Peace at Last in Canada's Gas Industry

Peace has broken out in the Canadian natural gas community with a new pact on competition that's as good as it gets in the eternal producer-pipeline rivalry.

The agreement announced last week virtually assures construction of the producer-spawned Alliance Pipeline Project, approval of the merger between TransCanada PipeLines and Nova Corp., and a settlement on a new tolling regime on Nova's Alberta gathering grid. It also ushers in a new era of marketer accountability, with pool producers invited into the pipelines' gas marketing shops to examine and help direct marketing practices.

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

Alliance, while not directly a party to the accord, is at the heart of it as a producer initiative to inject competition into the Canadian gas transportation sector. Results showed immediately. The worst enemy of the proposed export route to Chicago, Foothills Pipe Lines, withdrew a motion that threatened to delay the project indefinitely before the National Energy Board and the courts. Alliance promptly announced placing C$1.4 billion (US$1 billion) in pipe orders. Vice-president Jack Crawford said construction could start this fall.

TransCanada President George Watson told a telephone news conference "this has been a terrific win for all of us." But he added that the pact does not convert TransCanada-Nova into a fan of Alliance. "We do not support Alliance. We support competition. To the extent they can make themselves a competitor, I guess they are." TransCanada Vice President Bob Reid explained that, regardless of the new agreement's wording, TransCanada- Nova cannot become an active backer of Alliance in the same sense that Avis does not support Hertz, nor does Macy's sell Gimbels.

The peace pact, crafted in months of negotiations behind the scenes while the Alliance case set a duration record for hearings before the NEB, covers the full spectrum of issues that have divided the Canadian gas community. CAPP and SEPAC agreed to support the TransCanada-Nova merger rather than hold it up in a morass of regulatory/legal wrangling over the monopoly aspects of the combo.

In exchange, TransCanada and Nova signed a declaration that their combination will not try to monopolize Canadian gas transportation. The agreement says: "In recognition of the dynamic nature of the Canadian natural gas industry, the parties are intent upon promoting a competitive environment and greater customer choice." The pact further declares all sides will respect "the need to construct competitive incremental pipeline capacity from the Western Canadian Sedimentary Basin by both new competitors and existing pipelines alike in a timely, safe and cost-effective manner."

There also will be co-operation on promoting "regulatory changes that will provide existing and new pipelines equal opportunity to compete, recognizing that such competition is desirable and in the best interests of all industry stakeholders." The provisions include a pledge by TransCanada-Nova to negotiate interconnections with Alliance after it receives regulatory approval. CAPP and SEPAC, in turn, agree to co-operate on negotiating ways for any resulting added costs to the Nova grid to be incorporated into its tolls for a five-year period.

The agreement further sets a target date of May 8 for a settlement on a new tolling regime proposed by Nova to replace its 15-year-old regime of uniform postage-stamp tolling-a change triggered by Alliance and other bypass proposals.

Other items in the peace accord call for: a continuation of cost-cutting incentive agreements between shippers and TransCanada-Nova and a settlement by Dec. 31 on proposals for a new regulatory regime giving TransCanada-Nova a better chance to compete for future additions to the pipeline grid with changes such as "differentiated" tolling to reflect duration of shipping contracts early renewal incentives and shortened minimum term requirements.

Producers Win Marketing Concessions

The pact will improve the competitive position of the western Canadian production basin and demonstrates that the nation's suppliers and transporters can work together as a team, said CAPP Chairmen Norm McIntyre and George Fink of the SEPAC.

A key feature in getting producer support is the plan to have a producer group, the "Netback Steering Committee," participate in a restructuring of TransCanada's marketing arm, TransCanada Gas Services (TCGS). A direct descendant of Western Gas Marketing, TCGS is heir to one of the biggest supply blocks on the continent as TransCanada's sales affiliate, marketing 5 Bcf/d for 700 producers-or virtually the entire Canadian supply community-with reserves of 13 Tcf.

The netback committee will appoint audit and restructuring subcommittees to conduct a thorough analysis of TCGS's performance and devise changes. The deal authorizes "an historical audit of the TCGS netback pool conducted by independent auditors." There will be "good-faith discussions with TCGS aimed at restructuring the netback pool to provide improved pricing and delivery options to producers."

The committees are a key element in carrying out a pledge by the industry-wide agreement "to undertake a process that will include review and possible modification of existing codes of conduct." The pact specifies, "TransCanada and Nova acknowledge industry's concern with the adequacy of separation between their regulated gas transportation businesses and non-regulated businesses, such as gas marketing, gas gathering, processing and natural gas liquids marketing."

Industry sources suggest this part of the accord is meant to prevent repetition of a fight over the conduct of the nation's second-largest aggregator, Pan-Alberta Gas. A Nova affiliate that has been excluded from the merger with TransCanada and put up for sale, Pan-Alberta is mired in a court battle with senior members of a 425-company supply pool.

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

While not offering any money to settle the court case, the new industry-wide agreement effectively grants, in the case of TCGS, other key demands of the lawsuit. The steering, audit and restructuring groups for TCGS are conflict-preventing answers to calls for full information and a say on marketer conduct that figure in the Pan-Alberta case. TCGS's supply pool overlaps with the Pan-Alberta block, and Nova's ownership share of NGC is being included in the merger with TransCanada.

Nova Rate Overhaul

The commitment to a May settlement with Nova spells a complete rate overhaul and replacement of "postage stamp" tolls on its Alberta pipeline grid.

The new plan offers a shopping list of transportation services and rates. Tolls would depend on distances of shipments, the diameters or costs of the pipe used, and the duration of service contracts. The proposal would not change Nova's overall revenue requirement. But the multiple options put aside the old standard C26 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 for markets outside the province. Nova's plans call for a 16-week period to implement the new system following a settlement with shippers and approval by the Alberta Energy and Utilities Board.

The industry-wide peace accord's deadline for a settlement on Nova tolls puts heavy pressure on producers to get their act together. The conflict over postage-stamp tolling is less with Nova than between producers with fields in different parts of 265,000-square-mile Alberta, such as PanCanadian Petroleum in the south versus Anderson Exploration in the distant northwest. Postage-stamp tolling was a policy crafted by the Alberta government to encourage gas development across the province by ensuring transportation costs did not inhibit northern drilling. Southern producers cracked the policy by mounting bypass projects that came under NEB jurisdiction and forced Nova to negotiate special "load-retention" discounts, then Alliance finished the job of inaugurating an era of pipeline competition.

Gordon Jaremko, Calgary

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