NOVA-TransCanada merger should benefit producers, consumers

Feb. 9, 1998
A merger of Canada's two largest natural gas pipeline companies raises competition and regulatory issues but could reduce operating costs and benefit the oil industry as a whole, analysts say. They add that the $14 billion (Canadian) marriage of TransCanada PipeLines Ltd. and NOVA Corp. would create a corporate entity with major league clout in the North American pipeline industry. The Canadian Association of Petroleum Producers (CAPP) said it is unclear how the merger will affect

A merger of Canada's two largest natural gas pipeline companies raises competition and regulatory issues but could reduce operating costs and benefit the oil industry as a whole, analysts say. They add that the $14 billion (Canadian) marriage of TransCanada PipeLines Ltd. and NOVA Corp. would create a corporate entity with major league clout in the North American pipeline industry.

Potential cost savings

The Canadian Association of Petroleum Producers (CAPP) said it is unclear how the merger will affect producers, but it will bring major changes in the oil industry.

Greg Stringham, CAPP's vice-president of markets and transportation, said there is very strong potential for cost savings if duplication is eliminated on the administrative side of operations. But, he said, the merger creates a potential dominance of one large company, which raises questions of unfair competition.

He also wondered how long it will take to produce cost savings and what assurances there are that any cost savings will flow through to producers.

"They are talking about savings (to western Canadian producers) of about $150 million over a 2 or 3-year period, but it will have an impact on tolls. And, hopefully, with the onset of competitive alternatives it won't just be 3-4¢ellipseBoth (pipelines) will be able to refine their tolls to make the basin the most competitive in North America," Stringham said.

"The question of regulation between Alberta and the federal government depends on how the merger is arranged and assets are pooled. Will there be two entities under a holding company or will they be merged into one?" asked Stringham.

A win for all parties

Rick DeWolf, senior vice-president, Ziff Energy Group, said the merger is a win-win situation. He said that:
  • Producers will get service offerings that will help them streamline and reduce their administrative costs because they will only have to deal with one pipeline and because the merger would create a seamless pipeline service from Alberta to eastern Canada and the U.S.

  • Together, the companies will have the ability to operate in an efficient and effective manner in the North American market.

  • Gas buyers will benefit because many of them have seen the Alberta border as a barrier to their ability to buy back to the wellhead.

  • The public will profit because the merger could be positive for the proposed Alliance pipeline, thus providing another competitive pipeline system.
DeWolf supports the Alliance project but says the view that the merger would make Alliance a virtual shoe-in is overstated. He says Alliance will still have to prove its case to regulators on its own merits.

Joint regulation

A major issue is regulation of the new entity, says DeWolf. NOVA operates within Alberta and is regulated by the Alberta Energy and Utilities Board (AEUB). TransCanada is regulated by the National Energy Board.

"It might be in everyone's interest to start looking at some sort of potential joint regulation. It happened on the East Coast, with the Sable gas pipeline project and a joint review panel. That would be preferable to some big jurisdictional fight that creates uncertainty and volatility for the industry," DeWolf said.

George Fink, president of the Small Explorers and Producers Association of Canada (Sepac), said producers would benefit if the combined companies reduce administrative costs and pass the savings on. But he warned that joining two companies with monopoly operations could risk real abuse of monopolistic powers.

"The negative part is that there is one great big monopoly out there now. And it was good to have two regulators (AEUB and NEB) looking at things, because you have different views and philosophies. It was a good check-and-balance system, despite the fact that you had a pipeline monopoly inside Alberta and outside Alberta.

"Now probably the AEUB will be involved in just feeder-line situations, and that is negative," Fink said.

He said Sepac supports open markets and greater competition in the pipeline industry but added that regulators will have to exert efforts to provide and protect open competition.

Toll reductions

DeWolf said tolling is another issue raised by the merger. NOVA had been working on a new toll structure for Alberta before the merger was announced.

According to DeWolf, depending on how the merged organization is put together, certain facilities could be rolled into the mainline structure. You could then have mainline production zones.

TransCanada is on a zonal toll system, based on calculations involving volume and distance. NOVA could be structured in the same sort of mechanism. This would create potential economies of scale and reduce tolls.

Fink was skeptical of a projection by the merging companies that tolls from western Canada to Toronto will be cut by 3-4¢/Mcf in 2-3 years.

"It is hard to say whether they will carry through with that because they don't really have a whole lot of reasons to save and cut costs. The incentive to save still isn't strong enough among pipelines, but hopefully it will turn out that they do away with some of the overlap and duplication," Fink said.

Brent Friedenberg, Friedenberg Associates, Calgary, said the merger means major changes for the industry in western Canada.

The merged company may see itself as much more of an equal with the major players in the North American market, he said, making a takeover much less likely. The merger should produce economies of scale, lower transportation costs, and improved netbacks, but it also raises new regulatory and tolling issues.

"Will the NEB be regulating back into Alberta on the NOVA system, which will be an extension of the TransCanada system?" asked Friedenburg. "I'm not sure what will happen. Maybe the companies will apply to have the status quo maintained."

"Tolls are up in the air. NOVA was looking at a new tolling scheme to take to the AEUB. That's a major issue under the surface. We could see a mileage tolling system or a zoning system or some combination of those."

Competition issues

The merger received political blessing from both Alberta Premier Ralph Klein and Energy Minister Steve West. Klein said he is satisfied that the merger will not reduce competition and that it is the best way for the two companies to survive tough competition from the U.S.

The merger also would require approval of the federal Competition Bureau, which analyzes the impact of takeovers and mergers on competition. Widely expected regulatory approval of the Alliance pipeline project is seen by most analysts as a plus for the NOVA-TransCanada deal in the eyes of the competition regulators.

The spin-off of NOVA's $3 billion petrochemical division following a merger is seen as a positive move by most analysts. They say NOVA stock was undervalued because investors wanted a clear choice between pipelining and petrochemicals.

NOVA had planned to split its operations into stand-alone companies.

Companies named as potential buyers for NOVA Chemicals, if all or part of it comes up for sale, include Union Carbide Corp. and Dow Chemical Co.

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