Stating that it was “inappropriate at this time to implement procedures that would unduly interfere with the normal operation of the natural gas market,” the National Energy Board (NEB) said late last week that it has denied the Province of New Brunswick’s application that would have put local interests first in line for offshore Nova Scotia supplies, potentially jeopardizing millions of dollars in investments for supply development and transportation. While it found no evidence of companies favoring U.S. export markets and discriminating against Canadian buyers, the NEB said it would organize a monitoring team and gather price and supply data.

The export rules sought by New Brunswick would have clarified procedures for short-term exports of incremental Scotian offshore natural gas when supplies are not able to meet both domestic and export requests for service. In its application filed in March, New Brunswick stated that before drawing up such a set of rules, the board may need to review and vary the Market Based Procedure (MBP) set out in two previous NEB decisions.

The protesting province wanted the NEB to make the industry disclose all export plans and give potential Canadian consumers the first right to buy gas supplies that would otherwise go to the United States via the Maritimes & Northeast Pipeline (M&NP), which is seeking a pipe expansion to 900 MMcf/d (see NGI, June 17; Aug. 19). The province maintains that it is being made to pay premium prices for the little amount of production it is given access to.

In coming to its decision, the board noted that the public hearing held on this matter in July 2002 did not produce any direct evidence that Maritimes gas buyers have not had access to Scotian offshore gas supplies on terms and conditions similar to those in export markets. The NEB added that there was no evidence that any gas seller had refused to negotiate in good faith.

In listening to parties opposed to New Brunswick’s proposal, including members of the natural gas producing community, natural gas pipelines, marketing agents, the provinces of Nova Scotia and Alberta, and the Atlantic Institute for Market Studies (AIMS), the NEB said the various arguments could be placed under four broad categories:

The board found that almost every party arguing against New Brunswick’s proposal argued that the applicant had not made a case that there is a problem that needs to be resolved. Opposing parties said that New Brunswick should produce evidence of a refusal to negotiate in good faith or evidence that gas buyers with economic projects could not obtain gas at fair market terms and conditions.

Calling the practicality of New Brunswick’s proposal into question, the NEB said the proposed procedure for short-term orders would be “of no direct assistance” to Canadian buyers that require a long-term gas supply of 10 years or more to give support to new investment in infrastructure. The NEB said the Canadian Association of Petroleum Producers (CAPP), Chevron, EnCana and Duke Energy all stated that there was no such evidence; rather the evidence indicated that “a few speculative projects had not proceeded, as one would expect in a normally functioning market.”

In addition, the board said proposed requirements to disclose commercially sensitive information and the potential for delay would place “unreasonable burdens” on exporters with respect to their short-term commercial arrangements. The NEB said it would also be difficult to compare terms and conditions for short-term sales in a market that has constantly changing parameters. Introducing a regulatory burden on exporters would also send a negative signal to potential investors in the Scotian offshore basin, the NEB said.

The ruling sent a positive signal to Sable Offshore Energy Project, M&NP, EnCana and CAPP, which told the NEB what they needed in order to advance to the next stages of development offshore of Nova Scotia. The decision to preserve Canadian gas suppliers’ access to northeastern U.S. markets cleared the decks for EnCana’s U.S.$700-million Deep Panuke production project, an allied U.S.$123-million expansion by M&NP of 400 MMcf/d or about 75 per cent to 950 million, and U.S.$960 million in drilling programs planned by producers on 23,160 square miles of exploration leases offshore of Nova Scotia over the next five years.

The NEB observed, “Producers require access to a large liquid market in order to economically develop Scotian resources.” At about 137 MMcf/d, “the current size of the Maritime market is not sufficient to drive Scotian offshore development…a producer such as EnCana must ensure it has access to the U.S. Northeast in order to guarantee it has a market for its gas.”

However, the board did agree with New Brunswick that there are a number of characteristics of the Maritimes market which give rise for concern. The NEB said it believes the developing Maritimes gas market faces many challenges that are not faced by buyers in the mature export market. “Given the market realities in the Maritimes, the board shares the concerns of some parties about access to incremental gas supplies on fair market terms,” the NEB said.

Despite turning down direct regulatory intervention, the NEB said the matter “did raise sufficient concerns” that warrant enhanced monitoring efforts in Maritimes Canada. The board said it has decided to take the following actions:

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