Canadians are being assured by their two biggest natural gas transporters that they don’t have to take sides in the contest over the northern pipelines because they stand to gain no matter which project wins. After carrying an estimated C$40 billion worth (US$27 billion) of exports to the United States in the past 20 years, the “prebuild” of the Alaska pipeline, completed by Foothills Pipe Lines Ltd., predicts that far from losing, Canadians stand to gain if the country can build the missing northern link in the Alaska Natural Gas Transportation System (ANGTS).
Permanent benefits for all Canadian users of the pipeline grid are projected by Foothills co-CEOs Michael Stewart and Dennis McConaghy. Stewart is executive vice-president for business development for Westcoast Energy Inc. and McConaghy is his counterpart at TransCanada PipeLines Ltd. Foothills remains the sole owner of ANGTS’s sponsor, Alaska Northwest Natural Gas Transportation Co., after nine U.S. partners in the original 1970s version of the project dropped out during its long dormant spell.
In an interview, Stewart called Foothills a pipeline counterpart to “the little engine that could,” referring to the old children’s story book. “Except it’s not so little,” he said. Initially installed as an early start on southern legs in the megaproject in order to help finance the far costlier northern section, Foothills now carries about 35% of Canadian gas exports. Stewart described the reviving prospects of completing ANGTS as a further service – this time in “optimizing” use of the Canadian pipeline grid.
McConaghy believes that by completing the missing northern link, Canada would benefit, and Foothills has taken that case to the National Energy Board (NEB). The arrival of Alaskan gas into the 3.3 Bcf/d Foothills system would allow Canadian production to move over to TransCanada and Westcoast without forcing them to fight the new Alliance Pipeline and associated eastern links, the Vector and proposed Millennium systems. As a result, Canadians would shed the burden of costs associated with excess capacity that has emerged as a result of aggressive pipeline construction since the mid-1990s.
Capacity grew so much that Natural Resources Canada estimates refilling the routes to the Lower 48 will require exports from the western provinces of about 3.8 Tcf/year – or nearly one-third more than early-1990s industry planners estimated the region’s gas fields could support on a sustained basis. Despite production increases generated by a record drilling pace over the past year, McConaghy estimated that the pipeline grid still has 1.5-2 Bcf of excess daily capacity. That poses a problem of “defraying fixed costs,” in his words.
The problem drives an application by TransCanada to the NEB for a raise in its effective rate of return to 12.5% from 9.6%. The hike is sought to cover costs of lost traffic and compensate for increased business risks posed by the glutted, competitive Canadian market for gas-transportation services. Potentially long, hard-fought hearings are planned into how much of a raise to allow and how to translate it into toll increases for shippers still bound to use TransCanada by long delivery contracts.
TransCanada has told the NEB it does not expect the cost pressure to end any time soon, if ever. At current gas discovery, sales and reserves depletion rates, TransCanada projects that the production capability of the entire Western Canadian Sedimentary Basin is liable to peak and slip into decline within eight to 13 years. Some of the strain is expected to originate within the Canadian petroleum industry as it turns increasingly for its oil supplies to heavy crude and the oil sands, employing gas-fired heat extraction processes.
Use of gas by oil sands mining complexes is projected to triple by 2010 to 590 MMcf/d from 190 MMcf/d. Gas use by heavy-oil operations is expected to grow almost as fast, to 730 MMcf/d in 2010 from 270 MMcf/d. Gas-fired power generation in western Canada, which is also associated with industrial expansion, is forecast to consume 980 MMcf/d by 2010, compared to 490 MMcf/d last year.
When will Alaskan gas arrive to take some of the pressure off western Canadian supplies? Foothills estimates it will take five years from the time when a decision is made to go ahead on building the northern connection. That includes two years of planning, securing transportation contracts, procuring materials and satisfying regulatory and environmental requirements, followed by three years of construction.
Stewart and McConaghy are not predicting when the decision to go ahead will be made, although they are continuing to advance the megaproject through preliminaries such as nailing down rights-of-way. The Foothills CEOs expect no more than hints to emerge about when the talk about the northern revival will turn into action from hearings in Anchorage, before a natural gas pipelines committee set up by the Alaska State Legislature July 17 and 18 (see related story).
They expect a key element — a plan by the owners of Prudhoe Bay gas, BP, Exxon Mobil and Phillips Petroleum – to take much longer to come together. Current schedules for their feasibility studies indicate it will take until the end of the year for the reports to be completed, then as much as six months longer for corporate decisions on whether to proceed to development, with BP and Exxon Mobil making comparisons between Alaskan prospects and the rest of their global inventories of projects.
Foothills suggests that the northern planning exercise is evolving into a “two-pipeline world” and reports that it is going beyond its ANGTS interests to try to get in on proposals for a Mackenzie Valley line. Stewart and McConaghy expect markets for gas and transportation capacity to decide which line to build when, although they add that governments can make a big difference with decisions on items such as passing on delivery costs to consumers. The Foothills executives predict Canada will honor the treaty that created ANGTS if the Alaskan project is revived.
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