Nova, TransCanada Mega-Merger Puts Pan-Alberta Sale on Hold

The intended sale of one of Canada's biggest energy trading houses, Pan-Alberta Gas, has been put on hold as a result of the merger agreement between its parent, Nova Corp., and TransCanada PipeLine.

The sale "will be re-evaluated" in work on a final merger deal scheduled for completion by the end of June, said Nova spokesman Lisa Neiles, confirming speculation by other Canadian marketers.

Pan-Alberta is being watched closely by producers and traders. It is embroiled in an escalating legal dispute affecting much of the Canadian industry. And the merger potentially spells a realignment of Canadian trading by siring a new giant, with daily sales approaching seven Bcf, or more than one-third of Canadian production.

While Nova chief executive Ted Newall and TransCanada president George Watson gave nothing away in announcing the merger, their declared list of its benefits included "significant new marketing opportunities." Keeping Pan-Alberta as part of the family would help boost TransCanada Gas Services into the rarified air of the top five North American marketers, but it also would saddle it with a bitter court fight with producers.

Pan-Alberta, wholly-owned by Nova, sells 1.6 Bcf/d, primarily in the United States, for a supply pool of 425 producers that dates back to the 1970s. TransCanada Gas Services, handles about 5 Bcf/d across North America. More than half the TransCanada portfolio comes from a supply pool of about 700 Canadian producers in a structure that has a pedigree dating back to the birth of the industry.

The membership rosters of the Pan-Alberta and TransCanada supply pools overlap. The structures are held together by long-term contracts representing combined reserves well in excess of 10 Tcf.

Neiles reported that Nova's offer to sell Pan-Alberta, announced in December, drew numerous expressions of interest before the merger with TransCanada came along. Names and nationalities of prospective bidders are being kept confidential. Only one potential buyer has been ruled out by Nova: NGC Corp. of Houston, which is 26% owned by Nova.

Long before the merger set off fresh concerns over corporate concentration in the Canadian gas community, producers mounted a challenge of traditional "aggregator" roles and powers with a lawsuit against Pan-Alberta in Alberta Court of Queen's Bench. The year-old case escalated in late December, when Nova was dragged in as a defendant by a revised, increased claim from an expanded roster of plaintiffs.

The plaintiffs on the record include Anderson Exploration, Apache Canada, Gulf Canada, Home Oil, PanCanadian Petroleum, PCC Energy, Talisman Energy, Numac Energy and Pinnacle Resources. But a recent decision drew in the whole Pan-Alberta supply pool. Justice Kenneth Moore granted a request by Nova to make the case a Canadian version of a class-action lawsuit, by declaring the nine named plaintiffs are "representative" of the entire pool and that any results of the fight should be shared among all its 425 members. The ruling is under appeal.

In adding Nova to the court battle, the producers tripled their original claims. They allege misconduct by the aggregator has cost them at least C$150 million (US$110 million), and also demand punitive damages of C$5 million (US$3.6 million) apiece against Pan-Alberta and Nova. The case is still young by courthouse standards, but clerks need a dolly to trundle the file around, and that's not counting the 26,000 documents stored in electronic form.

The fight boils down to a definition of marketers' roles in Canada, past and future. The claims and defense statements ask the court to rule whether big marketers are father figures with special responsibilities, or just traders.

The producers claim pool arrangements put them at the "sole mercy" of Pan-Alberta and that it lost money on their behalf by failing to live up to "fiduciary obligations" or trust duties. Those allegedly include obtaining top market prices or better, and staying out of conflicts of interest by refraining from doing favors for affiliates including Canadian arms of the NGC-Nova alliance.

Among multiple claims, the producers allege the Nova family has diverted their gas into cut-priced domestic spot markets when prices elsewhere rose and it could not obtain volumes to meet its commitments from suppliers outside the pool.

The Nova side's lawyers retort that it and the producers "were and are parties of equal bargaining power, each capable of protecting their interests . . . none of the plaintiffs was subject to the 'sole mercy' of the defendant," Pan-Alberta. "The relationship . . . was, and is, one of buyers and sellers of natural gas," with diverse producers negotiating varying contracts with Pan-Alberta and doing deals with other traders. The case continues.

Gordon Jaremko, Calgary

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