[BETA] Fortnightly

 

A story of big gambles, big assumptions, and spark spreads now turned upside down.

Major battles are being fought over the movement of natural gas from Canadian soil to U.S. homes and businesses. Spurred by the new Alliance pipeline system, and its aggressive bid for market share, pipeline companies are fighting for shippers to use their systems for moving gas. And now, just in time for the pipeline's assumed startup date of Oct. 30, comes a dramatic rise in natural gas prices, bringing both good news and bad for all those who cast their lot with the pipeline, betting on market assumptions formed years ago.

The dynamics are complex-even counterintuitive. Each new development can undo the best of plans.

In the pipeline wars, in the battle for shippers, the shakeout already has begun. Canada's large natural gas pipeline company, TransCanada, is losing share to Westcoast Energy, the firm that has the most riding on the success of Alliance. Westcoast has large equity interests in both Alliance and Vector, a new U.S. pipeline that will connect indirectly with Alliance at its downstream end to help carry gas past Chicago and on to East Coast markets. Alliance, rooted in the Western Canadian Sedimentary Basin (WCSB), the major producing area in Canada, offers several potential advantages over longer lines. With a newer plant, it offers greater efficiency and promises greater flexibility to shippers. It also distinguishes itself in competition by its ability to diversify and transport raw material for the chemicals industry.

Vector plays a key role in these skirmishes. Vector promises to transform trading relationships and movements of existing gas in the United States. Not surprisingly, two of the three companies with an equity interest in Vector also have an equity interest in Alliance. And at its downstream end, Vector will connect with other new pipes, such as Millennium, designed to bring the gas the last mile to New York City and other East Coast areas hungry both for gas and electricity. Westcoast also has a major equity interest in Millennium. In the short term, the success of Alliance and Vector depend on the ability to steal market share from TransCanada. Farther out, however, in the immediate term, the key will lie in serving new customers using natural gas to generate electricity.

Yet it is here, in the power generation market, where spark spread is king, that the danger grows of assumptions gone wrong.

Gas-fired generation is crucial for extracting the full economic value of new pipelines such as Alliance, Vector and Millennium. But if natural gas prices remain at their current high levels (high, that is, relative to the past few years, when these pipes were planned), gas will lose much of its advantage in the fuel mix for generation. Of course, high prices should spur greater upstream production, eventually swelling supply and forcing prices down, but that has not yet happened, and may not for some time to come.

Overall, the Alliance story is marked by a volatile mix of conflicting assumptions and market trends, as shown in the following timeline,