After six months of increasingly hot and complicated wrangling, the international conflict over natural gas from offshore of Nova Scotia has boiled down to a question at its heart: How free is energy free trade?

Canada’s National Energy Board (NEB) directed all concerned to try coming up with an answer in an overtime round of the fight over a request by the New Brunswick government for intervention to secure access to Nova Scotia gas for domestic consumers in the Maritime provinces, Quebec and Ontario.

On the supply side of the gas equation, the answer turned out to be unanimous: Canada gave up power to interfere with exports in any way that generates favoritism for Canadian consumers, such as price breaks or stockpiles for future domestic use, by signing the Canada-U.S. Free Trade Agreement (FTA) and then the North American Free Trade Agreement (NAFTA).

In the overtime round, an exchange of hotly-worded written submissions requested by the NEB to tie up a loose end left by hearings in Fredericton, the Canadian Association of Petroleum Producers (CAPP) accused New Brunswick of trying to achieve “back-door price regulation.” The province has called for mandatory advance disclosures of all gas-export transactions, coupled with rights for potential eastern Canadian buyers to bid for the supplies.

The proposal includes a complicated formula for deciding on winning bids by taking export pipeline tolls into account in comparing prices offered by U.S. and Canadian customers for Nova Scotia gas. CAPP pointed out that “Canadian natural gas prices in both domestic trade and international trade have long been fully deregulated.” The policy predates the general free-trade pacts of the late 1980s.

Formerly tight and complex controls on both gas prices and export volumes ended as a result of the famous Halloween Agreement of Oct. 31, 1985, between the federal, Alberta, British Columbia and Saskatchewan governments. CAPP said “consistent with the deregulation of natural gas prices and Canada’s reciprocal commitments under the Canada-U.S. Free Trade Agreement and NAFTA, export prices have been removed from the criteria the board may consider in granting an export license . . . such references in gas export policy were long ago removed because they are not consistent with free and open trade.”

Along with the principles laid out by the 1985 agreement, detailed provisions of the trade pacts ended the bad old days of controls that established variable gas prices depending on the destinations of production, CAPP said. “Canada for a number of years pursued a two-price policy for oil and natural gas, with export prices intended to reflect full market value and domestic prices at lower levels. Price deregulation eliminated this discriminating practice.

The FTA later established by treaty a mutual prohibition on such discriminatory pricing policies. This has been carried over and broadened in NAFTA.” CAPP pointed to multiple provisions of the trade treaties. The ban against interference appears most clearly in Article 904 of the FTA and Article 605 of NAFTA, the industry association says. “Neither Canada nor the U.S. may ‘impose a higher price for exports’ of natural gas ‘than the price charged for such good when consumed domestically.”

The principal dealer in gas produced offshore of Nova Scotia, Duke Energy Marketing, echoed CAPP: “Energy is increasingly becoming a borderless commodity.” Duke maintained that “if the process the government of New Brunswick proposes leads, directly or indirectly, to a ‘set-aside’ of gas for domestic use in priority to export, that would constitute an illegal export restriction contrary to both the NEB Act and NAFTA.”

Duke warned that even creating the disclosure and bidding process advocated by New Brunswick would go too far in trying to turn back the clock on energy free trade. The province’s proposal would “have the effect, in and of itself, of impeding the efficient operation of the transboundary market for natural gas,” Duke said. “The existence of the process itself will affect gas purchase negotiations. It will therefore affect the terms and conditions under which the commodity is purchased, including price.”

Maritimes & Northeast Pipeline added that New Brunswick’s proposal violates the spirit of overall Canadian economic policy. MNP says “in an era of free trade, where Canada has committed to adopting a continental perspective with regards to a vast number of trade matters, the discrimination inherent in New Brunswick’s proposal is both inappropriate and unnecessary.”

The New Brunswick government stood its ground. The province insisted, “Establishing procedural rules for short-term export orders does not constitute an export restriction, but rather will provide a method to ensure that eastern Canadians are able to compete for natural gas on an equal level with foreign gas purchasers.”

The gas producers, marketers and transporters need to have a “reality check” by reading other sections of the trade pacts which make it plain that neither Canada nor the U.S. abandoned sovereignty over their energy supplies, New Brunswick said. “Article 603.5 of NAFTA states as follows: ‘Each party may administer a system of import and export licensing for energy . . . provided such system is operated in a manner consistent with the provisions of this agreement.”

New Brunswick pointed out that when Parliament in Ottawa amended the NEB Act to implement NAFTA in 1993, it did not scrap long-standing provisions giving the agency and Canadian consumers a say on the use of Canadian energy resources. The federal government “did not . . . in any way restrict the board’s right to determine its own export approval procedures or restrict anyone’s rights to procedural fairness in export applications.”

The NEB set no dates for a decision on New Brunswick’s application for export policing. In the meantime, the conflict has spread in a different form to forthcoming hearings on M&NP’s filing for a C$190.8 million (US$120 million), 75% capacity expansion to carry 400 MMcf/d from EnCana Corp.’s C$1.1 billion (US$700 million) Deep Panuke project. But the supply side came up with some confirmation for a central part of their case against Canadian interference with exports — that, given time and access to markets, enough supplies will be found to go around.

Marathon Canada and EnCana reported a drilling success viewed by industry analysts as potentially a major step forward for the fledgling Nova Scotia industry. Titled Annapolis, the discovery well — drilled to a depth of 20,282 feet beneath water 5,500 deep about 215 miles offshore, south of Halifax — hit 100 feet of “net gas pay” or potential production zones. No production tests were done, but the explorers made it plain they believe they are on the trail of a big discovery.

Marathon exploration vice-president Phil Behrman called Annapolis “an important first step in the developing deepwater play offshore of Nova Scotia.” His counterpart at EnCana, Gerry Macey, described the well as “a very encouraging beginning for our deepwater acreage.” Follow-up drilling is scheduled to start this fall.

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