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Alliance Gas Pipeline: Early, Late, or Just in Time?

A story of big gambles, big assumptions, and spark spreads now turned upside down.
Fortnightly Magazine - November 15 2000

which covers the formative years of Alliance.

Planning Stages (1996):

  • Perceived shortages in pipeline capacity out of Alberta.
  • Producers complaining of pipeline market power.
  • Existing pipes complain that new construction would overbuild pipe capacity, leaving assets stranded.
  • Alliance project proceeds, but is viewed as highly speculative.

Construction Stages (1998-99):

  • Gas prices crash in December; don't fully recover until July 1999.
  • Producers reluctant to explore and develop.
  • Gas production costs rise, both finding and lifting.
  • Investors demand higher returns, adding to costs of gas producing and marketing.
  • New gas supply still not forthcoming in Alberta for export to East.
  • Widespread spikes in power prices, with many days with high spark spreads.
  • U.S. power markets plan to increase dependency on natural gas.

Market Stage (2000):

  • Gas prices explode, shrinking the spark spread in the East.
  • Fewer days of high spark spreads than in 1999, with negative spark spreads in some cases.
  • Despite higher gas prices, new supplies not yet a reality in Alberta, owing in part to geology, and local conditions.
  • Shortage of available gas pipe capacity at times from Alberta to U.S. Pacific Coast, boosting gas prices there.
  • Greater competition for Alberta gas between U.S. West Coast and pipes leading to Chicago and East.

The Future:

  • Gas prices high enough to stimulate production in Alberta to supply gas to Alliance and California?
  • Gas prices low enough to sustain breathtaking growth in gas-fired generation and maintain export market for Alliance?

Nevertheless, despite all this uncertainty in natural gas markets, the arrival of Alliance is as important in its own right, for what it has told us about the market so far, and about the companies that supported the project and built the pipe.

From Plan to Startup: A Time of Shifting Assumptions

When plans for Alliance were being formulated in 1996 and 1997, the natural gas price in Alberta often hovered near or below $1.00 per million Btu. The price of natural gas in the United States often exceeded the cost of gas in Alberta by more than $1.00/MMBtu . After that, however, market conditions and prices changed dramatically.

By May 2000, the Alberta price was three times its 1996 value. By this fall, the price had jumped to five times as large. These higher prices, which of course are great news for producers and marketers, will continue if supplies continue to be tight. Also, as prices rose in Alberta and at Henry Hub, a very close relationship developed between Henry Hub and Chicago prices . This close relationship enhances price discovery and supports the completion of business and the effective hedging of price risk, adding potential value to the Alliance venture. At the same time, however, these high gas prices thwart investment in electric generation fueled by natural gas.

Competitive relationships between pipelines also played a role during this time.

Early on Alliance was envisioned to give producers greater access to export markets and relieve a perceived shortage of pipe capacity leading out of the Canadian Rockies to points East. In 1996, NOVA was the major gas pipeline in Alberta, while TransCanada had