Eastern Canadians are not only being denied access to most natural gas produced offshore of Nova Scotia, they also are being made to pay a premium for the limited supplies they can divert from exports to New England, the National Energy Board (NEB) has been told. The complaint was made by New Brunswick’s assistant deputy energy minister, Donald Barnett. It forms part of the provincial government’s case for an exception to be made from free trade in gas with the U.S. in order to hold back supplies traveling on Maritimes & Northeast through eastern Canada. Hearings have been called for July 15 in Fredericton, NB.

In written evidence submitted to the NEB, Barnett said “Marketers of Scotian offshore gas who have gas for sale at Goldboro (the Nova Scotia port where production arrives onshore from the Sable Offshore Energy Project) have been requiring potential Canadian shippers to commit to paying the `Boston price’ for that gas, even though that price incorporates M&NE’s U.S. pipeline transport tariff when the Canadian shippers do not require transport in the U.S.”

Barnett wrote that in effect, “Canadian shippers are being prevented in their attempts to secure gas supply” from producers. The New Brunswick official said “by insisting on a Boston price, producers with incremental Scotian offshore supplies are creating a significant barrier to potential Canadian purchasers wishing to obtain economic gas supplies.” He described the gas dealers’ behavior as just one illustration of the need for the NEB to intervene in the traffic in Nova Scotia production because an open, competitive market has not yet evolved for it.

Barnett said the demand for a Boston price “would be akin to Alberta producers requiring intra-Alberta users to pay a Chicago price. The difference of course is that in Alberta there are two transparent market prices — the NIT or Nova inventory transfer price, and the AECO hub price — that allow purchasers to acquire gas in Alberta at an Alberta price. No such market is available in Maritime Canada.”

Nor is any such East Coast market likely to emerge soon, according to other evidence laid before the NEB by the New Brunswick government. A package of consulting studies commissioned by the protesting province described the regional gas industry as at an early stage in what promises to be a long evolution.

Geophysical consultants James Wright and Ian Atkinson, both senior professionals in academic and government roles in Newfoundland, calculate that it will take a minimum of five years to put future eastern Canadian offshore discoveries into production on the basis of past performance. The earth scientists do not quarrel with studies done for M&NE that the gas potential of the region is very large, but they point out that the geology is complicated and both the natural and regulatory environments are challenging.

Wright and Atkinson predict that production offshore Nova Scotia will rise, as the industry promises, by 80% to 900 MMcf/d as of 2006, when EnCana Corp.’s Deep Panuke project is completed. The consultants say it is also possible that offshore production will reach 1.3 Bcf/d in the 2011-20 period. “But this will require the equivalent of at least three to five Deep Panuke-size discoveries (in the range of 1 Tcf each) early in the next decade.”

Economist Mitchell Rothman, a principal with Navigant Consulting Ltd., said the market that has grown up around current Nova Scotia production of 500 MMcf/d remains far from open. Rothman boiled down the state of the fledgling Canadian maritime gas sector to numbers, using a test employed widely before North American regulatory agencies called the HHI or Herfindahl-Hirshman Index. An HHI of 1,800 or more on a scale of 10,000 that measures market share serves as a warning signal that a concentrated economic power is at work. By Rothman’s calculations, the western Canadian production region has an HHI of 550 or less but the warning flag goes up on the East Coast. The eastern Canadian gas market scores an HHI of 4,627, with ExxonMobil and affiliate Imperial Oil accounting for 3,576 points because they have 59% of Sable production.

With that evidence in hand, New Brunswick laid out its proposal for intervention by the NEB. The province wants formal procedures now reserved for cases involving long-term export licenses lasting two years or more to apply to all transactions with U.S. customers for production from offshore of Nova Scotia. About 90% of Sable gas exports are traveling under short-term permits, which are routinely issued without public notifications, hearings or other reviews. New Brunswick says all export applications, regardless of the duration of the transaction, should be published by the NEB and subjected to its “market-based procedure,” which entitles Canadians to hold the gas off the export market if they can show they are being denied supplies on terms comparable to American deals.

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