Westcoast Energy Inc., of Vancouver, B.C., shelved the Tumbler Ridge project after producers cut projected processing requirements in one of Canada's hottest gas plays.
Plans for the stand alone plant were shelved when producers cut their estimated processing requirement the next 10 years by about 26%. Instead, Westcoast will seek approval for a $400 million, 230 MMcfd expansion of its existing Pine River plant. A $300 million expansion that doubled capacity at Pine River was completed only last November.
WESTCOAST STRATEGY
Art Willms, president and chief executive officer of Westcoast, a $7 billion pipeline and processing company that handles most British Columbia gas transmission, said the change makes sense. He said a new stand alone plant was not economic for new volumes totaling less than 300 MMcfd, and producers have cut their needs to 230 MMcfd from 313 MMcfd. In addition, the Pine River expansion will cost about $272 million less, and operating costs will be lower.
Willms contends his company is now responding to a classic commodity market, where customer demand dictates prices.
He notes that gas prices of $2 Mcf 18 months ago fell to less than half that earlier this year, although there has been some price recovery since then. He thinks the industry will be gas-long for a while but contends the market will revert to a gas-short situation. In the meantime, he says, Westcoast does not want to get into costly overbuilding and is trying to match new processing capacity to producer forecasts.
Willms says it is difficult to anticipate the market, and Westcoast must play with the cards it is dealt in meeting producer needs. He says producers now have a far greater capacity to react quickly to market price signals.
"A rule of thumb used to be that a producer would find gas and take 4 or 5 years to get it on line," he said. "Today, they want it on immediately unless there is a real restraint on plant."
"As soon as producers see the price going up, you will see a lot more production brought on line, which will slowly depress the price."
Willms expects to see some fluctuations in gas prices but not broad ones, and the price will stay in a relatively narrow band not much exceeding $2. If there is a price surge, Westcoast and producers will have to look at the situation then and examine options.
He says the company considered the Tumbler Ridge plant because there seemed to be a significant upside opportunity for more than 300 MMcfd in processing needs, "but that appears to have evaporated, at least in the minds of some producers."
The Westcoast executive says the company is still working on a capital spending plan for its gas facilities of $1.3 billion during 1994-99.
Willms says spending could be reduced in 1995 by a National Energy Board (NEB) decision in May affecting another proposed major Westcoast plant in the Fort St. John area.
AITKEN CREEK EXPANSION
NEB said it does not have jurisdiction to deal with the Westcoast application for the $400 million, 320 MMcfd sour gas plant at Aitken Creek, about 87 miles north of Fort St John.
Willms called the NEB decision "bizarre" because the board has been dealing with Westcoast regulatory applications for 40 years. The company is appealing the NEB position to the Federal Court of Canada to clarify legal issues. It says Aitken Creek start-up will be delayed by at least a year to mid-1997.
B.C. Gas Utility Ltd., which distributes 95% of gas in B.C., welcomed the NEB decision as a step towards deregulation.
The utility said Aitken Creek would add $75/year to its customers' bills, but the gas from the proposed plant is for the export market. Willms said producers will pay for the processing and there will be no cost to B.C. residents.
Willms says the Aitken Creek plant is critical to some producers who have spent on exploration and development and are ready to go. He says Westcoast is now looking at options for them.
"In our view, Westcoast owns and operates a federally regulated interprovincial pipeline system for the transmission and processing of raw natural gas," Willms says.
"The legal framework surrounding our business is important and must be clarified. But neither this decision of the (NEB) panel, nor any resulting appeal, will change the fact that the regulated natural gas infrastructure across North America is evolving towards a market based system with much less regulation. Westcoast welcomes this trend and intends to play a vigorous role in its evolution."
Willms contrasts the NEB position on Aitken Creek with the Federal Energy Regulatory Commission's Order 636, which moved the U.S. industry towards a deregulated market in 5 years. Despite some regulatory turbulence and project delays, Willms says he is an optimist who sees great opportunities for all sectors of Canada's gas industry.
One problem he sees is campaigns by environmentalists who want no development in wilderness areas, but he does not expect these challenges to have an impact on industry growth.
Willms says another problem is financing of major pipeline projects when long term contracts are being replaced by a short term market. He says efforts are needed to develop more creative financing approaches, perhaps similar to the type of financing used for oil pipelines.
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