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NEB Says Gas Export Capacity Adequate Despite Oil Conversion

Canada will have enough spare natural gas export capacity to cover for another North American natural supply emergency like the 2005 hurricane season in the Gulf of Mexico, even if a proposed pipeline conversion to oil service goes ahead, the National Energy Board (NEB) says.

The NEB made the prediction in its reasons for a decision approving the first step in a hotly contested conversion plan. The ruling authorized TransCanada to transfer ownership of one of six lines in its mainline system supplying central Canada, the U.S. Middle West and the northeastern states over to an oil sands transportation partnership with ConocoPhillips. Hearings on the US$2-billion project's engineering and construction application are scheduled for June.

The conversion, to carry 435,000 b/d of oil sands production, is expected to reduce TransCanada's mainline gas capacity by about 500 MMcf/d or 7% off its current maximum of 7.5 Bcf.

The ownership transfer was fought by environmentalists, conservationists and major Canadian gas producers and merchants including BP Canada, Coral Energy Canada, Devon Canada, EnCana Corp., Nexen Inc. and Shell Canada.

Opposing producers defended the gas line as potentially needed, both to encourage pipeline capacity by maintaining a safety margin of spare capacity and to anticipate potential growth in coalbed methane and arctic supplies.

But other producers with large and rapidly growing oil sands operations, such as Suncor Energy and Canadian Natural Resources Ltd., supported the project and have begun to sign binding transportation service contracts for the conversion. About three-quarters of the proposed oil capacity is booked.

Opponents of the oil conversion painted a scenario where it could turn out to damage the industry. Imagine Canadian supplies resume growing as northern and coalbed methane production reaches markets, the worst-case scenario said. Canadian demand falls off, possibly if growth of oil sands production as a major industrial gas consumer slows down. Then hurricanes again damage Gulf of Mexico production, igniting a call for accelerated Canadian gas exports.

"This set of market conditions was not shown to be sufficiently credible to serve as a basis for long-term planning of (TransCanada) mainline utilization," the NEB said. "In the event that such conditions were to occur, it appears that average day flows could still be accommodated without the (conversion) facilities in gas service, and that no firm transportation service forecast volumes would be impacted under peak day conditions."

The NEB ruled that multiple 1990s expansions of the TransCanada gas system -- plus new construction of the Alliance and Vector lines -- has left the Canadian gas grid with enough spare capacity to give up some safely.

Evidence presented to the ownership transfer hearings showed the TransCanada mainline permanently lost 1.5 Bcf/d of contract gas delivery volumes. The NEB suggested the best measure of whether the space is truly needed is the willingness of shippers to subscribe to it. No takers have stepped forward for firm contracts for TransCanada's excess capacity, the board pointed out. And the spare room appears destined to grow as long-term transportation service contracts expire.

"Shippers are entitled to receive the service for which they contract," the NEB said "The recent pattern of contract non-renewals does not strongly support the contention (by producers against the oil conversion) that the capacity associated with the facilities (to be transferred) is required."

The outlook is completely different for the oil side of the Canadian energy industry.

An estimated C$120 billion (US$100 billion) in projects are lined up at least to triple oil sands production to three million barrels daily within 10 to 15 years. Five-fold growth is a theoretical possibility if all known projects are built on announced schedules. The only holdups are labor and "infrastructure" shortages. Accelerating construction in the northern Alberta bitumen belt is already feverish to the point where strains on local and provincial services from schools and hospitals to roads and sewers have become major political issues.

Oil grid expansions are under way but not fast enough. "Incremental oil pipeline capacity will be needed as early as late 2009 to accommodate the forecast growth in oil sands production," the NEB predicted.

"If there is insufficient pipeline capacity to connect the growing crude oil supply to potential markets, the risk of apportionment (capacity rationing) — which is currently happening on some pipelines — and shut-in oil is increased," the NEB said.

"In addition, constrained access to markets capable of processing the heavier Canadian grades could exert downward pressure on heavy oil prices, thus widening the light-heavy price differential, leading economically inefficient outcomes." That is, quality price discounts on oilsands output would increase, investment would be threatened, and Alberta provincial royalties that account for up to 40% of government revenues would take a beating.

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