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NEB Finds No Fault With Canadian Gas Prices

NEB Finds No Fault With Canadian Gas Prices

Amid persistent questions about supplies and sustained high prices, the Canadian natural gas community heard a reassuring word --- it is not an issue in the federal election, and its defenders are armed with answers if critics step forward before the Nov. 27 vote. The good word --- and the defense arsenal --- came from the National Energy Board, in a 61-page market assessment released as the Canadian campaign entered its second week at the same time as falling thermometers signaled the onset of heating season.

The report concluded that the "continental market" for gas is treating Canadian consumers fairly, the current tightness is a natural part of a normal economic cycle and the tables will turn in their favor again. In the more formal terms of the NEB's "market-based procedure" for overseeing exports, there is no evidence that Canadian consumers have the right to halt continuing expansion of sales to the United States on the only allowed grounds --- that domestic gas users are being denied supplies at fair prices.

Although there has been some public grumbling over the up to seven-fold price increases in Canada as pipeline expansions eliminated supply gluts known as "trapped gas," the NEB's favorable verdict is unqualified. The board reports "a review of the annual weighted average border price for Alberta gas indicates that domestic gas users paid less than export customers until 1998, at which point the two prices converged. This indicates that Canadians have had access to natural gas on terms, including price, no less favorable than export customers."

The NEB, while refusing to be tied down to specific predictions, suggests that the seller's market of today is bound to head back in the opposite direction again. "Natural gas producers throughout North America have been responding to the current high price environment with aggressive drilling programs. In time, there will be a supply and a demand response, and accompanying relief in natural gas prices is expected."

The board continues to describe the Canadian resource base as abundant, and repeats the confidence that led it to replace strict supply policing and border controls with the market-based procedure in 1987. "A period of market adjustment is necessary any time the dynamic between supply, transportation and demand is significantly changed. It is difficult, if not impossible, to predict with certainty any movements in the commodity markets."

The NEB observed that a lag in the gas supply response to the tight market will be especially predictable this time around because the severe 1997-98 slump in oil prices cut all activity by the industry. The Canadian Energy Research Institute, a semi-official voice supported by a cross-section of government and industry authorities, suggested it will be later rather than sooner before the buyers' market returns. CERI officials voiced skepticism over results of an annual gas deliverability survey that indicated Canadian producers expect to add 2 Bcf/d of capacity by 2002.

The deliverability plan equals current estimates of excess pipeline capacity when Alliance Pipeline commences deliveries later this month. Project spokesman Jay Godfrey confirmed that Alliance will be able to carry about 1.5 Bcf/d in order to guarantee its firm-service commitments of 1.3 billion. Shippers are able to book extra capacity for the cost of the compressor fuel needed to use it. Godfrey, echoing the producers who founded the project before selling it to pipeline companies, said Alliance sees nothing wrong with excess capacity in the grid on principle. In practice, Alliance expects to be full because its shippers have contracts obliging them to pay for its capacity whether they use it or not, leaving the spare room to open up on elsewhere, chiefly on the TransCanada-Nova systems already plagued by non-renewals of service agreements.

CERI officials said their computer modeling suggests it would be realistic to expect western Canadian supplies to grow by only 300-400 MMcf/d in 2001. Although numbers of gas wells are proliferating, 60% of completions are shallow to tap low-cost reserves that can be marketed quickly, but also run dry rapidly. Results take longer from more expensive exploration plays developing along the Rocky Mountain foothills in western Alberta, northeastern British Columbia and the southern Northwest Territories. Canadian producers remain more optimistic than CERI, observing that exploration results are starting to come in and more successes are on the horizon.

In the West, a group led by Chevron Canada started production by its second find in the Liard area of the territories and projected flows from the single new well will reach 50 MMcf/d within a week then potentially rise to 75 MMcf/d.

On the East Coast a producers' consortium secured leases last week for about 3,850 square miles of gas drilling prospects offshore of Nova Scotia in trade for commitments to do C$191.76 million (US$132 million) in exploration work (see related story this issue).

Gordon Jaremko, Calgary

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