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Low Gas Prices Won't Deter TransCanada from Strategy

TransCanada Corp. CEO Hal Kvisle said Friday he didn't want to sound pessimistic about the reserves potential of the ballyhooed North American natural gas shales. "But in the grand scheme of things," he said, "they're just one more source of supply."

Kvisle and his management team hosted a conference call with financial analysts Friday afternoon to discuss the Calgary-based pipeline company's quarterly earnings. TransCanada's profit slipped 26% in the first three months of 2009 from a year ago, when it had gains from court settlements. Net income was C$334 million (54 cents/share), compared with C$449 million (83 cents) in 1Q2008. Revenue rose 12% to C$2.38 billion. Excluding 1Q2008 gains of C$162 million and other one-time items, TransCanada's earnings rose 5.2% to C$343 million.

The company performed well in early 2009 because of increased power generation earnings and benefits from a stronger U.S. dollar, Kvisle explained. Volumes on its gas-gathering pipes in western Canada dropped on a reduced demand for fuel. The company has oil and gas pipelines and storage facilities across North America, and analysts questioned how TransCanada's business strategy has changed as natural gas prices have plummeted.

TransCanada on Thursday announced it would merge its two Rocky Mountain gas proposals, the Pathfinder Pipeline project and the Bison Pipeline project, into one (see related story). Gas production in the Rockies has come to a near halt in recent months because of the recession and low gas prices, and many producers have responded by stepping up drilling operations into the emerging gas shale plays. But Kvisle said the move was not a sign that TransCanada has reconfigured its business strategy or its projections for North American gas supplies going forward.

"As I look back over the last 15 years, there have been many interesting new sources of gas come along," Kvisle said. "And at the time they come along, people proclaim that they are going to change the world. We've had some pretty significant discoveries, too. But in the grand scheme of things, it's just one more source of supply. Remember coalbed methane? None of us in Canada thought it would ever reach 1 Bcf/d and it still has never exceeded 700 million (MMcf/d)...

"Clearly the shale plays have impressive volumes, but I argue that it's just the latest place industry is looking to replace declining production. As producers turn their attention to drilling shale, they tend to leave other places behind...For example, like Talisman Energy, which has moved into shale, but it's pulled back on its conventional gas" (see related story).

The TransCanada chief noted that North America has a 13 Bcf/d annual decline rate, and "people need to drill like crazy to sustain" gas supplies. "Big declines get offset by big resources over time. Shale is just a big opportunity for companies right now."

Kvisle seemed especially critical of the Marcellus Shale in the Appalachian Basin, which, although it's near industrial centers, still lacks infrastructure. Executives at rival pipeline operator Williams said Thursday that the Marcellus offers many midstream opportunities (see related story). Kvisle is not so sure.

"We don't know at this point how aggressively people will develop the Marcellus, how sustainable production is, what kinds of rates it will offer, what type of local opposition there will be as they get drilling locations...I'm not trying to be pessimistic, but some things we just have to see how they unfold over time...If 5 Bcf/d is coming on in the Marcellus Shale, they'll be looking at that in lieu of something else to offset production..."

Through 2009, TransCanada has joined with many of its peers in forecasting low gas prices.

"Clearly LNG [liquefied natural gas] projects are on the back burner for the next little while," he said. TransCanada, he said, was set back by rulings against its Broadwater LNG project (see Daily GPI, April 14), but with Federal Energy Regulatory Commission approval already in hand, "we're just working it through with Shell to decide whether to put it on the back burner or what approach we'd take. Clearly there's not a strong economic signal to proceed on Broadwater or any other thing in the near term...

"The Northern [gas] pipes are interesting. Nobody would proceed with the Mackenzie [Gas Project] or the Alaska gasline based on this month's gas price versus the price eight months ago. Gas prices are obviously volatile, and we'd say our gas price outlook for the longer term is in the US$6-10 range. You could see gas prices go well above $10 and down to $3 or $4, as we're seeing right now. We don't see gas below $4 [for a sustained period] because you can't offset the annual decline in supply based on losing around 13 Bcf/d in North America..." However, he doesn't think gas prices will move up to $6 or above "for a bit..."

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