National regulators from the United States, Mexico and Canada said last week that chronically tight natural gas supplies make tapping new sources a must and their agencies stand ready to help make projects happen.

The trio of National Energy Board Chairman Ken Vollman and his counterparts from the United States and Mexico, Pat Wood of the Federal Energy Regulatory Commission and Dionisio Perez-Jacome of the Comision Reguladora de Energia, sounded a note of urgency at the annual meeting in Banff of the Canadian Association of Members of Public Utility Tribunals.

Vollman predicted the North American gas trade will stay vulnerable to repetitions of the price spikes in the winters of 2000-01 and 2002-03. He described the market as so tight that industry needs to brace for consumer backlash against energy free trade and work on rebuilding a reserve margin of both gas and electricity.

He stopped short of declaring the continent faces shortages on a scale anticipated by emergency rationing provisions in the North American Free Trade Agreement. The NEB expects market forces to do the job, with supply and demand kept in balance by voluntary consumption cuts among industrial energy users capable of switching fuels, closing plants or moving international-scale operations such as petrochemical manufacturing to other continents.

“The real issue is what we can do about price volatility,” Vollman said. He told reporters it could be wise for gas users that lack flexibility with energy sources or locations to seek long-term supply contracts.

Vollman, Wood and Perez-Jacome pledged their agencies will offset negative effects that gyrating prices and revenues have on investment by ensuring there is an encouraging regulatory environment for supply projects.

Wood and Vollman said market participants show signs of still only partially understanding the tightness of supplies. The FERC chairman said, “I was surprised at how many people were surprised this year by the gas markets.”

Wood shrugged off questions by Canadians worried that their gas market ties with the U.S. might suffer long-range damage because the Liberal government in Ottawa opposed the American and British invasion of Iraq. “It is an absolutely essential relationship…this relationship is too deep and long-standing,” Wood said. “You look at a pipeline map of North America, and it’s just no boundaries.”

A similar message was delivered by the U.S. ambassador to Canada, Paul Cellucci, to the annual meeting in Calgary of the Canadian Energy Pipeline Association.

Vollman told reporters a revival of border controls to protect Canadian supplies is unlikely. “I don’t think it would be a logical next step. Reregulation doesn’t create new supplies. And what we need is new supplies.”

But Vollman, whose NEB heard and ultimately rejected an appeal for partial re-regulation to reserve production offshore of Nova Scotia for Atlantic Canada last year from the New Brunswick government, acknowledged that protective action could tempt consumers. They may recall that the old regime of holding back a compulsory surplus for future domestic use kept prices low prior to energy deregulation and free trade. “That reserve margin has basically disappeared,” the NEB chairman said.

The open border, strong U.S. demand and increased pipeline capacity generated growth in western Canadian production by 10 Bcf/d or 140% into the range of 18 Bcf/d since the continental market dawned in the late 1980s. “What happened in effect was that the Western Canada Sedimentary Basin satisfied 75% of incremental U.S. gas demand. However, as production from the WCSB appears to be flattening out, it will no longer be possible to satisfy a large portion of incremental requirements,” Vollman said.

Doubts about Canadian supplies continued to spread. FirstEnergy Capital Corp., reviewing receipts at field gathering points on the western pipeline grid, said productivity appears to be declining faster than even pessimists suspected a few months ago. For the first four months of this year, the Calgary investment house said it detected a decline of 729 million cubic feet per day in pipeline field receipts compared to the same period a year ago. FirstEnergy said that points to productivity erosion of up to 1 Bcf/d or 5-6% this year.

As in the case of Canada’s federal-provincial division of jurisdiction, Wood said production and supply procurement are not matters for the national energy regulator. The FERC chairman said his agency and the NEB need to work on coordinating their responsibilities for international gas infrastructure, led by creating a reliable and timely regulatory regime for long-distance pipeline projects.

Wood described tapping Alaskan gas as “something I really want to see happen.” The FERC chairman said he will be knocking on Vollman’s door to make sure Canada and the U.S. co-operate on regulatory aspects as soon as the industry decides to advance the international northern pipeline project.

Vollman said “our respective staffs meet regularly to exchange information on regulatory approaches, share perspectives and learn from one another.” He raised possibilities for more formal collaboration such as harmonization of pipeline standards. “For example, why can’t pipeline companies design a single tariff for gas shipments from Alberta to California? And why should environmental standards change as a pipeline crosses a border?”

He said U.S. and Canadian authorities need to think about creating a “single-window approval process” for international projects such as the Alaskan plan.

Perez-Jacome said Mexico, while a long way from Canada and Alaska, takes a keen interest in North America-wide supply additions because it expects to be an importer on a growing scale for the next 10 years. His agency forecasts Mexican gas demand will rise by an average 7.4% per year. Even the most optimistic forecast for Mexican production growth is only 6% a year.

Perez-Jacome said Mexico will rely on a combination of liquefied natural gas (LNG) development to procure offshore supplies and pipeline imports from the United States, which means his country is directly affected by the overall state of the continental market. Mexican forecasts anticipate LNG imports eventually matching pipeline deliveries from Texas by about tripling to 2 Bcf/d over the next five years. Prices will be tied to North American trading by a “netback” formula indexed to Texas production.

©Copyright 2003 Intelligence Press Inc. Allrights reserved. The preceding news report may not be republishedor redistributed, in whole or in part, in any form, without priorwritten consent of Intelligence Press, Inc.