept. 21). Construction was approved last month by the Federal Energy Regulatory Commission. Work started Oct. 1, with the schedule calling for the new link to be finished and ready for operation next summer. Deliveries would begin at a rate of 106 MMcf/d, but the line is being built with 12-inch diameter pipe that will enable expansion, Alliance said.

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