Canadian natural gas export pipeline race heating up

Welding is shown under way on the TransCanada PipeLines Ltd. (TCPL) mainline expansion. Photo courtesy TCPL.

Canada's natural gas pipelines are in a crowded race to add new export capacity to U.S. markets, but some competitors are expected to lag or change before their projects reach the finish line.

Analysts and industry sources concede the market will decide which projects proceed-and when.

An estimated $20 billion (Canadian) in competing projects, including U.S. interconnects, are aimed at U.S. Midwest and Northeast markets (see table [112,467 bytes], p. 31).

Generally, analysts predict steady gas demand growth in Midwest and Northeast markets to 2000 and beyond. But they expect a project shakeout to occur because total projected capacity exceeds forecasted demand growth.

New Canadian gas imports into the Midwest stand to lower prices, reduce returns for some U.S. producers, and back out some Gulf of Mexico gas supplies. That could spark opposition from U.S. producer groups and some states whose revenues would be affected.

The competition is expected to benefit gas producers and customers with lower tolls and provide more choice in supply sources.

And Canada's National Energy Board (NEB) says there are adequate reserves to meet foreseeable domestic and export demand.

Major projects

Five major projects in Canada and related U.S. interconnects are competing to move new volumes to Chicago, the Northeast, and eastern Canada (see map and project key, pp. 30-31).

In western Canada, the Alliance Pipeline partners, TransCanada Pipe- Lines Ltd. (TCPL), and Foothills Pipe Lines Ltd./Northern Border are competing for a share of new capacity and export market routes.

Foothills and its U.S. partner Northern Border are already expanding their connecting lines with complementary 700 MMcfd additions for a November 1998 in-service date from Alberta to the Chicago area. An additional expansion is planned in 2000.

In August, TCPL made new deals and equity investments with other projects that would give it and partners a daisy chain of pipe from western Canada into Chicago and eastern U.S. markets.

Among recent pipeline projects to be disclosed, TCPL envisions building the TransVoyageur Transmission pipe- line, a 625-mile, $950 million (U.S.) high-pressure line, extending from Empress, Alta., to Emerson, Man.

The 2 bcfd line would connect there with the proposed Viking Voyageur line to Joliet, Ill. Viking Voyageur interests are TCPL 40%, Northern States Power 40%, and Nicor Inc., Naperville, Ill., 20%.

TransVoyageur replaces the company's proposal for Nexus, a high-pressure line to Emerson-a scheme that TCPL recently dropped as too expensive (OGJ, Aug. 4, 1997, Newsletter).

TCPL currently has a 100% interest in TransVoyageur, but it's talking with prospective partners.

TCPL also has a 35% interest in the Vector line from Joliet to Dawn, Ont., near Sarnia, and an undisclosed interest in the Millennium line and the Canadian link from Dawn to New York City (OGJ, Apr. 14, 1997, p. 28).

IPL Energy Inc., Calgary; Columbia Gas Transmission Co.; and MCN Energy Group Inc. are the other partners in Vector. Other partners in Millennium are Columbia Gas Transmission; Westcoast Energy Inc.Vancouver, B.C.; and MCN.

The projects would come on stream late in 1999, subject to regulatory approvals. The companies are expected to file applications for the stand-alone projects later this year. Meanwhile, TCPL is adding 456 MMcfd of firm mainline capacity for November 1998.

TCPL says the proposed new pipeline links would move gas to Chicago for about 70¢ (U.S.)/MMBTU and to New York City for $1.45 (U.S.)/MMBTU. Tolls to eastern Canada would be about 94¢ (U.S.)/ MMBTU. All tolls would include Nova (Alberta) tolls (see table [42,298 bytes], p. 34).

Meanwhile, most observers expect the 1.3 bcfd Alliance project will proceed because of strong shipper support, some influential members in its group ownership, and competitive economics (see chart, p. 32).

Alliance recently received U.S. Federal Energy Regulatory Commission approval and filed an application in July for the Canadian section of its line. Alliance says shippers have committed to 98% of available firm capacity and to payments of $8.2 billion (Canadian) over the 15-year term of agreements.

Fluid situation, politics

The pipeline expansion situation is fluid, with talks continuing between competing companies.

