Enbridge's Tutcher: Burgeoning US gas demand augurs well for long-distance gas pipleines

March 10, 2003
Dan C. Tutcher
President, Enbridge Energy Co. Inc.

Building two pipelines to bring natural gas from Alaska and Canada's Mackenzie Delta to the Lower 48 "doesn't make financial or physical sense, (although) politically, it may have to happen."

Warren R. True
Chief Technology Editor—Pipelines/Gas Processing

The recent history and current stance of Enbridge Energy Partners LP, Houston, provide perhaps the clearest example of growing Canadian involvement in the US midstream oil and gas industry.

Since early 2001, the company has evolved from its core asset, the Lakehead crude oil pipeline that runs across Minnesota, Illinois, and Michigan, to embrace a series of midstream natural gas assets almost entirely in Texas, paying nearly $1.2 billion in the process.

And along the way, it has branded the entire collection with the name of parent Enbridge Inc., Calgary.

In 2001, Enbridge Partners' predecessor Lakehead Pipe Line Partners LP:

-- Paid Enbridge Inc. $33 million for the North Dakota crude oil segment that complements its main system.

-- Named as its president Dan Tutcher (at the time president and chief executive officer of Enbridge unit Midcoast Energy Resources Inc.).

-- Changed its name to Enbridge Energy Partners LP.

-- Purchased natural gas gathering, treating, processing, and transmission assets in East Texas from Koch Midstream Services Co. LLC for $230.5 million. The East Texas system at the time was gathering about 400 MMcfd for delivery into the Carthage, Tex., hub, according to Enbridge Partners.

In 2002, the newly christened Enbridge Partners paid Enbridge Inc. $929 million for nearly all the assets of Midcoast and significant assets added to Midcoast through acquisitions such as the Northeast Texas system, the South Texas system, and the Hobart processing plant.

Enbridge Partners Pres. Tutcher told Oil & Gas Journal that, in the US, the company is "looking specifically more toward long-line pipelining in natural gas than anything else.

"I'd like to see us over the next couple of years (reach) a pretty good size (and be) a significant player in cross-country pipelines. That's both from the partnership and from the parent's perspective."

Enbridge Partners in fact announced in January that acquisitions it has identified and expects to conclude this year will contribute about $20 million to its projected overall operating income of $220-240 million for 2003.

The company projects net income will reach $130-140 million, compared with 2002 net income of $78.1 million.

Shape of the future
It will surprise few to learn that a man who has spent his career in the natural gas and NGL businesses is bullish on the future for natural gas in North America. And he believes the near term, out 8-12 years, will see critical developments in meeting demand, especially in the US.

Tutcher said supplies from northern Canada are racing imports via LNG to meet growing US demand. Rosy scenarios for that demand were what prompted Canada's Enbridge Inc. a couple of years ago to begin to look around the US for avenues to expand. The result is Enbridge Energy Partners.

And Tutcher cited Enbridge's large ownership positions in two pipelines that link gas supplies and markets in Canada and the US: the 1,857-mile Alliance pipeline from eastern British Columbia to near Chicago and the 348-mile Vector system in the upper US Midwest and Canada.

But major new supplies from either Alaska or Canada's Mackenzie Delta will not begin to affect the US market for some time, said Tutcher. How soon will depend on whether winter weather patterns follow those of 2002-03 or revert to the warmer patterns of the late 1990s.

It will be 2010 or 2011, he said, "probably at the earliest before we get any significant (new supplies of) Canadian gas down here," and existing US supply basins "are going to be dwindling far below the demand side during that time. So I think you've got to supplement with LNG. I think it's an absolute."

Assuming winters in the near term are normal, Tutcher sees a critical point in terms of supply to US markets being reached by 2005-06. But "if we have a winter like we've had this year in the Northeast, and we come out with storage significantly below where everybody thought it would be this spring, that timeframe moves closer," he said.

Existing LNG regasification terminals that are undergoing expansions "are going to be pushing toward capacity by mid-2004 or 2005. I think additional expansion projects are going to get moved up as (the current projects) start to fill up."

As for new LNG terminals along the southern US, Tutcher takes the view that siting obstacles may retard their construction, to the advantage of new supply projects for gas from Canada: "It's easier to site something in Canada than in the Lower 48 or the Bahamas or the Gulf of Mexico or even Baja (Mexico)."

Gas from Mackenzie Delta will probably hit the US in late 2009 or 2010, "depending on how quickly the producers move over the next 12 months," but the pricing "we've seen over the last 12 months is probably going to keep a fire under them."

Tutcher does not believe, however, in the viability of two gas pipelines from the north. Enbridge, he said, "thinks it's an 'either-or' situation. We just don't think you can build both economically or even physically during a reasonable time.

"Now politically, it may have to happen that way (i.e., two pipelines), but it doesn't make financial or physical sense."

Industry dilemma
Tutcher believes the current dearth of drilling activity in the face of rising commodity prices reflects, in part, industry's distrust of those high prices. But he also blames expensive, elusive capital to underwrite both supply and transportation projects.

The historical cyclicality of the oil and gas industry has made financing projects more difficult and made drilling contractors "more reluctant to jump into the market with, say, five new rigs," Tutcher said.

In some sense, behind the capital problem, he said, is the demise of the energy marketing function within large companies, most notably Enron. From producer through end user, he said, a piece of the chain has dropped out and as yet, companies are reluctant to step back, so poor an image does that function now have.

The piece of the supply chain that's missing or at least severely reduced he calls "counter parties": "Somebody who's willing to say, 'If you produce 1,000 b/d, I will pay you for the next 5 years at a fixed price.' There aren't very many people out there today as 'counter parties' that will go out an extended period of time for a full-blown hedge you can rely on or that your bank can rely on or that Wall Street can rely on."

This is the "worst time in the world to say you're a marketer."

But Tutcher also said that steady higher crude oil prices have clearly benefited and spurred part of the oil industry: Canadian oil sands projects are "over the hill" toward consistent profitability and, therefore, viability, pushed again by demand south of the border.

Career highlights

Dan Tutcher is president and director of Enbridge Energy Partners LP (formerly Lakehead Pipe Line Co.), an affiliate of Enbridge Inc., Calgary. He also serves as president of the partnership's general partner, Enbridge Energy Co. Inc. Previously, Tutcher's work for Enbridge included stints as president of Enbridge Energy Management LLC and group vice-president of the parent firm's Transportation Group South.

Employment
Tutcher is on the board of Alliance Pipeline LP. He also serves as president and CEO of Magic Interests LP, a Texas corporation controlled by his family, which has been involved in the petroleum industry for three generations.

Tutcher has spent more than 30 years owning and operating companies in petroleum production, gas processing, and natural gas gathering and transmission. He has been involved in the design, construction, and operation of petroleum pipelines and all types of petroleum equipment and storage, as well as oil and gas exploration and production.

He founded in 1992 and served as chairman, president, and CEO of Midcoast Energy Resources Inc., which was acquired by Enbridge in 2001.

Education
Tutcher graduated with a bachelor's in business administration from Washburn University, Topeka, Kan.

Organizations
Tutcher is on the boards of the Interstate Natural Gas Association of America, Gas Processors Association, Texas Intrastate Pipeline Association.

He also serves as a director on the boards of Berkshire Asset Management Inc. and Houston's Alley Theatre.

Tutcher is chairman and director, Cancer Counseling Inc., Houston.