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Vector Sees Excess Capacity; Suppliers Step Up Pace

Vector Sees Excess Capacity; Suppliers Step Up Pace

While admitting that proliferating pipeline projects are creating a tall order for marketers, the Canadian natural gas community is not only talking optimistically - it is acting on expectations that its hopes for increased exports will come true.

As Vector Pipeline described a huge sales challenge in an application to the National Energy Board for construction of its Canadian leg, two pillars of the production sector set a torrid pace for adding supplies to fill the expanding transportation grid.

Vector, adding up all the pipeline space developing around the Chicago trading hub, told the NEB there will be 5.9 Bcf/d more than the Midwest U.S. needs by 2000 - an amount approaching 75% of the capacity on TransCanada PipeLines. About 2.3 Bcf, or 40% of the total, will be Canadian gas arriving via the almost-completed expansion and extension of the Foothills-Northern Border system and Alliance Pipeline Project, now awaiting final NEB approval after receiving a clean environmental bill of health from Canadian authorities. The Chicago rush is unaffected by a sharp cut that TransCanada announced for the 1999 edition of its annual facilities additions (please see story p.7). TransCanada lopped 59% off the expansion budget by cutting the planned capacity additions down to 108 MMcf/d.

As the pipeline projects come together, the Canadian industry is rapidly gearing up to fill them. Amid flurries of announcements of drilling budgets shifting into gas and away from oil, Amoco Canada Petroleum and Alberta Energy showed that the change is already well under way and set examples of how it can pay off.

Amoco reported completing the second-biggest well in Canadian history, a 70 MMcf/d producer drilled 15,800 feet into the prolific Rocky Mountain foothills at Blackstone, 150 miles northwest of Calgary. The only larger producer is another Amoco well in the same area yielding 80 MMcf/d.

Amoco Canada president Greg Rich called the timing of the whopper wells "perfect" because they "coincide with the anticipated increase in export pipeline capacity." Being Canada's top gas producer is already paying off handsomely. Parent Amoco Corp. reported that stature let its wholly-owned Canadian arm buck the industry trend to sharply lowered earnings due to poor oil prices. Amoco Canada netted US$107 million in first-half 1998, compared to $103 million in the same period last year. Canadian gas production rose to 769 MMcf/d so far this year, compared to 749 MMcf/d a year earlier. Prices for Canadian gas production averaged US$1.35/Mcf in first-half 1998, up 20 cents since last year.

Alberta Energy likewise bucked the trend by reporting a doubling in 1998 second-quarter operations earnings (to C$5.3 million or US$3.7 million), thanks to its stature as Canada's sixth-ranked gas producer. The company promptly announced a 100-well gas drilling campaign on its prolific Suffield Block in southeastern Alberta, with president Gwyn Morgan declaring "the Canadian natural gas industry will soon mark an historic milestone: unrestricted access to North American markets."

Vector, while not minimizing the challenge of finding homes for all the new deliveries headed for Chicago over the next two years, described the sales opportunities as no less large. The project, sponsored by Alliance part-owner IPL Energy and MCN Energy Group, says it is providing a natural and essential further link with its proposal for a US$470 million line with initial capacity to move 1 Bcf/d 350 miles beyond Chicago to the Dawn trading hub on the TransCanada system in southern Ontario. From Dawn, the gas can move across central Canada and into New England via a variety of routes including new export connections of TransCanada with the proposed Millennium Pipeline to the U.S. Atlantic seaboard.

The Vector partners suggest there will be ample markets for all the gas in both Canada and south of the border, provided the right transportation services are available.

After rising by an exceptionally strong rate that averaged 3.5% or 107.5 MMcf/d each year during 1995-96, the growth rate among current sources of central Canadian demand is expected to taper off. The pace is forecast to stay at a healthy 2.1% until 2005 and 1.6% in 2005-10. But pleasant surprises are rated as likely in Ontario. Current gas demand forecasts do not count the "wild card" in Canadian gas demand, the forthcoming overhaul of electricity markets. Sharp increases in demand for gas as power-station fuel could be generated - and sooner, rather than later - as a result of open markets for electricity combined with closure of nuclear plants, the NEB is told.

Although Ontario could replace some of its atomic power with imports from other provinces and the U.S., "there is a very real prospect that gas-fired generation will be required to replace a portion of the 4,560 MW of shut-down capacity. For example, if gas-fired generation were to replace one-quarter of the shut-down capacity (1,100 MW), this would result in an additional 240 MMcf/d of gas baseload requirements."

Gordon Jaremko, Calgary

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