Canadian natural gas exporters have wasted no time in takingadvantage of their new power to shop around for markets as a resultof expanded pipelines.

Marketing targets began shifting as soon as new capacity openedup this year, according to quarterly reports on the gas trade bythe United States Department of Energy’s Office of Fossil Fuels.And that’s before the floodgates open with new U.S. importpipelines next year.

In first-half 1999, exports jumped by 36% on the expanded andextended route to the midwestern states run by Foothills Pipe Linesand Northern Border Pipeline. Shipments fell by 12% via the exportpath to California and the northwestern states of Alberta NaturalGas, Pacific Gas Transmission, Pacific Gas & Electric andNorthwest.

Exporters used an average of 80% of the 700 MMcf/d in capacitythat Foothills-Northern Border added last winter, when it alsoextended its reach to Chicago. Shipments rose by an average 562MMcf/d in first-half 1999 to 2.1 Bcf. But deliveries to the U.S.western seaboard on the Pacific Gas route declined an average 279MMcf/d to 2.14 Bcf.

Traders and pipeline executives say the shuffle reflected marketconditions — chiefly prices and the availability of U.S.-sourcedgas to markets reached by the export lines. In 2Q99, prices at theinternational border for West Coast-bound gas ran as low asUS$1.11/MMBtu for sales over short periods and $1.44 in longcontracts. Sales of all types to the midwestern U.S. held up at aminimum $1.56.

Traders, analysts and especially troubled pipeline managers saythis year’s shuffle of export sales targets was an early taste of ahotly competitive market emerging in transportation services forCanadian gas. TransCanada PipeLines describes big changesdeveloping in new evidence it has laid before the National EnergyBoard, to support its contested proposals for more flexibility insetting tolls.The nation’s biggest gas transporter says it faces”significant and growing competition in each of its markets,”including its old mainstay of deliveries to central Canada.

Alliance Pipeline’s route from northern British Columbia toChicago, scheduled to be completed in 10 months, plus theassociated Vector route from Chicago to the Dawn gas trading hub insouthern Ontario, create a bypass of the entire TransCanada system.But Alliance is far from the only competitor. TransCanada says itsrivals also include newly-completed Maritimes & NortheastPipeline to New England from Nova Scotia’s Sable Offshore EnergyProject; four short connections between Midwestern states andcentral Canada; and four projects to serve the U.S. Atlanticseaboard by American pipelines.

Even before Alliance is finished, TransCanada says it alreadyfaces 13 competitors across its markets throughout central Canadaand the northern regions of the U.S. The gas delivery business isbecoming like trucking — so complex “it is not possible toanalyze and predict the effect of a change in any one factor on themarket for TransCanada service,” the pipeline has told the NEB.

TransCanada says that as space opens up on Canadian pipelines,it will become increasingly vulnerable to U.S. competition. Itestimates that the Tennessee, Texas Eastern and Transcontinentalsystems could increase deliveries to the northeastern states by 1.5Bcf/d by taking competitive actions to increase their utilizationrates beyond their average 82% in 1999. In the Midwestern states,the ANR, Texas Gas and Trunkline systems could raise deliveries by2.5 Bcf/d if they took action to improve their average utilizationof 71%, TransCanada says. As the biggest Canadian gas transporterby far, TransCanada is feeling the effects of competition first andthe most. Losses of firm customers only began with cancellations ofabout 580 MMcf/d in long-term transportation contracts as of Nov.1.

TransCanada, in its new submissions to the NEB, says about 1.8Bcf of daily capacity on its system could be relinquished inNovember of 2000, by further cancellations of long-term firmservice contracts. Remaining holders of firm capacity stand to payheavy penalties, TransCanada adds. Their tolls could rise by about50% to C$1.56 per gigajoule (US$1.04) by 2004, TransCanada says. By2007, the toll could skyrocket to C$3.25 (US$2.17) if every shipperwith a right to drop long service contracts took advantage of it.The rate is projected to reach C$1.64 (US$1.09) in 2000 even if nostampede away from firm contracts develops.

Under the current tolling regime, TransCanada says it stands tolose C$170 million (US$113 million) by December of 2000 just fromthe first cancellations of 580 MMcf/d in firm service contracts.Attempts by TransCanada to halt the downward spiral have drawnresistance by interests ranging from the Canadian Association ofPetroleum Producers to the Canadian Industrial Gas UsersAssociation, triggering wide-ranging toll hearings before the NEBstarting Jan. 18 in Calgary. But TransCanada says it needs newflexibility both to prevent the projected slides in firmtransportation bookings and revenues and to be able to meet itscompetition.

The key proposal is to replace a regime that pricesinterruptible capacity on TransCanada at 50% of firm rates with asystem that would let it price space to meet the market.TransCanada wants to be able to sell excess capacity in a range of65-125% of firm rates, with the level set by reserve or minimumbids fixed to reflect the pipeline’s monthly readings of thechanging market for transportation services.

Gordon Jaremko, Calgary

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