Canada’s National Energy Board gave natural-gas exporters alicense to grow by approving the Alliance Pipeline Project, but theboard included a warning of the risks of excess capacity: pricecuts and strained supplies.

With a prediction the entire Canadian gas community will gaineventually, the NEB bluntly broke up the old-boy network thatdominated transportation north of the international border sincethe 1950s. The landmark ruling said “the board agrees with thoseparties who argued (in 77 days of hotly-contested hearings) thatAlliance will provide benefits by offering producers an alternativetransportation service and by increasing competition amongpipelines.”

Officially, Alliance president Dennis Cornelson was cautious,describing the ruling announced Nov. 26 as “another key milestone”but not the last it has to pass. The final hurdle will beendorsement by the federal cabinet in Ottawa. After poring over theNEB’s approval for a week, Alliance declared none of theengineering or environmental conditions hurt the project andformally received the Certificate of Public Convenience andNecessity for its Canadian half. President Dennis Cornelson saidthe project will move ahead on schedule, which calls for a start onconstruction early in the new year and completion in the lastquarter of 2000.

Cornelson acknowledged “there are significant challenges beforeus.” Not the least of them will be filling up the pipeline from aCanadian gas production sector already straining to keep up with1.1 Bcf/d in capacity being added this year by the TransCanadaPipeLines and Foothills-Northern Border systems. Compounding thedemands on productive capacity are constraints on drilling budgetsdue to poor oil prices for all but a handful of Canadian producerswhich are pure gas specialists.

The NEB noted that Alliance had its eyes open to production anddrilling issues and declared itself to be an “at-risk” project,with its owners taking responsibility for any problems arising forit from excess capacity in the overall pipeline grid. Canadianmarketers and industry analysts, however, predict that Nova andTransCanada are as likely to feel any pinch as Alliance.

The new project is fully subscribed, with 15-year commitments topay demand charges for its 1.3 Bcf in daily capacity whether theservice is used or not. TransCanada is widely forecast, amongCanadians, to face the toughest capacity marketing problem becausemany of its current transportation agreements have one-year terms.While no one is predicting competitive toll cuts yet, seniormarketers privately describe them as at least a theoreticalpossibility if Canadian producers fall behind in topping off”deliverability” by the time Alliance goes into service.

The NEB ruling set aside time-honored Canadian doctrine thatpipelines are public utilities that should be restricted to ahandful of franchises or natural monopolies, with the grid’s totalcapacity managed by government authority to protect their tolls andrevenues. The board said it accepts that “the potential for someduplication of facilities is inherent in the nature ofcompetition.”

The NEB noted Alliance and the Alberta pipeline grid,TransCanada’s Nova Gas Transmission, have 35 receipt points incommon. Talks are under way on interconnections. But it will not bea loss if the overlap leads to rivalry with the transportersdiscounting tolls or making other special offers to court shippers,the NEB suggested.

The board said, “If commercial negotiations do not completelyeliminate potential duplication, it will likely be due to theparties’ judgment that they are willing to compete in certain areas. . . duplication which results in beneficial competition may beconsidered to be in the public interest.”

Attention to Risk

The decision made it plain that the new era has some risks. TheNEB observed that completion of Alliance’s gas producer-inspired,C$3.7 billion (US$2.6 billion), 1,875-mile, 1.3 Bcf/d route toChicago by late 2000 is bound to create excess transportationcapacity and escalate competition to sell gas, especially in theearly years of the new pipeline.

The decision marks a landmark departure from traditionalCanadian requirements for proof that all the gas to fill a newpipeline is on hand. The NEB accepted $8.2 billion in 15-yearcommitments to Alliance shipping contracts as proof that producersare confident they will have the supplies.

The decision also brought to an abrupt end attempts to halt orchange Alliance by the Canadian petrochemical industry, with NovaChemicals leading the attack. Setting aside a mass of consultingstudies as invalid, the NEB found there is no reason to believethat Alliance’s plan to carry a gas stream rich in liquidbyproducts will dry up supplies of ethane raw materials forCanadian plants. “By providing enhanced market access, the Allianceproject would encourage additional gas production.thereby yieldingincreased supplies of ethane.”

In what may be the last in a long string of annual capacityadditions for some time, the NEB approved a 1999 program byTransCanada. The plan calls for C$402.9 million (US$280 million) infacilities by Nov. 1, 1999. The package was sharply cut downearlier this year. TransCanada lopped off C$575.9 million (US$400million) or 59% the 1999 expansion budget by cutting the plannedcapacity additions down to 108 MMcf/d, as a result of a resolutionof a dispute between Kamine Development and Niagara Mohawk Powerthat will close three cogeneration plants as well as an agreementby Union Gas Ltd. to use other delivery routes. TransCanada, hopingto hold down costs and tolls as it enters a new era of competitionamong Canadian pipelines, had asked shippers that could make otherarrangements to step forward.

Gordon Jaremko, Calgary

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