Alliance says Nova would like to provide the Alberta portion of its project. Nova says it will have in-depth talks with Alliance and can offer value to Alliance owners and shippers.

Nova Pres. Jeff Lipton says everyone must move fast to strike a deal. Both parties say there is no guarantee they will reach an agreement, and both say they're also talking to other interested parties.

Alliance Vice Pres. Jack Crawford says there have also been talks with TCPL, and future discussions are possible.

Plans by Alliance to ship gas and byproducts, including ethane, to the Chicago market have made some political waves. Expanding petrochemical companies have expressed concern about future feedstock supplies.

The Alberta government is letting the market call the shots for now, but it can act if necessary to ensure local supplies of feedstock. Forecasts indicate adequate supplies (OGJ, May 26, 1997, Newsletter).

Political factors are likely to have the most influence on projects competing to move gas from Sable Island off Nova Scotia to provincial and New England markets.

Canadian Prime Minister Jean Chretien and Quebec Premier Lucien Bouchard are both on record as supporting a line that would move more than 3 tcf of Sable Island gas to markets via Quebec.

The Trans-Quebec and Maritimes Pipeline (TQM) would go through Canada's maritime provinces and Quebec before terminating in Boston. It is backed by Gaz Metropolitain, Montreal, Quebec's largest gas distributor; TCPL; and IPL Energy. IPL also owns Consumers Gas Ltd., Ontario's largest gas distributor.

Rival Maritimes & Northeast Pipe- line (MNE), sponsored by Westcoast Energy Inc., Vancouver, Mobil Oil Canada Ltd. units, and PanEnergy Corp. (now Duke Energy), would pipe gas from Sable Island to New England, bypassing Quebec.

Both projects would deliver gas to a connection with the Portland Natural Gas Transmission System (Pngts) at a border point at East Hereford, Que. Pngts recently received U.S. regulatory environmental approval for its line between Portland, Me., and Boston.

The TQM line would cost an estimated $1.8 billion (Canadian) compared with $1.2 billion for the more direct MNE line.

TQM says Ottawa has put $1.4 billion into the Sable Island gas project and has an obligation to extract more economic benefits within Canada by approving a line through Quebec. It says the project will not delay delivery of gas to New England in 1999.

Posturing vs. economics

Mark Pinney of the Canadian Association of Petroleum Producers (CAPP) says politics could end up playing a fairly significant role in how Sable gas moves to market.

"There is some posturing going on, but at some point the economics have to be right for producers. Sable Island offers an opportunity for Canadian producers to tap into the U.S. Northeast market.

"There is a lot more than Sable Island gas involved if you consider other reserves identified on the Scotian shelf by the Geological Survey of Canada," Pinney said.

Pinney would not entirely discount statements by Mobil Oil Canada Ltd., a lead developer in the Sable Island gas project, that it could walk away if there is not a timely decision on how to get gas to market.

CAPP says politics should not be an issue in the competing pipeline proposals, and TQM would not fly if assessed on its own merits. It says the increased cost of transportation could make western Canada gas less competitive.

Meanwhile, the provinces of Nova Scotia and New Brunswick are involved in a dispute over pipeline tolls. A deal reached in June was rejected by a new Nova Scotia government, which is seeking a higher discount on tolls for gas in the province.

Hearings on the Sable Island project by a five-member federal/provincial regulatory panel ended in July. A report is not expected until fall.

Hearings were marked by disputes between provinces and rival pipeline projects, as well as environmentalist opposition. New Brunswick has asked the hearing panel to ignore Nova Scotia's new position.

A dark horse is Tatham Offshore Inc., Houston, which appeared at the hearings as an intervenor and announced a $3.5 billion (Canadian) plan to ship gas from the Grand Banks off Newfoundland. A 1,367-mile subsea line from the Grand Banks would pick up additional gas from Sable for delivery to New England.

Both the TQM and Tatham officials appeared at the hearings as intervenors.

Within Alberta, NOVA has outflanked two rival projects that threatened to bypass its system and position as the dominant line moving gas to Alberta export points. It cut a deal on tolls with backers of the Palliser Pipeline project, a deal that must still be approved by regulators (OGJ, Feb. 10, 1997, Newsletter).

