With natural-gas industry attention increasingly focused on costs in Canada, Westcoast Energy Inc. pared 20% off the price tag for its 200 MMcf/d expansion project on its mainline in British Columbia. The subsidiary of Duke Energy cut the budget to C$270 million (US$175 million) from C$338 million (US$220 million) without cutting the amount of the added capacity by making a deal with another B.C. pipeline.

Westcoast trimmed its construction budget by making a capacity swap to drop part of the new facilities in favor of acquiring space on B.C. Gas Utility’s Southern Crossing line across B.C. Westcoast told the National Energy Board (NEB) that corresponding adjustments will be made in tolls associated with the project.

Duke-Westcoast’s timing was right, Canadian industry analysts said. Gas shippers and producers are unhappily counting costs because of changed market conditions from the collapse of Enron Corp., toll negotiations under way with the B.C. delivery grid and an NEB ruling expected soon on increases sought by TransCanada PipeLines Ltd.

A running count kept by the NEB confirmed that the 2001-02 heating season was a bust for Canadian exporters by standards set in the previous 14 years. In February, volumes of sales in the United States continued to retreat as a result of warm weather and a faltering economy. Export deliveries slipped compared to the same month a year earlier by 1.4% to 309 Bcf. The erosion prolonged the first shrinkage in Canadian deliveries to the U.S. since the onset of gas deregulation and free trade in the mid-1980s.

During the first quarter of the current gas contract year (November through January), export volumes dropped by 12.2% to 926.4 Bcf compared to 1.05 Tcf in the same period of 2000-01. In combination with a 65.3% drop in average prices at the international border to US$2.57/MMBtu from US$6.30, the sales slippage dealt Canadian gas exporters a 65.7%, US$1.3-billion setback in revenues for February alone, with receipts for the month falling to US$683 million from $1.989 billion a year earlier.

While gas exports are widely expected to retrieve lost ground then resume growing as the North American economy revives and weather patterns change, Canadians say they are starting to feel pressures that natural market cycles cannot clear up. Fallout from the Enron affair is reaching across the international border and affecting every gas interest down to the smallest Canadian independents, a seminar held in Calgary by the Conference Board of Canada learned. David Maffitt, president of Phoenix Energy Marketing Consultants Inc., described the effects as at best annoying and at worst downright “excruciating.”

In Canada, the worst pangs were felt by firms that had direct relationships with Enron. In one case the victim, which prefers to remain anonymous, was an up-and-coming Canadian company that inherited a supply contract with Enron’s failed marketing network as a result of buying assets from its production arm. Getting out of the arrangement was “painfully slow and quite excruciating,” Maffitt said. The experience taught all concerned with the gas market in Canada that when a trading house “counterparty” in energy transactions founders, “they won’t return your calls, let alone work with you to get out of a deal.”

Maffitt said the duration of sales contracts is shortening and the trading systems are tightening up on policing participants’ ability to pay. In Canada, credit is tightening — like a vise, Maffitt said — and contract commitments must be backed up with cash, collateral or both.

The Calgary-based NGX trading network, the most widely used Canadian system, has served notice that strict new rules will go into effect this summer, Maffitt said. He said the immediate results include reducing the “liquidity” or volume of long-range sales contracts available and increasing the volatility of energy prices as a result.

Among gas producers, the long-range effects go beyond raising business expenses and increasing the importance of maintaining strong financial ledgers in order to earn high credit ratings. The changes impair the ability of growth companies to cover costs of making asset acquisitions by locking-in reliable revenue streams with lengthy “hedging” contracts. There are also, at the same time, fewer customers for energy commodities and a new necessity to find more because buyers have to restrict their commitments to volumes that they can cover with cash and collateral.

“Everybody’s taking a little bit of a hit between the eyes in their credit ratings. A lot of people are down half a notch or so,” Maffitt said. He called for an industry-wide effort to rebuild credibility lost in the Enron affair. The Canadian’s wish list includes early warning and termination systems to allow prompt replacement of contracts in cases of corporate failures, and for use of the information technology that makes fast energy trading possible to speed up payments too. “We’re still in the 1950s…at McDonald’s, they’ve got my money before I’ve got my hamburger. In the energy industry, they’re still saying they’ll pay you next month.”

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