Peace has broken out in the Canadian natural gas community witha new pact on competition that’s as good as it gets in the eternalproducer-pipeline rivalry.

The agreement announced last week virtually assures constructionof the producer-spawned Alliance Pipeline Project, approval of themerger between TransCanada PipeLines and Nova Corp., and asettlement on a new tolling regime on Nova’s Alberta gatheringgrid. It also ushers in a new era of marketer accountability, withpool producers invited into the pipelines’ gas marketing shops toexamine and help direct marketing practices.

Along with TransCanada and Nova, the agreement includesvirtually 100% of Canadian gas production because it is signed bythe Small Explorers and Producers Association of Canada as well asthe Canadian Association of Petroleum Producers.

Alliance, while not directly a party to the accord, is at theheart of it as a producer initiative to inject competition into theCanadian gas transportation sector. Results showed immediately. Theworst enemy of the proposed export route to Chicago, Foothills PipeLines, withdrew a motion that threatened to delay the projectindefinitely before the National Energy Board and the courts.Alliance promptly announced placing C$1.4 billion (US$1 billion) inpipe orders. Vice-president Jack Crawford said construction couldstart this fall.

TransCanada President George Watson told a telephone newsconference “this has been a terrific win for all of us.” But headded that the pact does not convert TransCanada-Nova into a fan ofAlliance. “We do not support Alliance. We support competition. Tothe extent they can make themselves a competitor, I guess theyare.” TransCanada Vice President Bob Reid explained that,regardless of the new agreement’s wording, TransCanada- Nova cannotbecome an active backer of Alliance in the same sense that Avisdoes not support Hertz, nor does Macy’s sell Gimbels.

The peace pact, crafted in months of negotiations behind thescenes while the Alliance case set a duration record for hearingsbefore the NEB, covers the full spectrum of issues that havedivided the Canadian gas community. CAPP and SEPAC agreed tosupport the TransCanada-Nova merger rather than hold it up in amorass of regulatory/legal wrangling over the monopoly aspects ofthe combo.

In exchange, TransCanada and Nova signed a declaration thattheir combination will not try to monopolize Canadian gastransportation. The agreement says: “In recognition of the dynamicnature of the Canadian natural gas industry, the parties are intentupon promoting a competitive environment and greater customerchoice.” The pact further declares all sides will respect “the needto construct competitive incremental pipeline capacity from theWestern Canadian Sedimentary Basin by both new competitors andexisting pipelines alike in a timely, safe and cost-effectivemanner.”

There also will be co-operation on promoting “regulatory changesthat will provide existing and new pipelines equal opportunity tocompete, recognizing that such competition is desirable and in thebest interests of all industry stakeholders.” The provisionsinclude a pledge by TransCanada-Nova to negotiate interconnectionswith Alliance after it receives regulatory approval. CAPP andSEPAC, in turn, agree to co-operate on negotiating ways for anyresulting added costs to the Nova grid to be incorporated into itstolls for a five-year period.

The agreement further sets a target date of May 8 for asettlement on a new tolling regime proposed by Nova to replace its15-year-old regime of uniform postage-stamp tolling-a changetriggered by Alliance and other bypass proposals.

Other items in the peace accord call for: a continuation ofcost-cutting incentive agreements between shippers andTransCanada-Nova and a settlement by Dec. 31 on proposals for a newregulatory regime giving TransCanada-Nova a better chance tocompete for future additions to the pipeline grid with changes suchas “differentiated” tolling to reflect duration of shippingcontracts early renewal incentives and shortened minimum termrequirements.

Producers Win Marketing Concessions

The pact will improve the competitive position of the westernCanadian production basin and demonstrates that the nation’ssuppliers and transporters can work together as a team, said CAPPChairmen Norm McIntyre and George Fink of the SEPAC.

A key feature in getting producer support is the plan to have aproducer group, the “Netback Steering Committee,” participate in arestructuring of TransCanada’s marketing arm, TransCanada GasServices (TCGS). A direct descendant of Western Gas Marketing, TCGSis heir to one of the biggest supply blocks on the continent asTransCanada’s sales affiliate, marketing 5 Bcf/d for 700producers-or virtually the entire Canadian supply community-withreserves of 13 Tcf.

The netback committee will appoint audit and restructuringsubcommittees to conduct a thorough analysis of TCGS’s performanceand devise changes. The deal authorizes “an historical audit of theTCGS netback pool conducted by independent auditors.” There will be”good-faith discussions with TCGS aimed at restructuring thenetback pool to provide improved pricing and delivery options toproducers.”

The committees are a key element in carrying out a pledge by theindustry-wide agreement “to undertake a process that will includereview and possible modification of existing codes of conduct.” Thepact specifies, “TransCanada and Nova acknowledge industry’sconcern with the adequacy of separation between their regulated gastransportation businesses and non-regulated businesses, such as gasmarketing, gas gathering, processing and natural gas liquidsmarketing.”

Industry sources suggest this part of the accord is meant toprevent repetition of a fight over the conduct of the nation’ssecond-largest aggregator, Pan-Alberta Gas. A Nova affiliate thathas been excluded from the merger with TransCanada and put up forsale, Pan-Alberta is mired in a court battle with senior members ofa 425-company supply pool.

The lawsuit claims that misconduct by Nova and Pan-Alberta, at atime when their marketing operations were closely linked withNova’s 26%-owned NGC Corp., cost the supply pool at least C$150million (US$110 million). The suit alleges that supply pool gas wasdiverted to meet marketer commitments to low-cost sales at a timewhen prices were rising and pool members had a right to command thehighest returns available. Pan-Alberta rejects all charges, sayingit was complying with contractual and legal mandates.

While not offering any money to settle the court case, the newindustry-wide agreement effectively grants, in the case of TCGS,other key demands of the lawsuit. The steering, audit andrestructuring groups for TCGS are conflict-preventing answers tocalls for full information and a say on marketer conduct thatfigure in the Pan-Alberta case. TCGS’s supply pool overlaps withthe Pan-Alberta block, and Nova’s ownership share of NGC is beingincluded in the merger with TransCanada.

Nova Rate Overhaul

The commitment to a May settlement with Nova spells a completerate overhaul and replacement of “postage stamp” tolls on itsAlberta pipeline grid.

The new plan offers a shopping list of transportation servicesand rates. Tolls would depend on distances of shipments, thediameters or costs of the pipe used, and the duration of servicecontracts. The proposal would not change Nova’s overall revenuerequirement. But the multiple options put aside the old standardC26 cents (US19 cents) per Mcf to generate a wide range of tolls:from C$0.04-.27 (US$0.03-.20 cents) for deliveries within Alberta,and from C$0.17-.40 (US$0.125-.29 cents) for gas destined formarkets outside the province. Nova’s plans call for a 16-weekperiod to implement the new system following a settlement withshippers and approval by the Alberta Energy and Utilities Board.

The industry-wide peace accord’s deadline for a settlement onNova tolls puts heavy pressure on producers to get their acttogether. The conflict over postage-stamp tolling is less with Novathan between producers with fields in different parts of265,000-square-mile Alberta, such as PanCanadian Petroleum in thesouth versus Anderson Exploration in the distant northwest.Postage-stamp tolling was a policy crafted by the Albertagovernment to encourage gas development across the province byensuring transportation costs did not inhibit northern drilling.Southern producers cracked the policy by mounting bypass projectsthat came under NEB jurisdiction and forced Nova to negotiatespecial “load-retention” discounts, then Alliance finished the jobof inaugurating an era of pipeline competition.

Gordon Jaremko, Calgary

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