The decision could have broad implications for Alberta's postage stamp toll system. The Alberta Pipeline Project, backed by Shell Canada Ltd. and Atco Corp., Calgary, was shelved in July due to insufficient shipper support.

NOVA announced a $1.4 billion expansion program during 4 years and says it will keep its unit transportation costs flat during that period.

The NOVA system moved 4.4 tcf of gas in 1996. The export-oriented expansion would add 2.25 bcfd to capacity.

CERI study

A study by the Canadian Energy Research Institute (CERI), Calgary, says proposed new pipeline and expansion projects would remove system bottlenecks and increase the inter-regional flow of competitively priced gas between market centers in North America. CERI counted 52 continental projects.

The study says if all three Canadian projects aimed at moving gas to the Midwest are completed as planned, combined additions would increase existing capacity by more than 150% by 2000. If only two of three projects proceed, it would still represent a 90% increase in delivery capacity.

CERI says a number of projects and proposals will affect the North American picture:

The competing projects for additional pipe capacity from western Canada and Sable Island gas fields off Nova Scotia to U.S. markets and related U.S. interconnects.
Redirection of pipelines in the U.S. Southwest to eastern markets, prompted by growth in San Juan basin production and excess capacity in California.
Regulatory changes to Mexico's natural gas industry, prompting interest in potential pipeline projects along the U.S.-Mexico border.
Expansion of gathering system and processing capacity for offshore supplies in the Gulf Coast region and expanded take-away capacity from the Gulf of Mexico by interstate pipelines, which could pose a serious challenge to Canadian producers.

CERI says if all the proposed projects are completed as planned, the amount of additional capacity on North America's gas transmission grid would exceed 26 bcfd, and total additions to Canadian export capacity would exceed 5 bcfd.

"It is unlikely that all these projects will be constructed as planned, at least not in the time frame proposed by developers. Ultimately, the market will decide which projects will be constructed," CERI says.

In an analysis of basin-to-basin competition, CERI says gas demand in Canada and the U.S. is expected to grow by about one-third by 2010.

Canadian gas exports to the U.S. have more than tripled since 1985, largely as a result of market deregulation. But that growth has been hampered recently by lack of pipeline capacity.

Canadian gas exports to the U.S. are expected to increase to 3.7 tcf by 2010. Two-thirds of growth in Canadian exports is directed into the U.S. Midwest, where Canadian gas will make inroads because of production costs lower than competing U.S. basins, as well as relatively low transportation costs.

The remaining export growth is split between northeastern and western export markets. In the Northeast, lower production costs offset the higher transportation costs to distant markets.

The study cautions that the impact of electricity deregulation, incremental pipeline expansion tolling, alternative approaches to estimating supply costs, and different assumptions on the effects of technological change all could substantially affect prices and competitiveness of various supply basins.

Ziff Energy's view

Paul Ziff, Ziff Energy Group, Calgary, says a new supply/demand pattern for gas in the North American market will begin to emerge late in 1998 as companies battle for a slice of the pie.

"Until late 1998, when the first pipeline expansions come on line to deliver higher volumes of Canadian gas, consumers and marketers will not be able to look north for an answer to the squeeze that has produced volatility in U.S. natural gas prices since 1996," Ziff said.

Ziff says decisions made by producers, transporters, regulators, and large users during the next 18 months will determine the availability and prices of more than 8 bcfd in new supply-about 13% of current U.S. consumption-from expanded production and major new basins in western Canada, the Gulf of Mexico, the U.S. Rocky Mountain region, and Canada's Sable Island area fields off Nova Scotia.

Ziff notes that U.S. gas reserve replacement dropped to 85% in 1996 despite strong drilling activity. That resulted in continued price pressures.

The U.S. supply and transportation structure is fully called upon to meet virtually all the increase in demand in 1997 and most of it in 1998.

Ziff says a number of factors will shape the size and speed of gas industry development. He says if the industry continues to grow at a steady rate, while deregulating and cutting costs, North American gas consumption will increase 10% in 5 years, or by 2-2.5 tcf. He also expects 20 existing significant gas marketers will consolidate into a limited number of continental mega- multi-fuel energy megamarketers, complemented by regional marketing specialists.

