ON THE LAST DAY OF 1997, A U.S. DISTRICT COURT IN Texas struck down sections of the Telecommunications Act of 1996 that prevent former Bell System operating companies (BOCs) from entering certain...
Alliance Gas Pipeline: Early, Late, or Just in Time?
most of the pipe business outside of the province and an equity interest in many of the pipes taking delivery of Canadian gas on points along the U.S. border. NOVA also included a chemical arm that processed the raw natural gas to produce ethane, propane, and other liquids. 1 NOVA processed these liquids to produce styrene and other basic material for a variety of plastic products.
Many producers worried that with just two companies controlling much of the processing and shipment of gas from the major producing province, they were not getting the best deal for their product. The Alliance system represented the chance for them to acquire some control over the gas processing, transport, and distribution.
In the legal proceedings in Canada for approval of Alliance, the pipeline was recognized as a speculative undertaking. Alliance received the right to proceed based on commitments by companies to ship gas on the pipe. The pipeline did not have natural gas reserves committed to the pipe. At the hearings, Foothills Pipeline raised the issue that if supplies were not available, then some pipe capacity somewhere would be a stranded asset. That now has occurred for the TransCanada system.
At the time, and for much of the 1990s, Canada had become the backstop source for North America. Many believed that Canadian supplies of natural gas would continue to be available for the United States. Indeed, the Federal Energy Regulatory Commission in its Environmental Impact Statement, an important document in the approval process, assumed that supplies would be available from Canada to fill all pipes.
Yet new supplies are not coming on-stream even now, despite the very high prices that have prevailed this year. That, in part, is a consequence of longer-term trends, but also special conditions in the gas industry that occurred in December 1998, when the last major expansion of pipeline capacity into the United States was completed and about when Alliance received final approval. At that time, mild weather, low oil prices, high storage levels, and overall robust supplies 2 conspired to pummel prices to $1.00 per million Btu at Henry Hub and $0.70 per million Btu in Alberta.
It was not until seven months later, in July 1999, that Henry Hub prices pushed back up above $2.50-providing enough of a return for many companies to cover the costs associated with supplying new or incremental gas to pipelines headed toward end-use markets on an ongoing basis. Compare that number to the situation today, with current prices regularly above or near $5.00 at Henry Hub.
And other factors besides price affect gas production.
Since 1998, gas production in North America has become more expensive. Finding costs have increased and lifting costs no longer are declining. Labor costs also have risen in a tight labor market. But the normal profit associated with producing and marketing gas also has risen in the last five years. Company executives and managers are expected to do more and assume more risk than in the past. Opportunities for returns on available funds have increased on international and domestic markets, and