Mirant Canada Energy Marketing Ltd. closed its purchase of TransCanada Gas Services from TransCanada PipeLines Ltd. last week opening the biggest energy trading floor in Canada with 80 specialists swinging into action in downtown Calgary’s newest office tower. The changing fortunes among energy merchants propelled Mirant into prominence north of the border at a time of high expectations and anxiety among producers alarmed by the Enron debacle.

The producer community is hungry for trading operations that it can trust to deal with marketing and hedging operations that all but the biggest companies would rather not have to do for themselves. “We sure hope they know what they’re doing,” said a veteran of four decades in Canadian gas exploration and development who asked not to be identified as Mirant stepped into its new role. “We’d prefer to get on with the real stuff — drilling and production.”

For Mirant, the TransCanada transaction was the third acquisition of a major supply pool in two years since it arrived on the scene as Southern Company Energy Marketing. The original name derived from roots that Mirant Canada president Rod Pocza described as firmly establishing the organization in a “different business model” from Enron, as an “integrated” approach rooted in tangible production.

The core of Mirant, spun off by Southern Company with share sales in 2000-01, remains the largest package of unregulated, independent power producing assets in the U.S. The marketing arm stresses that it is in intimate touch with reality because it evolved to look after obtaining fuels for the power plants, sell their production, and ensure the enterprise ran in the black by taking advantage of every chance to turn a profit along the energy value chain from wells or mines through transportation and storage of fuels to contracts with power purchasers.

Canada has figured in the Mirant vision since January of 2000, when Southern landed a contract to manage Pan-Alberta Gas, then the second-biggest exporter to the U.S. The deal stood out as a demonstration of ability to win trust in a field rife with suspicion and conflict. Pan-Alberta had just been through a regional version of the Enron crisis that dragged on for two years of negotiations and legal battles. A month before the Southern deal, ownership of Pan-Alberta was taken over by its gas suppliers, about 400 companies with reserves dedicated to the agency under long contracts to pool production for international sales. Pan-Alberta was an orphan, cut adrift by the takeover of former owner Nova Corp. by TransCanada PipeLines.

The gas producers took ownership only after a negotiated settlement ended a marathon lawsuit in Alberta Court of Queen’s Bench. Nine of Canada’s top gas producers alleged that Pan-Alberta, in arrangements with Nova affiliate NGC Corp., strayed from commitments to obtain the highest possible sales prices for the supply pool as a result of other corporate interests. Damage claims reached $150 million. The happy ending included the emergence of Pocza as a trusted industry diplomat. A veteran of energy trading with Amoco Corp. (now BP) in Houston and Chicago, he joined Pan-Alberta in 1992 and stepped forward as its president after playing a role in the settlement.

A month after the Pan-Alberta transaction took effect in June of 2000, Southern landed a similar agreement to take over managing another “aggregator,” CanWest Gas, a sales co-operative for output from British Columbia owned by 38 production companies and drawing supplies from 100. Membership in the supply pools overlaps and includes virtually all Canadian gas producers of any size: 550 with TransCanada Gas, 400 with Pan-Alberta and 100 with CanWest. The pooled supplies represent the biggest single block of Canadian gas production on the North American market: about 3.5 Bcf/d including 1.8 Bcf/d from TransCanada, 1 Bcf/d from Pan-Alberta, 500 MMcf/d from CanWest and 150-200 MMcf/d from Norpac, a B.C. subsidiary of Pan-Alberta.

Mirant’s total sales of Canadian gas run in a range of 7-8 Bcf/d. The agreement with TransCanada covered its entire marketing business, which handles 5.2 Bcf daily. Mirant’s role includes weaning Canadian producers off the old pool structure, a strictly regulated institution requiring voting on deals or changes that dates back to pre-deregulation times when pipeline affiliates did virtually all supply aggregation and marketing. With votes on deals taking two weeks at best, the pools move too slowly to adapt well to open markets, Pocza said. A target date of 2006 has been set for entirely replacing the TransCanada pool with a new network of unregulated sales contracts, he disclosed.

Canadian gas represents nearly 45% of Mirant’s total North American supplies of about 18 Bcf/d. The firm’s view is highly optimistic, with growth expectations driving its Canadian moves. Mirant’s senior vice-president in charge of gas trading, Gary Morsches, laid out a vision of 20 years of expanding markets when a fall conference held by Ziff Energy Group gave him a podium. The long-range trend will eventually strengthen the market to the point where there will be two peak sales seasons – summer as well as winter, Morsches predicted.

In an interview, he said the TransCanada transaction was confirmation of a long-term commitment to the industry north of the international border. In the Mirant outlook, gas prices will stay cyclical and volatile, with peaks and troughs recurring as a result of competitive markets, imperfect information among buyers and sellers, and natural swings of the economic pendulum. But thanks largely to steady growth in the use of gas as fuel for electric power generation, the long-range outlook continues to call for steady growth in demand in the U.S. Mirant predicts that only about 25% of the long lineup of new generating projects announced in the U.S. will be built, with the availability of gas supplies and pipeline services separating the winners from the losers. Even after the weak projects fall by the wayside, gas is forecast to be the fuel for one-third of total U.S. electricity generation by 2020 compared to 21% today.

Power stations are expected to account for more than one-third of U.S. gas consumption by 2015. The increasing “convergence” of gas and power spells the addition of a second seasonal sale high every year.

Besides the traditional winter heating season, summer is expected to become a time of peak demand for gas thanks to consumption of electricity for air-conditioning. The trend towards annual hot-weather demand spikes is already well established. By Mirant’s count, the U.S. summer gas consumption peak has grown by 53% since 1996 to 23 Bcf/d and will rise at least as much again by 2010 into a range of 33-40 Bcf/d.

Mirant turned to Canada as the best bet for obtaining large supplies on the continent. Morsches described the U.S. production industry as “mature,” with gas merchants able to count on supply increases on a scale only “modest at best” even from the Gulf of Mexico and its coastline. As in western Canadian fields, the average “decline rate” or depletion of known reserves has accelerated steadily in the Gulf region, where it currently stands at 19% per year compared to 12% in 1993.

But from the perspective of U.S. gas merchants including Mirant, which mirrors the expectations of American producers who have bought Calgary counterparts, the Canadian difference is that relatively fresh, prolific exploration and development frontiers remain at hand along the foothills of the Rocky Mountains, in the North, and offshore of the East Coast.

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