Key issue: timing

Richard Hillary, Hillary & Associates Inc., Calgary, says there is a timing problem with too much gas going into the Chicago market about the same time-before the market can expand enough to absorb it.

Hillary expects the Alliance project to advance, notes that a Foot- hills/Northern Border expansion is already under way, and he says the Viking Voyageur line will likely proceed. He points out that Viking Voyageur will have connections to eastern markets and will serve important markets in Minnesota, northern Illinois, and Wisconsin.

"The shunt to the east out of Chicago is critical, and some of the gas has to go east. There is a need for a major expansion line from Chicago to the east," Hillary said.

CAPP's Mark Pinney says the Northeast may offer more long-term potential than the Midwest for exporters because of low penetration rates and the possibility that some nuclear plants there will be decommissioned.

CAPP says Canadian gas could back out some Gulf Coast gas because Canada's western basin has relatively low production costs and is less developed than the gulf offshore.

Greg Stringham, CAPP's manager of regulatory affairs, says Canadian projects currently competing for new capacity to the U.S. Midwest have similar economics, as well as minor differences in tolling, but different projects offer producers different options.

Other views

Economist Brent Friedenberg, Friedenberg Associates Ltd., Calgary, says that, assuming an annual demand growth rate of 2.15% (midway between two major U.S. national forecasts), by the year 2000, demand in the Midwest would be about 5 tcf/year, or 13.7 bcfd.

U.S. Northeast demand would be about 3.9 tcf/year, or 10.8 bcfd.

The combined increment in average demand would be 2 bcfd.

If gas demand in the Northeast and Midwest continues to grow at rates that have up to now been above the U.S. average-and closer to 3.5%-the increment in average day consumption for the combined region will be closer to 3 bcfd by 2000.

In 1996, combined Midwest and Northeast demand averaged 22 bcfd, with Midwest at 12 bcfd and the Northeast at 10 bcfd. In winter, demand for the combined region reached 41 bcfd in January 1996.

Friedenberg says there are 19 major Canadian and U.S. pipeline proposals with total capacity of about 14 bcfd aimed at these markets, but some lines supply gas to other projects.

Eliminating inter-pipe duplication, he says there is about 6 bcfd of additional capacity from supply basins aimed at Midwest and Northeast markets by 1999, well in excess of the 3 bcfd demand growth at the high end of forecasts.

Bryan Curtis, vice-president of transportation and policy for the Canadian Energy Pipeline Association (CEPA), says there are up to $20 billion (Canadian) in planned projects, including U.S. interconnects.

Curtis says growth of 2-3% in markets in the Northeast and Midwest translates into additional capacity of 2-3 bcfd.

"There is an unprecedented level of activity, and there will be a shakeout among projects."

Curtis said, "Competition is coming to pipelines: Shippers want choices, and customers want a choice of supply sources."

Supply/demand

Exports of Canadian gas to the U.S. reached a record level of 2.85 tcf in 1996, up 38% since 1992, according to NEB.

Regionally, 35% of Canadian gas exports were to the Midwest, 24% to California, 23% to the Northeast, 17% to the Pacific Northwest, and 1% to the Rocky Mountain region.

Gas import levels remained strong into 1997, according to the U.S. Department of Energy. Imports of Canadian gas set a record in first quarter 1997 at 750.8 bcf, up from 731 bcf set in first quarter of 1995.

NEB said remaining established reserves of marketable gas at yearend 1995 were estimated at 64.6 tcf, excluding East Coast offshore and Arctic reserves.

Reserve additions replaced 82% of total production during 1991-95. Canadian gas production increased to 5.3 tcf from 2.6 tcf in the past decade, and continued growth is expected.

During the past decade, the Canadian share of U.S. gas markets has expanded to 13% from 8%. Substantial export growth has been absorbed by a 32% increase in U.S. gas demand over the same period and expansion of Canadian export-oriented pipeline systems.

Outlook

Despite export increases, NEB says estimates of the ultimate potential of the western Canadian sedimentary basin are 50% higher than a decade ago. The board says gas supplies are expected to meet Canadian domestic and export demands in the foreseeable future.

The market will determine which pipelines make it to the finish line in the gas export race to meet mounting U.S. demand.